Question Details

Why would easing the supply of liquidity not necessarily 



1. “When the U.S. Federal Reserve Board cuts it- interest rates, the stock market typically goes up.” What logic lies behind this observation? 
a)	the lower interest rate increases the price of bonds 
b)	at current earnings the return to holding stocks becomes higher than the return to holding bonds 
c)	the Fed buys stock to make interest rates fall 
d)	at lower interest rates the stock market is riskier and so requires a higher price to compensate 

2. “If the 10-year note tops 4.6%, last year- peak yield, it could spark panic selling that could cause rates to …….” The best way to complete this clipping is 
	a) fall dramatically b) rise dramatically c) freeze d) can’t tell what rates might do 
3. “The FOMC next meets on Oct.28 and 29. Between now and then, officials will consider whether additional cuts are likely to have their desired effect.” What kind of cuts are being discussed here? 
	tax cuts b) money supply cuts c) interest rate cuts d) government spending cuts 

4. “In the face of the major recession that seems certain to follow the financial crisis sparked by the sub-par mortgage fiasco, the responsible thing now is to give the economy the help it needs.” What kind of help is being referred to here? 
a)	lower spending and lower interest rates 
b)	lower spending and higher interest rates 
c)	deficit spending and higher interest rates 
d)	deficit spending and lower interest rates 

5. “The Fed has responded to the sub-prime mortgage crisis by easing the supply of liquidity. This does not necessarily mean that the federal funds rate will be cut.” Why would easing the supply of liquidity not necessarily imply a fall in the federal funds rate? 
	liquidity is not the same thing as the money supply 
	an increase in liquidity should increase the federal funds rate 
	the demand for money may have increased by the increase in the supply of liquidity 
	cutting the federal funds rate is the wrong thing to do here 




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