To decrease the money supply, the Fed might:
Answer(s): A
Choice "a" is correct. To decrease the money supply, the Fed can: (1) sell government securities in the open market, (2) increase the discount rate, and (3) increase the required reserve ratio. Choice "b" is incorrect. The Fed should sell (not buy) securities on the open market. Choice "c" is incorrect. The Fed should increase (not decrease) the required reserve ratio. Choice "d" is incorrect. The Fed should increase (not decrease) the discount rate.
Which of the following correctly lists the three ways to increase the money supply?
Answer(s): D
Choice "d" is correct. The three ways the Fed can increase the money supply are: (1) buy (purchase) government securities in the open market, (2) lower the discount rate, and (3) lower the required reserve ratio.Choice "a" is incorrect, per above Explanation.Choice "b" is incorrect, per above Explanation.Choice "c" is incorrect, per above Explanation.
An increase in the money supply leads to:
Choice "a" is correct. Expansionary monetary policy results when the Fed increases the money supply. Expansionary monetary policy affects the economy through the following chain of events: (1) an increase in the money supply causes interest rates to fall, (2) falling interest rates stimulate the desired levels of firm investment and household consumption, (3) increases in desired investment and consumption cause an increase in aggregate demand, and (4) aggregate demand shifts to the right causing real GDP and the price level to rise.Choice "b" is incorrect. An increase in the money supply causes investment to increase, not decrease. Choice "c" is incorrect. An increase in the money supply causes interest rates to decrease, not increase, investment to increase, not decrease and aggregate demand to increase, not decrease.Choice "d" is incorrect per above Explanation.
Which of the following is most likely to cause an increase in the amount of frictional unemployment in an economy?
Choice "d" is correct. Younger workers tend to move between jobs more frequently. Choice "a" is incorrect. This would lead to structural unemployment. Choice "b" is incorrect. This would lead to cyclical unemployment. Choice "c" is incorrect. Older workers tend to be voluntarily between jobs less frequently than younger workers.
Which of the following would lead to a reduction in inflation?
Answer(s): B
Choice "b" is correct. Decreasing aggregate demand and increasing aggregate supply will reduce the inflationary pressures.Choice "a" is incorrect. Increasing aggregate demand causes the price level to rise. Choice "c" is incorrect. Decreasing aggregate supply causes the price level to rise.Choice "d" is incorrect. Both of these would cause the price level to rise.
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