Econ chapter 16

If velocity = 5, the price level = 2, and the real value of output is 2,500, then the quantity of money is

$1000

The manager of the bank where you work tells you that your bank has $6 million in excess reserves. She also tells you that the bank has $400 million in deposits and $362 million dollars in loans. Given this information you find that the reserve requirement must be

6/362.

If a bank that desires to hold no excess reserves and has just enough reserves to meet the required reserve ratio of 15 percent receives a deposit of $600, it has a A. $510 increase in excess reserves and a $90 increase in required reserves B. $600 increase in excess reserves and no increase in required reserves C. $90 increase in excess reserves and a $510 increase in required reserves D. $600 increase in required reserves and no increase in excess reserves

600(0.15) = 90 increase in required reserves A

Assuming the only other item Namdian banks have on their balance sheets is loans, what is the value of existing loans made by Namdian banks?

625 million dias

The country of Robinya has a tax system identical to that of the United States. Suppose someone in Robinya bought a parcel of land for 10,000 deera (the local currency) in 1970 when the price index equaled 100. In 2010, the person sold the land for 100,000 deera, and the price index equaled 500. The tax rate on nominal capital gains was 20 percent. Compute the taxes the person paid on the nominal gain and the change in the real value of the land in terms of 2010 prices to find the after-tax real rate of capital gain.

64 percent

Which of the following both increase the money supply? A. a decrease in the discount rate and a decrease in the interest rate on reserves B. an increase in the discount rate and a decrease in the interest rate on reserves C. a decrease in the discount rate and an increase in the interest rate on reserves D. an increase in the discount rate and an increase in the interest rate on reserves

A

During a bank run, depositors decide to hold more currency relative to deposits and banks decide to hold more excess reserves relative to deposits. A. Both the decision to hold relatively more currency and the decision to hold relatively more excess reserves would make the money supply decrease. B. The decision to hold relatively more currency would make the money supply increase. The decision to hold relatively more excess reserves would make the money supply decrease. C. Both the decision to hold relatively more currency and the decision to hold relatively more excess reserves would make the money supply increase. D. Both the decision to hold relatively more currency and the decision to hold relatively more excess reserves would make the money supply increase. E. The decision to hold relatively more currency would make the money supply increase. The decision to hold relatively more excess reserves would make the money supply decrease.

A holding more currency would mean that you're holding back money supply, less selling and buying bonds

If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by A. buying bonds. This buying would increase reserves. B. selling bonds. This selling would reduce reserves. C. buying bonds. This buying would reduce reserves. D. selling bonds. This selling would increase reserves.

A selling bonds would decrease the amount of reserves (money set aside after deposits), so the fed would buy bonds, which would increase the reserves they would need to put aside.

If a bank uses $500 of excess reserves to make a new loan when the reserve ratio is 8 percent, this action by itself initially makes the money supply A. and wealth increase by $500. B. increase by $500 while wealth does not change. C. decrease by $500 while wealth decreases by $500. D. and wealth decrease by $500.

B

If people decide to hold more currency relative to deposits, the money supply A. rises. The larger the reserve ratio is, the more the money supply rises. B. falls. The larger the reserve ratio is, the less the money supply falls. C. falls. The larger the reserve ratio is, the more the money supply falls. D. rises. The larger the reserve ratio is, the less the money supply rises.

B

If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by A. buying bonds. This buying would increase reserves. B. selling bonds. This selling would reduce reserves. C. selling bonds. This selling would increase reserves. D. buying bonds. This buying would reduce reserves.

B

Imagine an economy in which: (1) pieces of paper called yollars are the only thing that buyers give to sellers when they buy goods and services, so it would be common to use, say, 50 yollars to buy a pair of shoes; (2) prices are posted in terms of yardsticks, so you might walk into a grocery store and see that, today, an apple is worth 2 yardsticks; and (3) yardsticks disintegrate overnight, so no yardstick has any value for more than 24 hours. In this economy, A. the yardstick is a medium of exchange but it cannot serve as a unit of account. B. the yardstick is a unit of account but it cannot serve as a store of value. C. the yollar is a unit of account, but it is not a medium of exchange and it is not a liquid asset. D. the yardstick is a medium of exchange but it cannot serve as a store of value, and the yollar is a unit of account.

