Describe how the Fed would traditionally use open market operations to change short-term and long-term interest rates
What will be an ideal response?
The Fed would try to achieve a target level for the federal funds rate by using open market operations. If it wants to lower the federal funds rate, it would buy Treasury bills using open market operations. This purchase would inject the banking system with reserves. The increased supply of reserves would lower the overnight loan rate on these reserves, which is called the federal funds rate. Changes in the federal funds rate will usually result in changes in the interest rates on other short-term financial assets such as Treasury bills, and eventually affect longer-term rates such as the rate of corporate bonds and mortgages. However, the effect on these longer-term rates is usually smaller than the impact on short-term rates and occurs with a lag.
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The self-correcting property of the economy means that output gaps are eventually eliminated by:
A. increasing or decreasing potential output. B. government policy. C. decreasing inflation only. D. increasing or decreasing inflation.
In a two-good, two country world, if one country has an absolute advantage in the production of both goods, it can still benefit by trading with the other country
Indicate whether the statement is true or false
Refer to Figure 2-18. Which two arrows in the diagram depict the following transaction: Dorian Gray hires "Wild Oscar," a professional portrait artist, to paint his picture
A) J and M B) K and G C) K and M D) J and G
Which of the following will not produce an outward shift of the production possibilities curve?
A. An upgrading of the quality of a nation's human resources. B. The reduction of unemployment. C. An increase in the quantity of a society's labor force. D. The improvement of a society's technological knowledge.