When the Fed Buys Bonds and Injects Additional Reserves into the Banking

question 16

Multiple Choice

When the Fed buys bonds and injects additional reserves into the banking system, this action will

• A) place downward pressure on short-term interest rates.
• B) cause many decision makers to expect that the future rate of inflation will fall.
• C) place upward pressure on both short-term and long-term interest rates.
• D) place upward pressure on short-term interest rates and downward pressure on long-term interest rates.

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Definitions:

Protective Put

A strategy in investing that involves buying a put option for an asset that one already owns to hedge against potential losses in the asset's price.

T-bill Rate

The yield or interest rate paid by the U.S. government on its Treasury bills, which are short-term debt obligations.

Stock Price

The price at which a particular share of stock is bought or sold in the market.

Risk-free Rate

The theoretical rate of return of an investment with zero risk, often represented by the yield on government bonds.