B

The money multiplier equals A. 1/(1+R), where R represents the quantity of reserves in the economy. B. 1/R, where R represents the reserve ratio for all banks in the economy. C. 1/R, where R represents the quantity of reserves in the economy. D. 1/(1+R), where R represents the reserve ratio for all banks in the economy.

B

When the Federal Reserve sells assets from its portfolio to the public with the intent of changing the money supply, A. those assets are items that are included in M2 and the Fed's reason for selling them is to increase the money supply. B. those assets are government bonds and the Fed's reason for selling them is to decrease the money supply. C. those assets are government bonds and the Fed's reason for selling them is to increase the money supply. D. those assets are items that are included in M2 and the Fed's reason for selling them is to decrease the money supply.

B

Which of the following is not correct? A. The President of the New York Federal Reserve Regional Bank always gets to vote on the decisions made by the Federal Open Market Committee. b. The Federal Open Market Committee meets every 12 weeks. C. The regional Federal Reserve Banks play a role in regulating banks and ensuring the health of the banking system. D. U.S. monetary policy is made by the Federal Open Market Committee.

B

Suppose the Fed requires banks to hold 9 percent of their deposits as reserves. A bank has $18,000 of excess reserves and then sells the Fed a Treasury bill for $9,000. How much does this bank now have to lend out if it decides to hold only required reserves? A. $27,190 B. $27,000 C. $9,000 D. $26,190

B 18,000 + 9,000 = 26,190

If people decide to hold less currency relative to deposits, the money supply A. falls. The Fed could lessen the impact of this by buying Treasury bonds. B. rises. The fed could lessen the impact of this by selling treasury bonds C. falls. The fed could lessen the impact of this by selling treasury bonds D. rises. The fed could lessen the impact of this by buying treasury bonds.

B Putting more money into the bank would increase money supply, to prevent too much money supply from occurring, the fed would sell bonds

The monetary policy of Namdian is determined by the Namdian Central Bank. The local currency is the dia. Namdian banks collectively hold 100 million dias of required reserves, 25 million dias of excess reserves, 250 million dias of Namdian Treasury Bonds, and their customers hold 1,000 million dias of deposits. Namdians prefer to use only demand deposits and so the money supply consists of demand deposits. Refer to Scenario 29-1. Suppose the Central Bank of Namdia loaned the banks of Namdia 5 million dias. Suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By how much would the money supply of Namdia change? A. 60 million dias B. 40 million dias C. 50 million dias D. none of the above is correct

B demand deposits: 1000 million excess reserves: 25 million 25/1000 = 25% demand deposits held as excess reserves 5 million loans = 1/25= 0.04 = 4% of 1000 = 40 million

A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can given the reserve requirement. A. It has $1200 in reserves and $8750 in loans B. it has $800 in reserves and $9200 in loans

B 0.08 (10000) = 800 10,000-800 = 9200 loans

An increase in the money supply might indicate that the Fed had A. sell government bonds B. increase the reserve requirement C. auction more loans to banks D. none of the above is correct

C

An increase in the money supply might indicate that the Fed had A. sold bonds in an attempt to reduce the federal funds rate B. purchased bonds in an attempt to increase the federal funds rate C. purchased bonds in an attempt to reduce the federal funds rate D. sold bonds in an attempt to increase the federal funds rate.

C

In a system of 100-percent-reserve banking, A. currency is the only form of money. B. deposits are banks' only assets. C. banks do not make loans. D. all of the above are correct

C

Other things the same if reserve requirements are decreased, the reserve ratio A.decreases, the money multiplier increases, and the money supply decreases. B. increases, the money multiplier increases, and the money supply decreases. C. decreases, the money multiplier increases, and the money supply increases. D. increases, the money multiplier increases, and the money supply increases.

C

The Federal Reserve Board of Governors A. hold lifetime appointments B. are elected by popular vote C. are appointment by the president and confirmed by the senate D. rotate each four years

C

Reserves decrease if the Federal Reserve A. lowers the discount rate but not if it auctions more credit. B. lowers the discount rate or auctions more credit. C. raises the discount rate but not if it auctions more credit. D. raises the discount rate or auctions more credit.

