Question Details

The Fed can cut interest rates because 


1. "One view in the market has been that because the economy seemed weaker than it should be, the Federal Reserve Board would cut its discount rate from 7.5 percent. This, of course, would be positive for bonds. On the other hand, there have been those thinking that rising money-supply growth would rule out such a discount rate reduction." Why would rising money-supply growth rule out a discount rate reduction? 
a) it would raise expected inflation and thus interest rates 
b) it shouldn't - the clipping is wrong - rising money supply growth should lower interest rates 
c) a rise in the discount rate is required for the Fed to be able to increase the money supply 
d) to increase the money supply the Fed needs to sell bonds which lowers their price, increasing the interest rate 
2. "Analysts say the three-month rally in bonds has been fuelled by Washington's promise to balance its budget by 1991 and OPEC's decision to abandon support for world oil prices in the short run." The bond rally is because 
a) unemployment should fall b) inflation fears have increased 
c) interest rates are expected to fall 
d) everyone is optimistic about future economic prosperity 
3. "News of economic weakness last week cleared the way for higher bond prices. The New York market moved quickly to capitalize on this good bad news: prices shot up more than a point in minutes." Bond prices rose because 
a) inflation expectations fell b) higher prosperity is coming 
c) unemployment is expected to fall d) the Fed is expected to raise interest rates 
4. "The Fed is scrambling hard to keep interest rates from increasing in the face of renewed inflationary pressures, but the banking industry is a lot less interested in cooperating with the Fed because of the rising loan demand they are facing." Loan demand is rising because 
a) real interest rates are low b) real interest rates are high 72 
c) people have confidence in the Fed d) inflation expectations are falling 
5. "Producer prices crept up a modest 0.2 percent in April, the government said yesterday in a report that could give the Federal Reserve room to cut interest rates again in a bid to boost the slowly recovering economy." The Fed can cut interest rates because 
a) inflationary expectations have fallen 
b) the recession demands stimulating monetary policy 
c) no recovery is possible without a fall in interest rates 
d) the clipping is wrong - the Fed controls the interest rate and can cut it whenever it wants




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