Describe the four distinct tools of policy that the Federal Reserve can use to influence the money supply. How would the Fed use each of these tools to either increase or decrease the money supply?
What will be an ideal response?
The Fed sets the discount rate, which is the interest rate it charges commercial banks for loans. The Fed can lower the discount rate to increase the money supply and raise the discount rate to decrease the money supply.
The Fed can change reserve requirements, which refers to the portion of deposits banks are required to keep and not loan to customers. By lowering the reserve requirement, the Fed can increase the money supply and by raising the reserve requirement it can decrease the money supply.
The Fed can engage in open market operations, which refers to the Fed's buying and selling of government bonds. The Fed can increase the money supply by purchasing bonds and can decrease the money supply by selling bonds.
The Fed pays interest on banks' required and excess reserve balances. The Fed can increase the money supply by lowering the interest rate it pays on these reserves and can decrease the money supply by raising the interest rate it pays on these reserves.
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Which of the following is an example of frictional unemployment?
A. Dora lost her job when the textile factory closed. She does not have skills to work in another industry and has been unemployed for over a year. B. Hector looked for a job for five weeks after finishing college. He turned down several jobs that didn't fit his skills, but now has a job that requires the expertise he gained in college. C. George is an unskilled worker who mows lawns in the summer, but is unemployed the rest of the year. D. Marsha was laid off from her job with the airline because the recession has reduced the demand for airline travel. She expects to get her job back when the economy picks up.
A coupon bond has an annual coupon of $75, a par value of $1000, and a market price of $900. Its current yield equals
A) 7.50%. B) 8.33%. C) its yield to maturity. D) Not enough information has been provided to calculate the current yield for this bond.
Suppose that the U.S. personal income tax was eliminated and replaced with a fixed tax that raised the exact same amount of revenue. The multiplier would be
A. larger. B. unchanged. C. smaller. D. incalculable.
The New Deal may be summarized by the words, ___________, ____________ and ___________.
Fill in the blank(s) with the appropriate word(s).