all of econ
Assume that the Federal Reserve increases the monetary base by $1 billion when the reserve requirement is 10 percent. The money supply will increase by:
$10 billion
When $1,000 gets deposited into the banking system, and the reserve ratio is 10%, what is the most the money supply could increase?
$10,000
If Martha puts $100 in the bank today at 6%, how much will she have in three years?
$119.10
How much will Bill and Mary need to put in the bank today at 4% interest to have $20,000 in five years for a down payment on a house?
$16,439
When the reserve ratio is 20%, the Fed buys $500,000 worth of government bonds in the open market. What is the maximum amount that the money supply could increase?
$2.5 million
Monetarism is the economic viewpoint that states which of the following?
Excessive expansion of the money supply leads to inflation.
When the central bank raises the reserve ratio from 20% to 25%, how does the multiplier change?
From 5 to 4
George reaches into his wallet and pulls out a $20 US bill to pay for his coffee. By using currency to make a purchase, what is George actually doing?
George is paying with a government guaranteed note.
According to the quantity theory of money, increasing the money supply will lead to what?
Higher economic output in the short-run and inflation in the long-run
Which of the following statements BEST explains the velocity of money?
How many times a single dollar is spent, or turned over within a certain time period
If the Federal Reserve lowers reserve requirements, nominal GDP will most likely do which of the following?
Increase
What will the purchase of government bonds from the public in the open market by the central bank do?
Increase the money supply
As the price level decreases, how is the value of money impacted?
Increases, so people want to hold less of it.
How does inflation prevent most of the money in use today from serving as a pure store of value?
Inflation causes the purchasing power of money to decrease over time.
The quantity theory of money describes the relationship between what fiscal components?
Inflation, the money supply, real output, and prices.
Because the central bank controls the money supply, it also controls what other economic driver?
It also controls market interest rates.
Money is a medium of exchange because:
It can be used to satisfy any number of needs and desires.
Why does the Federal Reserve require commercial banks to maintain reserves with them?
It gives the Federal Reserve more control over the money supply and interest rates.
All of the following impacts the velocity of money except
how many years ago the currency was printed
Money serves as a standard of deferred payment when:
it is used to buy something now and make payments later on.
The government issues a new two-dollar and fifty cent bill. What is the intrinsic value of the new currency?
nothing
Most bonds have par values of:
$1,000
If a couple saves $5,000 a year for five years at 5% interest, what is the future value of this annuity after those 5 years?
$27,628
According to the T-account shown, if the required reserve ratio is 10%, what is the maximum amount of additional loans this bank can make?
$4,000
Assume that the reserve requirement is 25%. If banks have excess reserves of $10,000, which of the following is the maximum amount of additional money that can be created by the banking system through the lending process?
$40,000
A bank has demand deposits of $50,000 and actual reserves of $5,000. If the reserve requirement is 10%, what is the maximum the bank can loan out at this time?
$45,000
Lydia deposits $70,000 into the First National Bank of Ceelo. The required reserve ratio is 10%. How much will the money supply increase if the bank loans out excess reserves?
$63,000
A money market account at the bank offers a 4% nominal interest rate, while inflation is expected to be 3%. What is the real interest rate for this account?
1%
If banks have excess reserves of $5,000, and the money supply increased by $20,000, what is the reserve ratio?
25%
Let us assume that the price level remains constant and the nominal gross domestic product is $8 trillion and the money supply is $2 trillion. Use the equation of exchange (MV=PY) to determine what the velocity of money would be.
4
There is a company offering $5000 bonds which will earn an annual interest of $200. What is the coupon rate?
4%
If nominal GDP = $5,000 billion and the money supply is $1,000 billion, assuming a constant price level, what is the velocity of money?
5
In the country of Athenia, banks charge 10% interest on all loans. If the general price level has been increasing at a rate of 2% per year, what is the real rate of interest in Athenia?
8%
The real interest rate for a consumer loan is 5%, and the expected inflation rate is 3%. What is the nominal interest rate on this consumer loan?
8%
Which of the following BEST explains the contractual obligation associated with stock?
An ownership interest in a company.
What is a coupon rate?
Annualized coupon divided by par value.
Assume that there are two parties to an exchange and that they value the goods they would receive as much as the goods they would give away. What do economists call this?
A coincidence of wants
The time value of money means that:
A dollar received today is worth more than a dollar received tomorrow
How would economists graphically illustrate a decrease in the money supply?
A leftward shift of the vertical money supply curve.
When someone deposits money into a savings account, this demand deposit becomes _____ to the bank?
A liability
If the Federal Reserve suddenly decreases the growth rate of the money supply from 6% to 4% per year, what is likely to happen to aggregate demand and real Gross Domestic Product in the short-run?
Aggregate demand will decrease and real GDP will decline.
When the Fed lowers the discount rate, what will happen?
Banks borrow more from the Fed, so reserves increase.
Why is the Fed referred to as 'the lender of last resort'?
Banks can always borrow directly from the Fed when other banks will not lend to them.
Which of the following is NOT true regarding the role of banks in the economy?
Banks control the fiscal policy of the country.
Why is gold NOT considered money?
Because despite being a store of value, it is not a medium of exchange or a unit of account.