C raises the discount rate but not if it auctions more credit

Other things the same, if reserve requirements are increased, the reserve ratio A. decreases, the money multiplier increases, and the money supply increases. B. increases, the money multiplier increases, and the money supply increases. C. decreases, the money multiplier decreases, and the money supply increases. D. increases, the money multiplier decreases, and the money supply decreases.

D

People can write checks against A. money market mutual funds but not demand deposits B. neither demand deposits nor money market mutual funds C. demand deposits but not money market mutual funds D. demand deposits and money market mutual funds

D

Suppose banks decide to hold fewer excess reserves relative to deposits. Other things the same, this action will cause the A. money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds. B. money supply to fall. To reduce the impact of this the Fed could sell Treasury bonds. C. money supply to rise. To reduce the impact of this the Fed could buy Treasury bonds. D. money supply to rise. To reduce the impact of this the Fed could sell Treasury bonds.

D

The money supply increases when the Fed A. buys bonds. The increase will be larger, the larger is the reserve ratio. B. sells bonds. The increase will be larger, the larger is the reserve ratio. C. sells bonds. The increase will be larger, the smaller is the reserve ratio. D. buys bonds. The increase will be larger, the smaller is the reserve ratio.

D

When conducting an open-market sale, the Fed A. buys government bonds, and in so doing decreases the money supply. B. sells government bonds, and in so doing increases the money supply. C. buys government bonds, and in so doing increases the money supply. D. sells government bonds, and in so doing decreases the money supply.

D

Which of the following does the Federal Reserve not do? A. It controls the supply of money. B. It loans money to banks. C. It tries to ensure the health of the banking system. D. It makes loans to businesses that requests one.

D

Which of the following is included in both M1 and M2? A. demand deposits b. other checkable deposits C. currency D. all of the above are correct

D

Which of the following items is not included in the most narrow definition of money, M1? A. traveler's checks B. demand deposits C. currency D. savings deposits

D

The Fed can reduce the federal funds rate by A. decreasing the money supply. To decrease the money supply it could buy bonds B. increasing the money supply. To increase the money supply it could sell bonds. C. decreasing the money supply. To decrease the money supply it could sell bonds. D. increasing the money supply. To increase the money supply it could buy bonds.

D The federal funds rate is basically the interest rate, and if it's high, the fed needs to increase the amount of money in banks, which would lower interest rate. Buying bonds would also increase money supply

Which of the following is correct concerning the FOMC? A. the New York Federal Reserve Bank District President is always a voting member B. all Federal Reserve Bank presidents attend the meetings C. the members of the Board of Governors have the majority of the votes D. all of the above are correct

D federal open market committee

When the money market is drawn with the value of money on the vertical axis, if money demand shifts leftward, then initially there is an

excess supply of money which causes the price level to rise

The nominal interest rate is 5 percent and the inflation rate is 2 percent. What is the real interest rate?

nominal rate = inflation + real interest 5 = 2 + real interest 3 = real interest

The tool most often used by the Fed to control the money supply is

open market operations

An increase in the money supply might indicate that the Fed had

purchased bonds to increase banks reserves.

The money supply decreases if the Fed

sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.

Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 32 percent. Sam's after-tax real rate of interest

will be 1.2 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent.

If the central bank in some country raised the reserve requirement, then the money multiplier for that country

would decrease.

Harvey, a U.S. taxpayer, purchased 10 shares of MVC stock for $100 per share; one year later he sold the 10 shares for $130 a share. Over the year, the price level increased from 140.0 to 147.0. What is Harvey's before-tax real capital gain?

$1,300 - $1,000(1.05) but he is to report a $300 gain on his income tax

Suppose the banking system currently has $400 billion in reserves, the reserve requirement is 8 percent, and excess reserves amount to $5 billion. What is the level of deposits?

$400/0.08 5/0.08 subtract to get $4937.5

If the reserve ratio is 4 percent, then $81,250 of new money can be generated by

$81,250 (0.04) = $3250

The country of Lessidinia has a tax system identical to that of the United States. Suppose someone in Lessidinia bought a parcel of land for 20,000 foci (the local currency) in 1960 when the price index equaled 100. In 2002, the person sold the land for 100,000 foci, and the price index equaled 600. The tax rate on nominal gains was 20 percent. Compute the taxes on the nominal gain and the change in the real value of the land in terms of 2002 prices to find the after-tax real rate of capital gain.

