Macro Final- HW 7 and 8, Exam 3

A decrease in the interest rate shifts the money demand curve to the right. True/False

False

An increase in the interest rate reduces the opportunity cost of holding money. True/False

False

An increase in the money supply will increase both the amount of money demanded and output True/False

True

The Federal Reserve banks make loans to member banks at a special interest rate called the discount rate. True/False

True

For any value of the required reserve ratio (RRR), the money multiplier is a. 1/RRR b. 1 - (1/RRR) c. RRR multiplied by the change in reserves d. 1 - RRR e. (1/RRR) -1

a. (1/RRR)

Which of the following would lead to a movement down and along a stationary money demand curve? a. A decrease in the interest rate b. A decrease in the price level c. An increase in the interest rate d. An increase in the price level e. An increase in real income

a. (A decrease in the interest rate) (interest rate= only thing that moves you along the demand curve)

The Fed's open market operations involve a. buying and selling of government bonds b. changes of the discount rate c. setting the required reserve ratio d. buying and selling corporate bonds e. a policy of last resort used to avert a financial crisis

a. (buying and selling of government bonds)

Which of the following is not included in the M1 money stock? a. small time deposits b. demand deposits c. checking account deposits d. travelers' checks e. cash in the hands of the public

a. (small time deposits)

The least liquid of the following assets is a. cash in the hands of the public b. Certificates of deposit c. savings accounts d. travelers' checks e. demand deposits

b. (Certificates of deposit)

The institution charged with creating and regulating the U.S. money supply is the a. U.S. Treasury b. Federal Reserve System c. Department of Commerce d. Department of Weights and Measures e. U.S. Mint

b. (Federal Reserve System)

The standard definition of M1 is a. currency + checking account balances + saving account balances b. currency + checking account balances + travelers' checks c. currency + checking account balances + credit cards d. currency + credit cards + certificates of deposit e. currency only

b. (currency + checking account balances + travelers' checks)

If the Fed wishes to raise the interest rate, it will a. increase the money supply b. decrease the money supply c. increase money demand d. decrease money demand e. simply set a higher market interest rate

b. (decrease the money supply)

Fiat money is a. money with intrinsic value (gold coins) b. money without intrinsic value c. any currency made of paper d. a tangible asset like a house e. money that is backed by gold

b. (money without intrinsic value)

The demand curve for money a. shows the amount of money people actually hold b. shows the amount of money people would like to hold, given the interest rate c. shifts if the interest rate changes d. is independent of the price level e. changes whenever the Fed changes the money supply

b. (shows the amount of money people would like to hold, given the interest rate)

If the Fed sells $1,500 in bonds and the resulting money supply change is $7,500, what is the RRR? a. 5.0 b. 0.2 c. 0.1 d. 0.4 e. 0.8

b. 0.2 ((1/x)1500=7500)

Assuming that households do not change their cash holdings and banks loan out all of their excess reserves, if the required reserve ratio (RRR) is 20 percent and the Fed purchases $2,000 worth of bonds from banks, how much money will be eventually created? a. $1,800 b. $2,000 c. $10,000 d. $18,000 e. $20,000

c. ($10,000)

Given the following information, what would be the value of M1? Small time deposits $650 billion Checking deposits $300 billion Savings-type accounts $750 Money market mutual funds $600 Travelers' checks $25 Large time deposits $600 Cash in hand $100 a. $400 billion b. $100 billion c. $425 billion d. $475 billion e. $1175

c. ($425 billion) (CHECKING DEPOSITS $300 TRAVELERS' CHECKS $25 CASH IN HAND $100)

If the reserve requirement is 0.2 and demand deposits are $800 (assume no earlier loans), the banks can lend out a. $800 b. $80 c. $640 d. $160 e. $960

c. ($640)

If nominal GDP is $5 trillion and the money supply is $1 trillion, then velocity will be: a. 1/5 b. 4 c. 5 d. 6 e. 50

c. (5) (5/1 or (NGDP/M))

Which of the following is a reason why a bank may hold excess reserves? a. It earns more interest on reserves than on loans. b. It is required to do so. c. It may want flexibility to increase its loans if interest rates rise in the near future. d. Banks often expect a drop in the required reserve ratio. e. Banks often expect a rise in the required reserve ratio.

c. (It may want flexibility to increase its loans if interest rates rise in the near future.)

The demand deposit multiplier is likely to be smaller than 1/RRR if a. the public will not want to change its holdings of currency b. the public holds no currency c. banks want to hold excess reserves d. want to hold no excess reserves e. banks increase the number of loans they offer to make a larger profit

c. (banks want to hold excess reserves)

If the money supply decreases, there will be a decline in a. government purchases b. unemployment c. economic investment d. demand for bonds e. deflationary pressures

c. (economic investment)

An individual would be most likely to increase the amount of money he wants to hold if a. the price level declines b. the price level declines and the interest rate increases c. his real income increases d. the interest rate increases e. the interest rate and his real income decrease

c. (his real income increases)

The primary reason that U.S. money has value is that it a. is backed by gold b. is fiat money c. is accepted by others in exchange for goods and services d. is commodity money e. has a fixed value established by the Federal Reserve.

c. (is accepted by others in exchange for goods and services)

Commercial banks can increase the money supply by a. refusing demand deposits b. loaning out required reserves c. loaning out excess reserves d. selling bonds to the public e. buying bonds from the Fed

c. (loaning out excess reserves)

The Fed can decrease the money supply by a. decreasing the reserve requirement b. making open market purchases of bonds c. selling government bonds d. destroying printed currency e. creating wealth

c. (selling government bonds)

Open market sales of bonds by the Fed drain reserves from the banking system and shift a. the allocation of wealth between bonds and stocks b. the economy toward a trough in the business cycle c. the money supply curve leftward d. reserves to nonmember banks e. the demand for money curve leftward

c. (the money supply curve leftward)

If a commercial bank has assets valued at $200 million and a net worth of $20 million, what is the value of the bank's liabilities? a. There is not enough information to determine. b. $20 million c. $220 million d. $180 million e. $200 million

d. ($180 million)

If the interest rate is dropped, what would be the effect on spending? a. Spending on cars would decrease. b. Business spending on new capital would decrease. c. Spending on consumer durables would decrease. d. Business spending on new factories would increase. e. Spending on new homes would decrease.

d. (Business spending on new factories would increase.)

