Econ test

Scenario 25-2: Money Creation The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves. 19. Use Scenario 25-2. After the initial deposit, by how much did the monetary base change?

0

Scenario 25-2: Money Creation The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves. ____ 18. Use Scenario 25-2. How much of the deposit is the bank required to keep in reserves?

200

The central bank of Foxystan has set the reserve requirement at 10%. If Dave makes a cash deposit of $5000, and the bank carries zero excess reserves, by how much will the money supply increase?

45000

The Federal Reserve System was created in:

A. 1913.

39. If the Federal Reserve wants to increase the monetary base, the Fed might:

A. engage in an open market purchase of Treasury bills.

8. Money that the government has ordered be accepted as money is:

A. fiat money, because it was created by an act of law.

9. The U.S. dollar is defined as:

A. fiat money, because it was created by an act of law.

When a financial institution finances investments by borrowing money it is said to be using

A. leverage.

2. According to the "savings-investment spending identity":

A. savings = investment spending

22. Suppose that the economy enters a recession and real GDP falls. All else equal, we would expect:

A. the money demand curve to shift inward.

27. If a one-year project costs $100,000 and is expected to return the firm $105,000, then the rate of return of the project is:

B. 5%.

3. A financial asset is:

B. a claim that entitles the owner to future income from the seller.

40. When a bank borrows from the Federal Reserve, it pays the:

B. discount rate.

1. In a closed economy, all investment spending must come from:

B. domestic savings.

The amount of money you would be willing to lend today, in exchange for $1 paid to you one year from now is known as the

B. present value of $1.

23. According to the liquidity preference model, the equilibrium interest rate is determined by:

B. the supply and demand for money.

Your grandparents offer you $500 in one year. Assuming no inflation, if the interest rate is 10%, you are indifferent between their gift in one year and _____ today.

C. $454.55

38. Suppose that the reserve ratio is 10% when the Fed buys $25,000 of U.S. Treasury bills from the banking system. If the banking system does NOT want to hold any excess reserves, _______ will be added to the money supply.

C. $500,000

34. A _____ is when people rush to a bank to withdraw all of their deposits because they feel that the bank could fail.

C. bank run

11. Suppose that the interest rate is zero and there is no inflation. In this case, the present value of $5 received one year from today is

C. exactly $5.

4. When a corporation borrows money from lenders in exchange for a fixed share of the firm's assets and potential profits, the corporation is:

C. issuing stocks.

37. To change the money supply, the Fed most frequently uses:

C. open-market operations.

29. An expectation that perceived business opportunities will increase will generally cause:

C. the demand for loanable funds to increase.

13. When lending $Y to a friend at an interest rate of r%, you would expect to be repaid _______ in one year.

D. $Y*(1+r)

In the U.S., the institution that is charged with determining the size of the monetary base and with regulating the banking system is the:

D. Federal Reserve.

36. The discount rate is the interest rate the Fed charges on loans to:

D. banks.

30. A decrease in the demand for loanable funds would most likely be caused by a(n):

D. decrease in the amount of expected business opportunities.

14. If the interest rate is 10%, the amount received two years from now as a result of lending $1000 today is

E. $1210

5. The government of Foxystan has a balanced budget this year and operates in an open economy with exports greater than imports. How will net exports affect capital investment?

E. Capital investment decreases because the capital inflow is negative.

10. The most liquid form of money is:

E. M1

An example of a double coincidence of wants is:

E. a car mechanic who wants a TV finding an owner of an electronics store who wants a car repaired. ____

32. The Federal Reserve System is the _______ for the United States.

E. central bank

Now that fast food places such as McDonald's are accepting credit card payments:

E. the demand for money has decreased.

The medium-of-exchange function means that money is used:

E. to pay for goods and services.

MODULE 23 The new republic of Frank must decide on a form of money to use in their economy. president Dave has proposed the use of cow's milk as money A=If President Dave's "milk money" idea is adopted, would milk be fiat money, commodity money or commodity-backed money? explain B= Use the three functions of money to evaluate whether President Dave's proposal is a good one

a. (1 point) Commodity money. (1 point) Besides being used as money, it has intrinsic value as drinkable milk. b. (1 point) Milk could be used as a medium of exchange if people used it to purchase other goods and services. However it would be difficult for a person to keep a lot of milk on hand, or in their pockets, to purchase many items. (1 point) Milk is not a very good store of value because it rapidly gets sour and sour milk isn't as drinkable as fresh milk. (1 point) Milk could be used as a unit of account, so long as the quality was uniform

MODULE 22 For each of the following transactions, identify and describe who holds the asset and who holds the liability A= theodore borrows $10,000 from first bank of river valley to purchase a car B= Kylie buys 10 shares of stock issued by the Toyota motor company C= Kimberly purchases a $1000 municipal bond issued by the city of Fredericksburg

a. (2 points) The $10,000 loan is an asset for the bank, and a liability to Theodore because he has agreed to repay the $10,000 plus interest to the bank. b. (2 points) The shares of stock are an asset for Kylie and a liability for Toyota because Toyota has sold a small fraction of ownership of Toyota to Kylie. c. (2 points) The bond is an asset for Kimery and a liability for Fredericksburg because the holder of the bond (Kimery) is lending the issuer (the city) funds. The city will eventually repay that loan with interest.

