When the Fed sells bonds and drains reserves from the banking system, thereby reducing the supply...
When the Fed sells bonds and drains reserves from the banking system, thereby reducing the supply of money, this policy will a. decrease short-term interest rates to a greater degree than long-term interest rates. b. decrease long-term interest rates to a greater degree than short-term interest rates. c. increase short-term interest rates to a greater degree than long-term interest rates. d. increase long-term interest rates to a greater degree than short-term interest rates. Empirical studies indicate that the velocity of money tends to increase when interest rates rise. Which of the following best explains why this is true? a. When the velocity of money is high, banks will increase their lending interest rates. b. An increase in the growth rate of GDP will cause the velocity of money to increase. c. The higher interest rates increase the cost of holding money balances and, thereby, increase the velocity of money. d. Both the velocity of money and interest rates will rise when the inflation rate falls.
Homework Answers
c. increase short-term interest rates to a greater degree than
long-term interest rates.
(A decrease in money supply will increase interest rates and
increase in short term interest rates will be greater than long
term interest rates.)
c. The higher interest rates increase the cost of holding money
balances and, thereby, increase the velocity of money.
(Increase in interest rate increases the cost of holding money so
people will try to decrease their money holdings which will
increase the velocity of money.)
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When the Fed sells bonds and drains reserves from the banking
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