-30 percent

If the Fed requires a reserve ratio of 6 percent, then what quantity of excess reserves does the Bank of Springfield now hold?

0.06(180,000) =10,800 Reserves - 10,800 19,800 - 10,800 =9,000

Which of the following statements is correct? In the special case of the 100-percent reserve banking the money multiplier is

1 and banks do not create money.

Last year, you earned a nominal wage of $10 per hour and the price level was 120. This year your nominal wage is $11 per hour, but you are unable to purchase the same amount of goods as last year. The price level this year must be

135

Over the past 80 years, the overall price level in the U.S. has experienced a(n)

17-fold increase

The banking system currently has $50 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve requirement to 12.5 percent and at the same time sells $10 billion worth of bonds, then by how much does the money supply change?

180 billion

You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?

2 percent

You put money into an account and earn a real interest rate of 4 percent. Inflation is 2 percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of interest?

2.5 percent

Suppose the Central Bank of Namdia purchases 25 million dias of Namdian Treasury Bonds from banks. Suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By how much would the money supply of Namdia change?

200 million

At any meeting of the Federal Open Market Committee, that committee's voting members consist of

5 Federal Reserve Regional Bank Presidents and all the members of the Board of Governors.

Which of the following is included in both M1 and M2? A. demand deposits B. money market and mutual funds C. small time deposits D. savings deposits

A

Which of the following statements regarding the Federal Open Market Committee is correct?

All regional Fed presidents attend the meetings, but only five get to vote. the New York Federal Reserve Bank District President is always a voting member the members of the Board of Governors have the majority of the votes all Federal Reserve Bank presidents attend the meetings

All Fed purchases and sales of A. government bonds are conducted at the New York Fed's trading desk. B. corporate stocks and bonds are conducted at the New York Fed's trading desk. C. real estate and other real assets are conducted by the Federal Open Market Committee. D. All of the above are correct

B

During wars the public tends to hold relatively more currency and relatively fewer deposits. This decision makes reserves A. increase, but leaves the money supply unchanged. B. and the money supply decrease. C. decrease, but leaves the money supply unchanged. d. and the money supply increase.

B

A problem that the Fed faces when it attempts to control the money supply is that A. the Fed has to get the approval of the U.S. Treasury Department whenever it uses any of its monetary policy tools. B. the Fed does not control the amount of money that households choose to hold as deposits in banks. C. the Fed does not have a tool that it can use to change the money supply by either a small amount or a large amount. D. the 100-percent-reserve banking system in the U.S. makes it difficult for the Fed to carry out its monetary policy.

B the Fed does not control the amount of money that households choose to hold as deposits in banks.

Credit cards A. represent the largest component of M1. B. are a form of money unique to the U.S. C. are not included in M1 but are included in M2. D. are not considered money.

D

Paper dollars A. are commodity money and gold coins are fiat money. B. and gold coins are both fiat monies. C. and gold coins are both commodity monies. D. are fiat money and gold coins are commodity money.

D

Relative-price variability is "automatic" when

Firms change prices only once in a while

In which of the following cases is the after-tax real interest rate highest?

Inflation is 6%,the pre tax real interest is 3%and the tax rate is 20%

Which of the following are costs incurred by people trying to protect themselves from the effects of inflation?

Menu costs and shoe leather costs

Monetary policy affects employment

Monetary policy affects employment

On a given morning, Franco sold 40 pairs of shoes for a total of $80 at his shoe store.

The $80 is a nominal variable. The quantity of shoes is a real variable.

If M = 3,000, P = 2, and Y = 6,000, what is velocity?