Which of the following financial assets is a debt instrument - a promise by the issuer to pay the holder their principal plus interest at some future date?
Bonds
Which of the following is a component of M1?
Cash and coins in circulation
Money that has an intrinsic value is called what?
Commodity money
The Federal Reserve achieves its monetary goals by doing which of the following?
Controlling the money supply and interest rates
In a fractional reserve banking system, how does a decrease in reserve requirements affect the money supply?
It increases the money multiplier and the money supply.
Which of the following is an inaccurate description of The Federal Reserve?
It is the US mint.
Which of the following statements is FALSE regarding the discount rate?
It is the rate that banks charge to other banks when they need more reserves.
Which of the following is FALSE regarding the Federal Reserve?
It issues debit cards.
How does high economic output lead to higher nominal interest rates?
It leads to higher income which leads to higher demand for money
What does it mean if everything in an economy can be quoted in terms of money?
It refers to money as the foundation of every transaction.
How does the demand curve for money shift?
It shifts down as the price level decreases.
Money demand varies depending on what factors?
It varies directly with the price level and output.
When the reserve requirement is 20% and banks hold no excess reserves, how will an open market sale of $500,000 of government securities by the Fed affect money supply?
It will decrease the money supply by up to $2.5 million.
Which of these is an annuity?
Joan gets $100 every year for the rest of her life
How do banks make money?
Loaning out excess reserves
How do banks make money?
Loaning out their excess reserves
What happens when there is an increase in the demand for money when the supply of money is unchanged?
Lower interest rates
How does an increase in the money supply impact economic output within the US economy?
Lower interest rates encourage additional borrowing and investment, leading to higher aggregate demand.
When interest rates are 20%, the demand for money is:
Lower than it would be if interest rates are 2%.
Which of the following statements is true regarding the money supply?
M1 is more liquid than M2.
Which of the following measures of the money supply is largest?
M2
Loretta deposits money into her savings account. If all other factors are held constant, how does this affect M2?
M2 increases
What are some of the objectives of the Fed?
Maximize employment, stabilize prices, and moderate interest rates
Which of the following lists is in the correct order, from least to most, of the market value of each type of financial asset discussed in this lesson?
Money, Stock, Bonds
The velocity of money is a ratio of what quantities?
Nominal GDP to a measure of the money supply
Which of the following insures that the US dollar maintains its value?
Only the promise of the United States government
The purchases and sales of government securities in the open market by the Federal Reserve are referred to as which of the following?
Open market operations
In the formula C = i / p, what does the p represent?
Par value
According to the quantity theory of money, an increase in the money supply results in an increase in which of the following?
Real GDP
Which of the following is FALSE regarding real interest rates?
Real interest rates are determined in the money market
Besides being known as the reserve ratio, what is the fraction of a customer's deposits that a bank is required to hold in reserve also called?
Required reserves
The money multiplier is a relationship between which two drivers?
Reserves in a banking system and the money supply.
Most bonds pay interest:
Semi-annually
In economics, the word 'liquid' refers to which of the following?
The ability to quickly and easily convert an asset to cash.
When a deposit is made into a bank, what does the bank do?
The bank sets aside a required reserve and loans out the rest.
Which of the following statements BEST explains how a high velocity of monetary exchange effects the economy?
The changes in the money supply will have a greater effect on nominal GDP
What is the interest rate that the Federal Reserve charges on loans it makes to member banks called?
The discount rate.
How would buying or selling government bonds affect the federal funds rate, if it was the government that initiated the sale?
The government uses the sales of securities to change the money supply, thus changing the federal funds rate.
Which of the following accurately describes the discount rate?
The interest rate member banks pay when they borrow directly from the Fed.
If all other factors remain equal, what would happen to interest rates when the amount of money circulating in the economy is increased?
The interest rate would decline.
What is the economics model that describes the demand and supply of money in a nation called?
The money market
What happens when money demand increases and all other things remain constant?
The money market finds a new equilibrium and the market interest rate rises
How does the economy change every time banks loan out excess reserves?
The money supply increases.
Under fractional banking, when a bank lends to a customer, which of the following happens?
The money supply increases.
What is the reserve requirement?
The proportion of customer deposits a bank is required to hold in reserve.
What is the prime rate?
The rate banks charge to their best customers.
What happens if the Federal Reserve sells a large amount of government securities in the open market?
The total amount of loans in the banking system will decrease.
What will happen if the Federal Reserve sells a significant amount of government securities in the open market?
The total amount of loans made by commercial banks will decrease.
Which of the following statements is FALSE about the monetary tools of the Federal Reserve?
They include changing tariffs on imported goods.
Why do banks choose to borrow directly from the Fed?
They need additional reserves and cannot borrow from other banks.
Why was money created?
To reduce the costs of making transactions in the economy.
The Fed's monetary policy has the greatest effect on real Gross Domestic Product under what set of conditions?
When interest rates are low and the interest rate has a large effect on investment spending.
When economists illustrate the money market, the demand curve is _____ while the supply curve is _____.
downward sloping; vertical
In order to adjust a nominal interest rate for inflation, which of the following formula should be used?
r = n - i
What are the conditions for something to qualify as a financial asset?
something you can own, something with monetary value, something where that monetary value is derived from a contractual claim
