7 and 8

14) A nation's investment must be financed by A) national saving plus borrowing from the rest of the world. B) borrowing from the rest of the world only. C) the government's budget deficit. D) national saving only.

a

2) The most direct way in which money eliminates the need for a double coincidence of wants is through its use as a A) medium of exchange. B) store of value. C) standard of deferred payment. D) unit of account.

a

28) A decrease in the demand for loanable funds and a leftward shift of the demand for loanable funds curve results from A) decreases in the expected profit. B) tax cuts. C) an increase in the real interest rate. D) technological improvements.

a

32) When the nominal interest rate rises, the opportunity cost of holding money A) rises and people hold less money. B) falls and people hold more money. C) rises and people hold more money. D) falls and people hold less money.

a

14) The required reserve ratio A) is higher for banks that make riskier loans. B) is the fraction of a bank's total deposits that is required to be held in reserves. C) is the amount of money that banks require borrowers to reserve in their accounts. D) increases when withdrawals from a bank are made.

b

22) If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately A) -6 percent. B) 7 percent. C) 6 percent. D) 8 percent.

c

28) An increase in the currency drain A) results in an increase in deposits. B) results in an increase in required reserves. C) decreases the size of the money multiplier. D) leads to an increase in excess reserves.

c

30) Due to the recession in 2008, firms decreased their profit expectations. As a result, there was a ________ shift in the ________ loanable funds curve. A) rightward; demand for B) rightward, supply of C) leftward; demand for D) rightward; supply of

c

38) Which of the following is TRUE? I .As the real interest rate increases, people increase the quantity they save. II. The supply of loanable funds curve is downward sloping. III. As disposable income increases, the supply of loanable funds curve becomes steeper. A) I and III B) II and III C) I only D) III only

c

42) In the above figure, the initial supply of loanable funds curve is SLF0 and the initial demand for loanable funds curve is DLF0. An increase in the expected profit would A) have no effect on either the demand for loanable funds curve or the supply of loanable funds curve. B) shift the supply of loanable funds curve rightward to a curve such as SLF1, and shift the demand for loanable funds curve rightward to a curve such as DLF1. C) only shift the demand for loanable funds curve rightward to a curve such as DLF1. D) only shift the supply of loanable funds curve rightward to a curve such as SLF1.

c

46) The crowding-out effect refers to A) private investment crowding out government saving. B) government spending crowding out private spending. C) government investment crowding out private investment. D) private saving crowding out government saving.

c

50) According to the quantity theory of money, in the long run, an increase in the quantity of money results in an equal percentage increase in ________. A) the growth rate of real GDP B) the growth rate of potential GDP C) the price level D) the inflation level

c

50) The Ricardo-Barro effect says that A) government budget deficits resulting from an increase in government expenditure have no effect on investment but government deficits resulting from a decrease in taxes crowd out investment. B) government budget deficits crowd out private investment and thereby lower the real interest rate. C) government budget deficits have no crowding out effect because taxpayers increase their savings to match the quantity of loanable funds demanded by the government. D) government budget deficits cause households to save more in anticipation of higher taxes, which causes higher real interest rates.

c

12) Investment is financed by which of the following? I. Government spending II. National saving III. Borrowing from the rest of the world A) I, II, and III B) I and II only C) I and III only D) II and III only

d

24) Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio is 15 percent. How many loans can Bank A create at Bank A? A) zero, because Bank A has no excess reserves B) $850 C) $200 D) $50

d

26) If the real interest rate increases from 3 percent to 5 percent A) the supply of loanable funds curve will shift rightward. B) the nominal interest rate will also increase. C) the demand for loanable funds curve will shift rightward. D) there will be a movement up along the demand for loanable funds curve.

d

30) The quantity of real money demanded is A) proportional to the price level B) negatively related to the price level. C) positively related to the price level. D) independent of the price level.

d

4) If the economy's capital stock increases over time A) depreciation is less than zero. B) depreciation exceeds gross investment C) gross investment equals depreciation. D) net investment is positive

d

42) In the figure above, if the interest rate is 8 percent, people demand $0.1 trillion A) less money than the quantity supplied and bond prices will fall. B) more money than the quantity supplied and bond prices will fall. C) more money than the quantity supplied and bond prices will rise. D) less money than the quantity supplied and bond prices will rise.

d

44) In the short run, when the Fed increases the quantity of money A) the demand for money increases. B) bond prices fall and the interest rate rises. C) the supply of money curve shifts leftward. D) bond prices rise and the interest rate falls.

d

44) When a government has a budget surplus, the surplus A) must be subtracted from private saving to get total saving. B) crowds-out private saving. C) increases the world real interest rate. D) helps finance investment.

d

48) In the absence of the Ricardo-Barro effect, an increase in the government deficit results in a ________ real interest rate and a ________ equilibrium quantity of investment. A) lower; lower B) lower; higher C) higher; higher D) higher; lower

d

48) The quantity of money in an economy is $9 million, and the velocity of circulation is 3. Nominal GDP in this economy is ________. A) $9 million B) $3 million C) $6 million D) $27 million

d

6) Checks are NOT money because they A) are not backed by either gold or silver. B) have value in exchange but little intrinsic value. C) are issued by banks, not by the government. D) are merely instructions to transfer money.

