One Mark at Stake

2 questions on this screen, from this outline item's own pool, so some will test a rule you met earlier in the unit. Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen here, and the coach treats it that way.

Question 1Exam level

The Federal Reserve sells government securities in the open market. What happens to the prices of bonds already outstanding?

A. They rise, because short-term rates fall B. They fall, because reserves drain and rates rise C. They are unaffected; only new issues reprice D. They rise, because the money supply expands

How sure are you?

Sure Fairly sure Guessing

Correct: B. A Fed sale drains reserves, contracts the money supply and pushes rates up; a bond paying an older, lower coupon is worth less once new bonds pay more.

A. Rates rise on a sale, not fall.

C. Outstanding bonds reprice continuously in the secondary market; that repricing is the mechanism itself.

D. A sale removes reserves, so the money supply contracts, not expands.

Unit: SIE outline 1.3.1

Question 2Harder

The Board of Governors raises the reserve requirement. What happens to banks' lending capacity and to money conditions?

A. Lending capacity rises; money eases B. Lending capacity falls; money tightens C. No effect; the reserve requirement is unrelated to lending capacity D. Lending capacity falls; money eases

How sure are you?

Sure Fairly sure Guessing

Correct: B. A higher reserve requirement forces banks to hold back more of each deposit, leaving less to lend, which tightens money.

A. Reverses the direction; raising the requirement reduces lending capacity, it does not increase it.

C. The reserve requirement directly limits how much of each deposit a bank may lend, so it has a direct effect.

D. Gets lending capacity right but mislabels the result; less lending capacity is tight money, not easy money.

Unit: SIE outline 1.3.1

Now answer