Question

18) A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called A) debt deflation. B) moral hazard. C) insolvency. D) illiquidity. 19) There are two ways in which the Fed can provide additional reserves to the banking system: it can government bonds or it can discount loans to commercial banks. A) sell; extend B) sell; call in C) purchase; extend D) purchase; call in 20) Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem? A) open market operation B) discount policy C) required reserve ratio D) the Fed's liquidity provision

Answer 1

18) option A

• Debt deflation is said to occur when the aggregate price level falls, which increases the debt more than the profits they earn.
• This will slow down the recovery from a recession.

19) option C

• Fed is responsible for providing reserves to the banks and other financial institutions.
• It can do so by either of the following two ways:
• It can either purchase the government securities from the open markets to increase the money supply or provide more discount loans to the commercial banks.

20) option D

• The fed's liquidity provision acts as a monetary policy tool .
• It helps an economy to come out of the zero interest rate problem.