When the Fed raises the target for federal funds, it
A) sells government bonds.
B) increases the discount rate.
C) buys government bonds.
D) increases the required reserve ratio.
Ans: A) sells government bonds.
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All governments face a budget constraint: none can spend more than the sum of current government revenues plus the amount that creditors are willing to lend. Why, then, do government budget deficits matter?
What will be an ideal response?
Suppose two goods (X and Y ) are being produced efficiently and that the production of X is always more labor intensive than the production of Y. Production depends only on two factors (capital and labor); these may be smoothly substituted for each other. The total quantities of these inputs are fixed. An increase in the production of X and a decrease in the production of Y will
a. increase the capital-labor ratio in each firm. b. decrease the capital-labor ratio in each firm. c. leave the capital-labor ratio for each firm unchanged. d. increase the capital-labor ratio in Y production and decrease the capital-labor ratio in X production.