Under Which of the Following Circumstances Would the Federal Reserve

question 87

Multiple Choice

Under which of the following circumstances would the Federal Reserve System want to increase the money supply by increasing the discount rate?

• A) The economy is experiencing severe inflation, and market activity is very low. Yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing.
• B) The economy is experiencing severe inflation, and most financial institutions have low M-1 resources at their disposal. Yet there is a great deal of market activity.
• C) The economy is experiencing severe deflation, and market activity is very low. Yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing.
• D) The economy is experiencing severe deflation, and most financial institutions have low M-1 resources at their disposal. Yet there is a great deal of market activity.
• E) The economy is experiencing wild fluctuations, and most financial institutions have low M-1 resources at their disposal.

---

Definitions:

Internal Rate

Often referring to the internal rate of return (IRR), which is the rate of growth a project is expected to generate, calculated as the rate of discount that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

Net Present Value

A financial indicator that determines the variance between the current value of incoming and outgoing cash flows during a specific timeframe.

Initial Investment

The sum of funds utilized to initiate a project, investment, or business endeavor.

Cash Break-even

The point at which a business generates just enough revenue to cover its operating cash expenditures.