V = (P x Y)/M = Price level x real GDP M= money supply (2 x 6000)/3000 = 4

The Fed increases the reserve requirement, but it wants to offset the effects on the money supply. Which of the following should it do?

buy bonds to increase reserves, increased reserve requirement would result in less reserves

If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

buying bonds. This buying would increase reserves. federal funds are > federal reserves right now, so buying bonds would decrease federal funds and increase reserves

Which of the following can the Fed do to change the money supply?

change reserves or change the reserve ratio

When prisoners use cigarettes or some other good as money, cigarettes become

commodity money and function as a unit of account

When inflation causes relative-price variability,

consumer decisions are distorted and the ability of markets to efficiently allocate factors of production is impaired.

If the economy unexpectedly went from inflation to deflation,

creditors would gain at the expense of debtors

If the Fed sells government bonds to the public, then reserves

decrease and the money supply decreases.

If the public decides to hold more currency and fewer deposits in banks, bank reserves

decrease and the money supply eventually decreases.

The reserve ratio is 10 percent, banks do not hold excess reserves, and people hold only deposits and no currency. When the Fed sells $20 million worth of bonds to the public, bank reserves

decrease by $20 million and the money supply eventually decreases by $200 million.

In the last part of the 1800's

deflation made it harder for farmers to pay off their debt.

People can write checks against

demand deposits and money market mutual funds

The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi. The local unit of currency is the taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million tazes of required reserves, 75 million tazes of excess reserves, have issued 7,500 million tazes of deposits, and hold 225 million tazes of Tazian Treasury bonds. Tazians prefer to use only demand deposits and so all money is on deposit at the bank. Assuming the only other thing Tazian banks have on their balance sheets is loans, what is the value of existing loans made by Tazian banks?

deposits - (required reserves + excess reserves + treasury bonds) = 7500 - (300 + 75 + 225) =6900 loans

If Y and V are constant and M doubles, the quantity equation implies that the price level

doubles

All Fed purchases and sales of

government bonds are conducted at the New York Fed's trading desk.

If a bank uses $500 of excess reserves to make a new loan when the reserve ratio is 8 percent, this action by itself initially makes the money supply

increase by $500 while wealth does not change.

When the money market is drawn with the value of money on the vertical axis, as the price level decreases, the value of money

increases, so the quantity of money demanded decreases.

All regional Fed presidents attend the meetings, but only five get to vote.

it increases by $150,000

If people had been expecting prices to rise but in fact prices fell, then who among the following would benefit?

lenders and people holding a lot of currency

This bank's leverage ratio is

leverage ratio assets/capital 10,000/200 =50

The money supply increases when the Fed

lowers the discount rate. The increase will be larger the smaller the reserve ratio is.

When the money market is drawn with the value of money on the vertical axis, the price level increases if

money demand shifts left and decreases if money supply shifts left.

Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the

money supply to fall. To reduce the impact of this the Fed could lower the discount rate.

According to the assumptions of the quantity theory of money, if the money supply increases by 5 percent, then

nominal GDP would rise by 5 percent; real GDP would be unchanged.

According to the classical dichotomy, which of the following is influenced by monetary factors?

nominal interest rate

If the nominal interest rate is 5 percent and there is a deflation rate of 3 percent, what is the real interest rate?

nominal interest rate + deflation = real interest rate 5 + 3 = 8

Banks are able to create money only when

only a fraction of deposits are held in reserve.

The banking system currently has $100 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed lowers the reserve requirement to 5 percent and at the same time buys $10 billion worth of bonds, then by how much does the money supply change?

reserves/reserve requirement =100 billion/0.10 =1000 after lowering reserve requirement: 100/0.05 = 2000 10 billion worth of bonds/0.05 = 200 2000+200 = 2200 2200-1000 = 1200

The Fed can decrease the money supply by conducting open-market

sales or by raising the discount rate.

When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve buys bonds, then the money supply curve

shifts rightward, causing the value of money measured in terms of goods and services to fall.

A decrease in the money supply might indicate that the Fed had

sold bonds in an attempt to increase the federal funds rate.

Any item that people can use to transfer purchasing power from the present to the future is called

store of value

When the money market is drawn with the value of money on the vertical axis, an increase in the money supply creates an excess

supply of money, causing people to spend more.

Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases

the inflation rate and the nominal interest rate by the same number of percentage points.

Other things the same, an increase in velocity means that

the rate at which money changes hands rises, so the price level rises.

