Identify the four major methods the Fed uses to control the money supply. Give two examples of situations in which the Fed might use one of these methods and explain why that method is best for the given situation.
What will be an ideal response?
To control the money supply, the Fed can use open market operations, change reserve requirements, alter its discount rate, or change the interest rate paid on bank reserves at the Fed. Examples will vary. A possible response is: To slow inflation, the Fed might use open market operations to sell government bonds. By using this method, the Fed can avoid making a major announcement, and thus avoid potentially scaring the public, but still make a significant impact on the money supply. If the economy is booming and the Fed is worried about banks overextending, it may raise the interest rate on reserves held with the Fed. This would encourage banks to keep more of their excess reserves, but it would not cause such a massive change as to disrupt the economy, as changing the reserve requirement might.
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Refer to Figure 11.5. An increase in exports is best illustrated by diagram
A) A. B) B. C) C. D) D.
Which of the following statements is TRUE?
A) Both wealth and income measure variables over a period of time. B) Wealth measures a variable at a point in time and income measures a variable over a period of time. C) Wealth measures a variable over a period of time, and income measures a variable at a point in time. D) Both wealth and income measure variables at a point in time.
Bonds can be risky investments because
A. bondholders are paid from whatever remains after stockholders have been paid what the corporation owes them. B. if the corporation loses its assets, the bondholders may not receive payment on their investments. C. the general price level may fall. D. the voting power of an individual bondholder may be more apparent than real.
Unplanned inventory decreases prompt firms to cut back on production until equilibrium output is restored
a. True b. False Indicate whether the statement is true or false