An Example of a Federal Reserve Action That Decreases the Money

question 128

Multiple Choice

An example of a Federal Reserve action that decreases the money supply is:

• A) a reduction in the taxes banks pay on their profits.
• B) a decrease in the discount rate.
• C) the Fed buying government bonds in the open market.
• D) an increase in the required reserve ratio.

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Definitions:

Required Rate

is the minimum return that investors expect from an investment, taking into account the risk level compared to the risk-free rate of return.

Net Present Value

A valuation method used to determine the attractiveness of an investment opportunity, calculating the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Profitability Index

A financial metric used to evaluate the desirability of an investment or project, calculated as the present value of future cash flows divided by the initial investment cost.

Discounted Payback

is a capital budgeting method that calculates the period of time required for the discounted cash flows from a project to recoup its initial cost.