Over time both real GDP and the price level have trended upward. Which of these trends would the classical dichotomy say could be explained by an upward trend in the money supply?

the upward trend in the price level but not the upward trend in real GDP

When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal due to adjustments in

the value of money.

The Federal Open Market Committee meets approximately A. every three weeks B. every six weeks C. every 6 months D. every 3 months

B

If the current money supply is MS1, then

equilibrium exists when the value of money is 2.

The manager of the bank where you work tells you that the bank has $300 million in deposits and $255 million dollars in loans. If the reserve requirement is 8.5 percent, how much is the bank holding in excess reserves?

$19.5 million 300 (8.5)/100 = 25.5 million 300-255 = 45 million 45-25.5 million = 19.5 million

People hold $400 million of bank deposits but no currency. Banks have made $380 million dollars of loans and only hold enough reserves to satisfy reserve requirements. Because of uncertainty, banks choose to hold $10 million more in reserves. The Fed takes no action. What happens to bank loans?

400-380 =20 x 10 =200 million shortage

Suppose the banking system currently has $300 billion in reserves, the reserve requirement is 5 percent, and excess reserves are $30 billion. What is the level of loans?

5400 (300-30)/0.05 =5400

Suppose the relevant money-supply curve is the one labeled MS1; also suppose the economy's real GDP is 30,000 for the year. If the money market is in equilibrium, then the velocity of money is approximately

6.0

At the end of 2009 the relevant money-demand curve was the one labeled MD2. At the end of 2010 the relevant money-demand curve was the one labeled MD1. Assuming the economy is always in equilibrium, what was the economy's approximate inflation rate for 2010?

75 percent

Suppose the relevant money-demand curve is the one labeled MD1; also suppose the economy's real GDP is 20,000 for the year. If the money market is in equilibrium, then how many times per year is the typical dollar bill used to pay for a newly produced good or service?

8

Suppose that the Bank of Tazi changes the reserve requirement to 3 percent. Assuming that the banks still want to hold the same percentage of excess reserves what is the value of the money supply after the change in the reserve requirement

9375 million tazes

Assuming the only other thing Tazian banks have on their balance sheets is loans, what is the value of existing loans made by Tazian banks? A. 6,900 million tazes B. 7350 million tazes C. 7125 million tazes D. none of the above is correct

A

If a bank uses $500 of excess reserves to make a new loan when the reserve ratio is 8 percent, this action by itself initially makes the money supply A. increase by $500 while wealth does not change. B. decrease by $500 while wealth decreases by $500. C. and wealth increase by $500. D. and wealth decrease by $500.

A

In the special case of the 100 percent-reserve banking, the money multiplier is A. 1 and banks do not create money B. 2 and banks create money C. 1 and banks create money D. 2 and banks do not create money

A

The Soviet government in the 1980's never abandoned the ruble as the official currency. However, the people of Moscow preferred to accept A. goods such as cigarettes or American dollars in exchange for goods and services, reminding us of the fact that government decree by itself is not sufficient for the success of a commodity money. B. American dollars in exchange for goods and services, because rubles were extremely hard to come by. C. cigarettes in exchange for goods and services, because they were convinced that cigarettes were going to soon become hard to come by. D. All of the above are correct.

A

Which of the following is a liability of a bank and an asset of its customers? A. deposits of its customers but not loans to its customers B. deposits of its customers and loans to its customers C. loans of its customers but not the deposits of its customers D. neither the deposits of its customers nor the loans to its customers

A

Which of the following is included in both M1 and M2? A. demand deposits B. money markets mutual funds C. small time deposits D. savings deposits

A

You receive money as payment for babysitting your neighbors' children. This best illustrates which function of money? A. medium of exchange B. unit of account C. store of value D. liquidity

A

Assuming the only other item Namdian banks have on their balance sheets is loans, what is the value of existing loans made by Namdian banks? A. 625 million dias B. 1125 million dias C. 875 million dias D. none of the above is correct

A 625 million dias

Metropolis National Bank is holding 2% of its deposits as excess reserves. Assume that no banks in the economy want to maintain holdings of excess reserves and that people only hold deposits and no currency. The Fed makes open market purchases of $10,000. The person who sold bonds to the Fed deposits all the funds in Metropolis National Bank. If the bank now loans out all its excess reserves, by how much will the money supply increase? A. $200,000 B. $240,00 C. $190,000 D. none of the above are correct

