Question

An article in BusinessWeek in 2013 reported that Fed Chairman Ben Bernanke testified to Congress that: "If we see continued improvement and we have confidence that that is going to be sustained, then we could-in the next few meetings-we could take a step down in our pace of purchases." According to the article, Bernanke also told Congress that '"premature tightening' could 'carry a substantial risk of slowing or ending the economic recovery."' Source: Nick Summers, "Confusion about the Fed Slowing Its $85 Billion in Monthly Bond Buying Is Roiling the Markets," Bloomberg BusinessWeek, June 10-16,2013. The purchases Fed Chairman Bernanke is referring to are a) purchases of foreclosed homes. b) open market purchases of commercial bonds. c) purchases of foreign currencies. d) open market purchases of government securities.

Answer 1

Answer:

(B)

Explanation:

First of all, the Fed Chairman Ben Bernanke is talking about the government's moves to boost the economy or bring it out from recession. If the government sees continued improvement in the economy, it will reduce its pace of purchases. In other words, it will reduce government spending or the rate at which it pumps money into the economy.

Premature tightening of government spending (reducing government spending before the time when the economy recovers) could carry a substantial risk of slowing or ending economic recovery.

The purchases that Fed Chairman Bernanke is referring to are open market purchases of commercial bonds.

In fiscal policy, Open Market Operations (O.M.O.) are indulged in, to adjust the state of the economy.

In this case, the government purchases commercial bonds (especially from private institutions/bodies) instead of government securities; because its aim is to get the economy (aggregate production) functioning and directly increase money supply in the economy.