ECON211 Quiz 4

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is: 1 percent. 6 percent. -4 percent. -5 percent.

-4 percent.

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ______ percent. 1 3 4 7

7

In a system with fractional-reserve banking: a) all banks must hold reserves equal to a fraction of their loans. b) no banks can make loans. c) the banking system completely controls the size of the money supply. d) all banks must hold reserves equal to a fraction of their deposits.

d) all banks must hold reserves equal to a fraction of their deposits.

If income velocity is assumed to be constant, but no other assumptions are made, the level of ______ is determined by M. a) prices b) income c) transactions d) nominal GDP

d) nominal GDP

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the: a) money supply is constant. b) velocity is constant. c) inflation rate is constant. d) real interest rate is constant.

d) real interest rate is constant.

IMAGE 3A (Table: Bank Balance Sheet) Based on the table, what is the reserve ratio at the bank? 3 percent 5 percent 10 percent 15 percent

10 percent

According to the quantity theory a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation a 5 percent increase in the rate of inflation increases the nominal interest rate by _____. 1; 5 5; 1 1; 1 5; 5

5; 5

The quantitative easing policy conducted by the Federal Reserve between 2007 and 2011 resulted in a large increase in the monetary base that was partially offset by: a) a significant increase in the reserve-deposit ratio. b) a significant decrease in the reserve-deposit ratio. c) open-market purchases. d) open-market sales.

a) a significant increase in the reserve-deposit ratio.

If many banks fail, this is likely to: a) increase the ratio of currency to deposits. b) decrease the ratio of currency to deposits. c) have no effect on the ratio of currency to deposits. d) decrease the amount of currency in circulation, if the Fed takes no action.

a) increase the ratio of currency to deposits.

When the Fed increases the interest rate paid on reserves, it: a) increases the reserve-deposit ratio (rr). b) decreases the reserve-deposit ratio (rr). c) increases the monetary base (B). d) decreases the monetary base (B).

a) increases the reserve-deposit ratio (rr).

If the quantity of real money balances is kY, where k is a constant, then velocity is: a) k. b) 1/k. c) kP. d) P/k.

b) 1/k.

The reserve-deposit ratio is determined by: a) the Federal Reserve. b) business policies of banks and the laws regulating banks. c) preferences of households about the form of money they wish to hold. d) the Federal Deposit Insurance Corporation (FDIC).

b) business policies of banks and the laws regulating banks.

In a fractional-reserve banking system, banks create money when they: a) accept deposits. b) make loans. c) hold reserves. d) exchange currency for deposits.

b) make loans.

The money supply consists of: a) currency plus reserves. b) currency plus the monetary base. c) currency plus demand deposits. d) the monetary base plus demand deposits.

c) currency plus demand deposits.

Liabilities of banks include: a) currency in the hands of the public. b) loans to customers. c) demand deposits. d) reserves.

c) demand deposits.

According to the classical theory of money, inflation does not make workers poorer because wages increase: a) faster than the overall price level. b) more slowly than the overall price level. c) in proportion to the increase in the overall price level. d) in real terms during periods of inflation.

c) in proportion to the increase in the overall price level.

The quantitative easing operations conducted by the Federal Reserve between 2007 and 2011 resulted in _____ increases in the monetary base and _____ increases in money supply. a) no; no b) large; larger c) large; smaller d) small; smaller

c) large; smaller

The currency-deposit ratio is determined by: a) the Federal Reserve. b) business policies of banks and the laws regulating banks c) preferences of households about the form of money they wish to hold. d) the Federal Deposit Insurance Corporation (FDIC).

c) preferences of households about the form of money they wish to hold.