A Excess reserve = 0.2 * 500000 = 10,000 60,000-10,000 = 50,000 50,000/500,000 = 0.10 1/0.10 = 10% 10,000 + 10,000 = 20,000 20,000 x 10 = $200,000

The Fed can decrease the money supply by conducting open-market A. sales or by raising the discount rate B. sales or by lowering the discount rate C. purchases or by lowering the discount ratee D. purchases or by raising the discount rate

A Raising discount rates would increase sales, bringing in more money supply

In December 1999 people feared that there might be computer problems at banks as the century changed. Consequently, people wanted to hold relatively more in currency and relatively less in deposits. In anticipation banks raised their reserve ratios to have enough cash on hand to meet depositors' demands. These actions by the public A. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds. B. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have sold bonds. C. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds. D. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have sold bonds.

A There's less money being deposited into the bank, which is going to decrease money supply, the fed would buy more bonds to increase money supply

To increase the money supply, the Fed could A. sell government bonds B. increase the reserve requirement C. auction more loans to banks D. none of the above is correct

C

A bank loans Greg's Ice Cream $250,000 to remodel a building near campus to use as a new store. On their respective balance sheets, this loan is A. an asset for the bank and a liability for Greg's Ice Cream. The loan does not increase the money supply. B. a liability for the bank and an asset for Greg's Ice Cream. The loan increases the money supply. C. a liability for the bank and an asset for Greg's Ice Cream. The loan does not increase the money supply. D. an asset for the bank and a liability for Greg's Ice Cream. The loan increases the money supply.

D

Which of the following is included in both M1 and M2? A. demand deposits B. other checkable deposits C. currency D. All of the above are correct.

D

According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also

either a rise in output or a fall in the rate at which money changes hands.

When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is an

excess demand for money, so the price level will fall,if there's too much demand for money, the price level will fall, opposite trend on graph

Suppose the money market, drawn with the value of money on the vertical axis, is in equilibrium. If the money supply increases, then at the old value of money there is an

excess supply of money that will result in an increase in spending.

If people decide to hold more currency relative to deposits, the money supply

falls. The larger the reserve ratio is, the less the money supply falls.

In recent years the Federal Open Market Committee has focused on a target for

federal funds rate

Currently, U.S. currency is

fiat money with no intrinsic value

Relative-price variability is "automatic" when

firms change prices only once in a while.

Under a fractional-reserve banking system, banks

generally lend out a majority of the funds deposited

The banking system currently has $200 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 4 percent. If the Fed raises the reserve requirement to 10 percent and at the same time buys $50 billion worth of bonds, then by how much does the money supply change?

it falls by $2500 billion

According to the assumptions of the quantity theory of money, if the money supply decreases by 7 percent, then

nominal GDP would fall by 7 percent; real GDP would be unchanged.

The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi. The local unit of currency is the taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million tazes of required reserves, 75 million tazes of excess reserves, have issued 7,500 million tazes of deposits, and hold 225 million tazes of Tazian Treasury bonds. Tazians prefer to use only demand deposits and so all money is on deposit at the bank. Assume that banks desire to continue holding the same ratio of excess reserves to deposits. What is the reserve requirement and the reserve ratio for Tazian Banks?

required reserves/deposits = 300/7500 =4 percent This would be the reserve requirement excess reserves + required reserves/deposits = 300 + 75/7500 =5 percent The reserve ratio

If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

selling bonds. This selling would reduce reserves.

During the last tax year you lent money at a nominal rate of 6 percent. Actual inflation was 1 percent, but people had been expecting 1.5 percent . This difference between actual and expected inflation

transferred wealth from the borrower to you and caused your after-tax real interest rate to be 0.5 percentage points higher than what you had expected.

If the relevant money-demand curve is the one labeled MD1, then

when the money market is in equilibrium, one unit of goods and services sells for 2 dollars. when the money market is in equilibrium, one dollar purchases one-half of a basket of goods and services. there is an excess demand for money if the value of money in terms of goods and services is 0.375.