Question

QUESTION 19 Which of the following is a monetary policy tool? A open-market purchases of corporate stock B. changes in the required reserve requirement. OC changing tax rates OD changes in the prime rate QUESTION 20 The Federal Reserve most frequently relies on which of the following to change the money supply? O A changes in the discount rate B. changes in the required reserve ratios Copen-market operations OD changes in the inflation rate

Answer 1

Answer:

Que.1 Option A - Open market purchases of Corporate stock is the right option.

Reason:

Government securities are traded in open market operations. The term "open market" means that the Fed does not decide on which securities dealers it will trade on a particular day. Instead, the choice stems from the "open market" in which the various Fed dealers - primary sellers - compete on price. Open market operations are flexible and thus the most widely used tool of monetary policy.

Que.2 Option C - Open market operations is the right option

Reason:

The Fed uses open market operations as its primary tool to affect the supply of bank reserves. This tool includes the Federal Reserve's purchase and sale of financial instruments, usually U.S. There are securities issued by the Treasury, federal agencies and government-sponsored industries.

When the Fed wants to increase stocks, it buys securities and pays for them by depositing them in the Fed's account with the primary seller's bank. When the Fed wants to reduce stocks, it sells securities and collects from those accounts. For many days, the Fed does not want to permanently increase or decrease reserves, so it usually engages in reverse transactions over several days. Through trading securities, the Fed influences the amount of a bank's reserves, which in turn affects the federal fund rate, or overnight lending rates that banks reserve from each other.

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