Question

The Federal Reserve purchases U.S. Treasury securities to: increase interest rates Oincrease the money supply O decrease expected inflation. increase tax rates reduce credit availability

Answer 1

Q1) When the Fed buys securities, it induces money into the system by paying for the securities it buys.

• Interest rates are the price for borrowing money, they will be high when money in the system is low. If fed increases the money in the system then the interest rate will fall rather rise so 1st option is incorrect
• Decrease inflation: inflation rises when too much money chases too few goods, with increased money in the system, inflation will increase rather decrease, so 3rd option is incorrect
• Buying or selling treasury will not impact tax rate, so 4rth option is incorrect
• When more money is available in the market, more money can be loaned out, therefore, credit availability will increase. So 5th option is incorrect
• As we have mentioned in all options that the money in the system will increase, this implies that money supply will increase so 2nd option is correct

Q2) When the coupon rate < yield, it means that we have can receive a higher yield from the market by buying a bond that pay the current yield, therefore if we stay invested in the bond with lower coupon, its value should be lower than that available presently at a higher coupon. Therefore the price is lower than the par value when the coupon < yield, so option 2 is correct