Which tool of monetary policy is most important? Why?
What will be an ideal response?
Open-market operations are the most important tool of monetary policy. Changes in the discount rate are less effective because bank reserves are relatively small and require action by commercial banks. Reserve requirements are rarely changed. Reserves do not earn interest so an increase in reserve requirements would be costly to banks, making this policy move less attractive. The term auction facility was successfully introduced in 2007 but its use is reserved for times of crisis. Open-market operations are used most often because they are very flexible and have an immediate effect on bank reserves.
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Refer to the scenario above. If Mary prefers more money to less, ________
A) she will not accept any offer that Beth makes B) she will accept any offer that Beth makes C) she will accept the offer only if Beth offers her $2,500 D) she will accept the offer only if Beth offers her $5,000
The cost of producing cigarettes in the United States has increased and at the same time, more and more Americans are choosing to not smoke cigarettes. Which of the following best explains the effect of these events in the cigarette market?
A) Both the supply and demand curves have shifted to the left. As a result, there has been a decrease in the equilibrium quantity and an uncertain effect on the equilibrium price. B) Both the supply and demand curves have shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price. C) The supply curve has shifted to the right and the demand curve has shifted to the left. As a result there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price. D) The supply curve has shifted to the right and the demand curve has shifted to the left. As a result, there has been an increase in the equilibrium price and an uncertain effect on the equilibrium quantity.