Question

Bank regulators impose capital requirements in order to

a. increase the amount of leverage in the economy.

b. provide an incentive for banks to hold risky assets. 

c. ensure banks can pay off depositors.

d. increase the probability of a credit crunch.

 

To decrease the money supply, the Fed can

a. buy government bonds or increase the discount rate.

b. buy government bonds or decrease the discount rate. 

c. sell government bonds or increase the discount rate.

d. sell government bonds or decrease the discount rate.

Answer 1

Q1.Bank regulators impose capital requirements so that banks do not make risky lendings and in case their someone in their borrowers default they should have enough funds preventing the bank from collapsing.

now look at each option

A) capital requirements make bank lend less which will decrease the leverage in the economy so this option is incorrect.

B) capital requirements reduces risky lending thus banks have less risky assets. So this option is incorrect.

C) capital requirements makes bank do less risky lending so they will have enough funds to pay off their depositers. So this option is correct.

D) Capital Requirments make sure banks have enough funds to pay off their lenders which may be other banks, this keeps the banking system functioning and prevents credit crunch. So this option is incorrect.

Q2. To decrease money supply fed sells government bonds to the public. It can also increase the discount rate so it makes it more expensive for banks to borrow from other banks , thereby decrease the lending by banks and decreasing the money supply.

Now look at the options

A) fed should sell govt bonds to decrease money supply so this option is incorrect.

B) fed should sell govt bonds or increase discount rate to decrease money supply so this option is incorrect.

C) fed sells govt bonds or increases discount rate to decrease money supply so this option is correct.

D)fed should increase discount rate to decrease money supply so this option is incorrect.