Exam 1 questions



Exam 1 Questions

Answer 1)

The Fed may manipulate the economy by using monetary policy. Through the use of open market operations, changes in the discount rate to affect the level of interest rates, changes in the reserve requirements and credit availability. When the interest rates are lowered people are forced to spend more rather to invest in the commercial banks. Spending more leads to rise in the Gross Domestic Product (GDP).

Answer 2)

Rise in GDP means moving towards the economic growth and it comes with spending more. Greater spending leads to greater demand and greater demand bring inflation in the economy (Federalreserveeducation.org, 2012).

Answer 3)

Whenever money supply has to be increased in the market in order to make it spend by a person, easy money policy is used which is lowering the interest rates and tight policy is required when to reduce money from the market by increasing the interest rates.

Answer 4)

The yield curve gives a clear indication of the economy through its policies applied. When the tight monetary policy will be in place, the yield curve will be inverted and at easy policy the yield curve will revert back to normal.

Answer 5)

Easy money policy deals with the lowering of interest rates that focuses on rise in spending by the economy which leads to inflation due to rise in demand. The dollar value relatively falls. Surplus Spending Units (SSUs) are those who spend and invest less than their income; they will not be affected much through such policy.

Answer 6)

Normal monetary policy deals with money lending and money investing in the economy. Quantitative easing is used when the normal monetary policy does not work. It is required to increase the reserve requirements in the central bank through purchasing all the financial assets from commercial banks and other private institutions so to inject ...