MODULE 24 You are about to graduate from high school and your generous Aunt Scharf makes you an offer. She will give you $2000 today or she will give you $2500 in four years when you graduate from college. Assume no inflation or taxes. A= compute the present value of $2500 received in four years if the interest rate is 5% Show your work and explain which option provides you with the largest monetary gift. B= Instead, suppose you could invest your $2000 high school graduation gift and earn an interest rate of 6%. Would you take the 2000 and invest it for four years? Show your work.

a. 1 point for calculating PV = $2500/(1.05)4 = $2056.76 and for showing the work. 1 point for stating the $2500 in four years. b. 1 point for calculating FV = $2000*(1.06)4 = $2524.95 and for showing the work. 1 point for stating that you should take the $2000 and invest it for four years.

MODULE 28 a. Draw a correctly labeled graph showing equilibrium in the money market. Label the equilibrium interest rate r*. b. Suppose that real GDP increases in the economy. In the graph you've drawn from part (a), show how this will affect the equilibrium interest rate. Label the new equilibrium interest rate r**.

a. 1 point for a vertical axis labeled "interest rate" or "r" and the horizontal axis labeled as "quantity of money". 1 point for a vertical money supply curve and labeled. 1 point for downward sloping money demand curve and labeled. 1 point for equilibrium interest rate identified as r* on the vertical axis at the intersection of money supply and money demand. b. 1 point showing the money demand curve shifting to the right. 1 point showing the new equilibrium interest rate r** increasing.

MODULE 29 Does each of the following affect the demand for loanable funds or the supply of loanable funds? And how will each affect the equilibrium interest rate in the loanable funds market? a. Firms are more optimistic about future investment opportunities. b. Foreign investors decrease capital flows into the economy. c. Households increase the rate of savings. d. The government decreases borrowing.

a. 1 point for an increase in the demand curve. 1 point for an increase in the interest rate. b. 1 point for a decrease in the supply curve. 1 point for an increase in the interest rate. c. 1 point for an increase in the supply curve. 1 point for a decrease in the interest rate. d. 1 point for a decrease in the demand curve. 1 point for a decrease in the interest rate.

MODULE 25 Suppose the first bank of burgin knows that the central bank has specified a required reserve ratio of 10%. Currently the bank has $1,000,000 in cash reserves. A= if the bank is holding no excess reserve cash what are total deposits at the fist bank of burgin? B= suppose Sandra finds $2000 in her sofa and deposits the money at the bank. If the first bank of B holds no excess reserves, how much can the bank lend and how much cash must the bank hold in required reserves. C= at most how much will sandra's deposit increase the money supply?

a. 1 point for stating that deposits are $10,000,000. 1 point for explaining that since the bank is not holding any cash reserves, the $1,000,000 must be required reserves. b. 1 point for stating that the bank can lend 90% of $2000 or $1800, so required reserves must be 10% of $2000 or $200. c. 1 point for stating that the money supply could increase by as much as 10*$1800 = $18,000

MODULE 26 a. Within the Federal Reserve structure, how is the Board of Governors different from the Federal Open Market Committee? b. Why is it considered important for the President to appoint the Board of Governors to 14-year terms of service, rather than to have these positions elected by the population to a more traditional 4-year term?

a. 1 point for stating that the Board of Governors oversees the entire Federal Reserve system. 1 point for stating that the FOMC includes the Board of Governors, plus five of the regional bank presidents and has the important job of conducting monetary policy. b. 1 point for describing how presidential appointment to 14-year terms, rather than general elections, insulates the members from political pressures and allows for monetary policy that is best for the nation rather than individual, or party, interests

MODULE 27 a. What are the three tools of the Federal Reserve? b. How could each of the three tools be used to reduce the monetary base?

a. 3 points for stating that the three tools are: open market operations, the discount rate and the reserve requirement. b. 1 point for selling securities 1 point for increasing the discount rate 1 point for increasing the reserve requirement.

17. The existence of banks:

result in the money supply being larger than the amount of currency in circulation

A bank run occurs when:

when many bank depositors are trying to withdraw their funds from the bank