AP Gov Unit 4

Assume that the reserve requirement is 10 percent. Marwa deposits $1 million into her checking account at First Bank. The deposit will initially increase excess reserves at First Bank by

$900,000

Suppose that the real interest rate is equal to seven percent and the expected inflation rate is currently three percent. If an oil crisis in the Middle East increases the expected inflation rate to four percent, the new nominal interest rate is equal to

11%

For which of the following sets of unemployment and inflation rates will a central bank be most reluctant to increase the rate of growth in the money supply?

5% and 10%

A commercial bank's ability to create money depends on which of the following?

A fractional reserve banking system

Which of the following shifts the money demand curve to the right?

An increase in price level

Which of the following will lead to a decrease in a nation's money supply?

An increase in reserve requirements

It will decrease if the expected inflation rate increases by more than the nominal interest rate.

Currency

If the central bank raises the required reserve ratio, the money multiplier and the money supply will change in which of the following ways? Money Multiplier and Money Supply

Decrease and Decrease

The implementation of an expansionary monetary policy by the Canadian central bank will result in which of the following changes in the short run? Interest Rate and Canadian Dollar

Decrease and Depreciate

Assume that the public holds part of its money in cash and the rest in checking accounts. If the central bank lowers the reserve requirement from 16% to 8%, the money supply will

Decrease by half

Which of the following would be included as a liability on a commercial bank's balance sheet?

Demand deposits

One way in which the Federal Reserve works to change the United States money supply is by changing the

Discount rate

Under which of the following conditions would a restrictive monetary policy be most appropriate?

High inflation

Suppose the national government increased deficit spending on goods and services, increasing its demand for loanable funds. In the long run, this policy would likely result in which of the following?

Increase in the real interest rate

If the federal government reduces its budget deficit when the economy is close to full employment, which of the following will most likely result?

Interest rates will decrease.

Which of the following will most likely occur in an economy if more money is demanded than is supplied?

Interest rates will increase.

If both the nominal interest rate and the expected inflation rate increase, what will happen to the real interest rate?

It will decrease if the expected inflation rate increases by more than the nominal interest rate.

When the central bank sells government bonds on the open market, which of the following will most likely increase?

Nominal Interest rates

When there is excess demand in the loanable funds market, which of the following will occur?

Real interest rates will increase.

If a central bank significantly increases its sales of government bonds, it is most likely responding to which of the following Correct!

Rising price levels

When Stephanie took out a one-year fixed-rate loan, she expected to pay a real interest rate of 3 percent. At the end of the year, the real interest rate had fallen to 2 percent. Which of the following could have caused the decrease in the real interest rate?

The actual inflation rate was greater than the expected inflation rate.

Which of the following will occur in the money market when the aggregate price level increases?

The demand for money will increase and nominal interest rates will increase.

If businesses become optimistic about the profitability of investments in an economy, which of the following will happen in the loanable funds market in the short run?

The real interest rate will increase.

An increase in government spending with no change in taxes leads to a

higher interest rate

The transaction (buying) demand for money is very closely associated with money's use as a

medium of exchange

The demand for money increases when national income (GDP) increases because

spending on goods and services increases

Pat deposits a portion of her wages into a personal savings account every week. The saved money can be considered to be primarily a

store of value

Banks create money when

they make loans