How would an increase in the required reserve ratio affect banks' ability to create money? a. Banks will be able to create more money because of the decrease in excess reserves. b. Banks will be able to create more money because of the increase in the demand deposit multiplier. c. It will have no effect on banks' ability to create money. d. It will reduce banks' ability to create money by forcing them to hold more reserves. e. It will reduce the banks' ability to create money by increasing excess reserves.

d. (It will reduce banks' ability to create money by forcing them to hold more reserves.)

Which of the following groups exerts the most control over the money supply in the United States? a. The executive branch of government b. The legislative branch of government c. The judicial branch of government d. The Federal Reserve e. The U.S. Treasury Department

d. (The Federal Reserve)

If the required reserve ratio is 20 percent, banks loan out all excess reserves, people hold no currency, and the Fed sells $5,000 worth of bonds to banks, what is the ultimate impact on the money supply? a. The money supply will increase by $5,000. b. The money supply will decrease by $5,000. c. The money supply will increase by $25,000. d. The money supply will decrease by $25,000. e. The money supply will not change.

d. (The money supply will decrease by $25,000.)

Which of the following is the most liquid asset? a. a certificate of deposit b. a government bond c. a share of corporate stock d. a checking account balance e. fine jewelry

d. (a checking account balance)

When economists speak of the demand for money, they refer to the amount of money people would like to hold a. given that it can only be printed slowly b. in the best of all possible worlds c. in their bank accounts rather than their wallets d. at each interest rate e. rather than spend

d. (at each interest rate)

M1 and M2 are a. usually equal b. aggregates that, when added together, encompass all methods of payment c. nonofficial measures of the U.S. money supply d. both measures of the U.S. money supply e. not ways way to measure the U.S. money supply

d. (both measures of the U.S. money supply)

Gold and silver, when used as money, are referred to as a. fiat money b. precious money c. paper currency d. commodity money e. exchange money

d. (commodity money)

If the Fed conducts an open market purchase of bonds, the a. money supply decreases as reserves are injected into the banking system b. demand for money increases as reserves are drained from the banking system c. demand for money decreases as reserves are injected into the banking system d. money supply increases as reserves are injected into the banking system e. money supply increases as reserves are drained from the banking system

d. (money supply increases as reserves are injected into the banking system)

In the short run macro model, a decrease in the money supply will a. lower the interest rate, increase spending, and increase GDP b. lower the interest rate reduce spending, and lower GDP c. raise the interest rate, increase spending, and increase GDP d. raise the interest rate, reduce spending, and lower GDP e. raise the interest rate, reduce spending, and increase GDP

d. (raise the interest rate, reduce spending, and lower GDP)

A reduced interest rate stimulates investment by a. reducing the prospects for a large profit from new investment b. enabling firms to ignore the opportunity costs of financing new investment c. increasing the opportunity cost of the investment d. reducing the cost of the borrowing e. signaling the existence of eager buyers

d. (reducing the cost of the borrowing)

Which of the following is included in the M2 money stock? a. bonds b. stocks c. gold d. savings accounts e. credit card balances

d. (savings accounts)

If there is a decrease in the price level, a. there will be a rightward movement along a stationary money demand curve b. there will be a leftward movement along a stationary money demand curve c. the demand curve for money will shift rightward d. the demand curve for money will shift leftward e. there will be no movement of the demand curve for money and no movement along it

d. (the demand curve for money will shift leftward)

If the price of bonds rises, a. the Fed will decrease the money supply b. the Fed will increase the money supply c. the interest rate will rise d. the interest rate will fall e. inflation must be accelerating

d. (the interest rate will fall) (inversely related)

Assuming that households do not change their cash holdings and banks loan out all of their excess reserves, if the RRR is 10% and the Fed purchases $2,000 worth of bonds from banks, how much money will eventually be created? a. $1,800 b. $2,000 c. $9,000 d. $18,000 e. $20,000

e. ($20,000) (1/.1)2,000

Which of the following is a liability of a commercial bank? a. Property and buildings owned b. Loans c. Government bonds held d. Cash in its vault e. Deposits at the bank

e. (Deposits at the bank)

If the Fed increased the discount rate, a. banks would make more loans b. the money supply would increase c. firms would be more likely to seek out loans d. the required reserve ratio would increase e. banks would make fewer loans

e. (banks would make fewer loans)

To determine the total change in deposits as a result of an injection of excess reserves, we must a. sum the number of loans a bank has made b. multiply the injection of excess reserves by 10 c. multiply the number of loans by the expenditure multiplier d. sum the reserves of each bank e. multiply the injection of excess reserves by the money multiplier

e. (multiply the injection of excess reserves by the money multiplier)

Demand deposits are liabilities to a bank because a. the bank must pay interest on these accounts b. we need some method of creating a balance c. the bank must be willing to account for loans and bonds d. the bank could potentially lose this money if loans are not repaid e. the customers have the right to withdraw the funds from their checking accounts

e. (the customers have the right to withdraw the funds from their checking accounts)