Money: Quiz

Luigi is willing to lend Klaus $5,000 for one year at a nominal rate of interest of 7 percent. Both Luigi and Klause expect the rate of inflation to be 2 percent in the next year. If the actual rate of inflation over the year was 1 percent, what is the real return did Luigi receive? Multiple Choice ◉6 percent ◉5 percent ◉8 percent ◉4 percent

6 percent

Use the following table to answer the next question. Interest Rate | Demand for Money (billions) 7% | $200 6 | 300 5 | 400 4 | 500 If the current interest rate is 5 percent, what will be the equilibrium interest rate if the money supply falls by $100 billion dollars? Multiple Choice ◉7 percent ◉6 percent ◉4 percent ◉5 percent

6 percent

Use the following given market-for-money diagrams to answer the next question. The total demand for money is shown by Multiple Choice ◉D1. ◉D2. ◉D3. ◉S.

D3.

Which group is responsible for the policy decision of changing the money supply? Multiple Choice ◉Federal Open Market Committee ◉Office of Management and Budget ◉Thrift Advisory Council ◉Federal Advisory Council

Federal Open Market Committee

Suppose that Ava withdraws $300 from her savings account at Second Bank. The reserve requirement facing Second Bank is 10%. Assume the bank does not wish to hold any excess reserves of new deposits. Use this information to complete the balance sheet below to show how Second Bank's assets and liabilities change when Ava withdraws the $300 from the bank. Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign. A Simple Bank Balance Sheet Assets | Liabilities Change in Reserves: $ ___ | Change in Deposits: $ ___ Change in Loans: $ ___

Reserves: -30 Loans: -270 Deposits: -300

What function is money serving when you deposit it in a savings account? Multiple Choice ◉a store of value ◉a unit of account ◉a checkable deposit ◉a medium of exchange

a store of value

Suppose that Kesha deposits $7,000 into her savings account at First Bank. The reserve requirement facing First Bank is 12%. Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign. a. Use this information to show how First Bank's assets and liabilities initially change when Kesha deposits the $7,000 in the bank. A Simple Bank Balance Sheet Assets | Liabilities Change in Reserves: $ ____ | Change in Deposits: $ ____ b. How much money can First Bank lend out to other people? $ ____ c. Now suppose that First Bank holds no excess reserves and lends out all of the excess reserves resulting from Kesha's deposit. How do First Bank's assets and liabilities change? A Simple Bank Balance Sheet Assets | Liabilities Change in Reserves: $ ____ Change in Loans: $ ____

a. Reserves: 7,000 Deposits: 7,000 b. 6,160 c. Reserves: -6,160 Loans: 6,160 Explanation a. When $7,000 is deposited into First Bank, the bank's deposits will increase by $7,000, so $7,000 should be entered into the response on the liabilities side. The $7,000 of additional deposits will immediately sit at the bank as reserves before anything happens, so $7,000 should be entered into the response on the asset side. b. Since the reserve requirement is 12%, the bank must hold that amount of deposits as reserves. To meet the reserve requirement, First Bank would have to keep 12% × $7,000 = $840 as reserves. So the bank could increase loans by the amount of the additional deposit minus the reserves to meet the reserve requirement, which is $7,000 − $840 = $6,160. First Bank can loan out $6,160 from the deposit. c. First Bank holds no excess reserves, so the bank would want to increase loans by the maximum amount of $6,160. When the bank increases loans, it does so from the money it has in reserves. An increase in loans would be offset by a decrease in reserves. For First Bank, in this case, loans would increase by $6,160, and those additional loans would decrease reserves by $6,160. To show the increase in loans, $6,160 should be entered into the response on the asset side as loans = $6,160. To show the decrease in reserves, the amount will need to be entered as a negative, so -$6,160 should be entered into the response on the asset side as reserves = -$6,160.

Suppose the Federal Reserve increases the amount of reserves by $100 million and the total money supply increases by $600 million. Instructions: Enter your answers as a whole number. a. What is the money multiplier? _ b. Using the money multiplier from part a, how much will the money supply change if the Federal Reserve increases reserves by $60 million? $ ___ million

a. 6 b. 360

Suppose the Federal Reserve sets the reserve requirement at 14%, banks hold no excess reserves, and no additional currency is held. Instructions: In part a, round your answer to one decimal place. In parts b and c, enter your answers as a whole number. If you are entering a negative number include a minus sign. a. What is the money multiplier? __ b. How much will the total money supply change by if the Federal Reserve changes reserves by -$70 million? $ ___ million Suppose the Federal Reserve wants to decrease the total money supply by $400 million. c. How much should the Federal Reserve change reserves to achieve this goal? $ __ million

a. 7.1 b. -500 c. -56 Explanation a. Depending on the data that you have, the money multiplier can be found by taking 1/rr, where rr is the reserve requirement in decimal form, or by taking the total change in the money supply divided by the change in reserves. In this case, we are given a reserve requirement of 14%. Therefore, we can find the money multiplier by taking 1/rr, which is equal to 1/0.14 = 7.1. b. When we know the money multiplier, we can find the total change in the money supply by taking the money multiplier times the change in reserves. If the money multiplier is 7.1 and reserves decrease by $70 million, then the total change in the money supply can be found by taking 7.1 × -$70 million = -$497 million. c. Because the total change in the money supply equals the money multiplier times the change in reserves, we can use this relationship to find the change in reserves given the total change in the money supply and the money multiplier. This uses the same relationship only with different information. The total change in the money supply desired is a $400 million decrease, and with a reserve requirement of 14%, we know the money multiplier is 7.1. Thus, putting in the information, we have -$400 million = 7.1 × Change in Reserves. Using algebra to find the change in reserves, we take the -$400 million and divide it by 7.1 such that -$400 million/7.1 = -$56 million.

To keep high inflation from eroding the value of money, monetary authorities in the United States Multiple Choice ◉create token money that is less than its intrinsic value. ◉make paper money legal tender for the payment of debt. ◉establish insurance on checkable deposit accounts. ◉control the supply of money in the economy.

control the supply of money in the economy.

If, in the market for money, the quantity of money demanded exceeds the money supply, the interest rate will Multiple Choice ◉fall, causing households and businesses to hold less money. ◉rise, causing households and businesses to hold less money. ◉rise, causing households and businesses to hold more money. ◉fall, causing households and businesses to hold more money.

rise, causing households and businesses to hold less money.

Who determines the size of the money supply in the United States? Multiple Choice ◉the Federal Reserve ◉the Treasury Department ◉the Federal Reserve and the Treasury Department together ◉the Federal Reserve and the banking system together

the Federal Reserve and the banking system together