d

34) Use the figure above to answer this question. Suppose the economy is operating at point a. A move to ________ could be explained by ________. A) point c; an increase in the use of credit cards B) point e; an increase in U.S. exports C) point b; an increase in real GDP D) point b; an increase in the nominal interest rate

a

34) Which of the following are included in the supply of loanable funds? I. private saving II. government budget surplus III. international borrowing A) I, II and III B) I and III C) II and III D) I and II

a

36) Which of the following will shift the supply of loanable funds curve leftward? A) a decrease in disposable income B) a decrease in the real interest rate C) a decrease in expected future income D) a decrease in real wealth

a

4) According to the table above, the value of M1 is ________ and the value of M2 is ________. A) $813 billion; $3303 billion B) $813 billion; $2490 billion C) $1,488 billion; $3978 billion D) $805 billion; $2490 billion

a

6) At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's net investment for the year totaled A) 1 machine. B) 2 machines. C) 3 machines. D) 6 machines.

a

8) For a commercial bank, the term "reserves" refers to A) the cash in its vaults and its deposits at the Federal Reserve. B) the net interest that it earns on loans. C) a banker's concern ("reservation") in making loans to an individual without a job. D) the profit that the bank retains at the end of the year.

a

10) When the Fed is ________ it is ________. A) regulating the nation's financial institutions; conducting monetary policy B) adjusting the amount of money in circulation; conducting monetary policy C) issuing government bonds; conducting monetary policy D) adjusting the amount of money in circulation; issuing government bonds

b

12) Which part of the Federal Reserve System meets every 6 weeks to determine the nation's monetary policy? A) the Federal Reserve Banks B) Federal Open Market Committee C) Board of Governors D) depository institutions such as commercial banks

b

20) The above table gives the initial balance sheet for Mini Bank. Mini Bank's actual reserve ratio equals ________. A) 33.3 percent B) 20 percent C) 25 percent D) 12.5 percent

c

16) If foreigners spend more on U.S.-made goods and services than we spend on theirs A) all U.S. national saving remains in the United States. B) foreigners must borrow from the United States or sell U.S. assets to make up the difference. C) we must borrow from foreigners because of low imports. D) funds flow in from abroad to help finance U.S. investment.

b

18) Use the information in the table above to calculate the value of government saving. A) $15 million B) $5 million C) $45 million D) $-5 million

b

22) The table above shows the balance sheet for Ralph's Bank. If the desired reserve ratio is 15 percent, Ralph's Bank has excess reserves of ________. A) $2,500 B) $50 C) $500 D) $450

b

26) When part of the quantity of money is held in currency, then A) the Fed will find it beneficial to increase the discount rate. B) a currency drain occurs. C) there is a higher level of excess reserves. D) the money multiplier will increase in value.

b

32) In the above figure, new expectations of booming business conditions and a higher expected profit will A) make the demand for loanable funds curve become horizontal. B) shift the demand for loanable funds curve rightward. C) shift the demand for loanable funds curve leftward. D) have no effect on the demand for loanable funds curve.

b

36) In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of an increase in financial innovation such as the introduction of ATMs? A) The demand for money curve would shift rightward to MD2. B) The demand for money curve would shift leftward to MD0. C) There would be a movement upward along the demand for money curve MD1. D) There would be a movement downward along the demand for money curve MD1.

b

38) In the figure above, an increase in the monetary base would create a change such as a A) movement from point a to point b along the supply of money curve MS0. B) shift from the supply of money curve MS0 to the supply of money curve MS1. C) movement from point b to point a along the supply of money curve MS0. D) shift from the supply of money curve MS1 to the supply of money curve MS0.

b

40) In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if real wealth decreases? A) The supply of loanable funds curve would shift leftward to a curve such as SLF1. B) The supply of loanable funds curve would shift rightward to a curve such as SLF2. C) Nothing; the economy would remain at point a. D) There would be a movement to a point such as b on supply of loanable funds curve SLF0.

b

40) The table above gives the quantity of money and money demand schedules. Suppose that the interest rate is equal to 6 percent. The effect of this interest rate in the money market is that A) bond prices fall and so the interest rate falls. B) people buy bonds and the interest rate falls. C) the money market is in equilibrium. D) people sell bonds and the interest rate falls.

b

46) If an economy has a velocity of circulation of 3, then A) the quantity of money is 3 times real GDP. B) in a year the average dollar is exchanged 3 times to purchase goods and services in GDP. C) the quantity of money is $3 for every dollar of GDP. D) nominal GDP is 1/3 the size of the quantity of money.

b

8) Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond increases from $1,000 to $1,250, then the interest rate on the bond A) rises from 8 percent to 10 percent. B) falls from 10 percent to 8 percent. C) does not change because it is not affected by the price of the bond. D) falls from 10 percent to 6 percent.

b

16) When the Fed lowers the federal funds rate, it can lead to A) a decrease in demand deposits. B) the Fed selling government securities C) an increase in lending by banks. .D) a decrease in the quantity of money.

c

18) The Fed buys $100 million of government securities from Bank A. What is the effect on the Federal Reserve's balance sheet? A) Securities increase by $100 million and reserves of Bank A decrease by $100 million. B) Securities decrease by $100 million and reserves of Bank A increase by $100 million. C) Securities increase by $100 million and reserves of Bank A increase by $100 million. D) Securities increase by $100 million and Federal Reserve notes (currency) decrease by $100 million.

c

2) In January 2015, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2015, Tim spent $200,000 on new machines. During 2015, Tim's gross investment totaled A) $1 million B) $900,000 C) $200,000 D) $300,000

c

20) If you lend a dollar for a year and at the end of the year the price level has risen by 10 percent A) the purchasing power of your loan has remained constant over the year regardless of the interest rate at which you lent it. B) the purchasing power of your loan has risen over the year regardless of the interest rate at which you lent it. C) you must have earned a nominal interest rate of 10 percent to maintain the purchasing power of your loan. D) you must have earned a nominal interest rate of 5 percent to maintain the purchasing power of your loan.

c