Quiz 3

Assume that all banks choose a 20 percent reserve-deposit ratio and there is no cash held by the public (the currency-deposit ratio is zero). The Federal Reserve decides that it wants to expand the money supply by 50 million dollars. To accomplish the goal, the Fed needs to increase the monetary base by _____ .

$10 million

If currency held by the public equals $350 billion, reserves held by banks equal $150 billion, and bank deposits equal $500 billion, then the money supply equals:

$850 billion

An economy produces 50 widgets, which sell for $4 each, and has a money supply of $100. The velocity of money is

2.

An economy with constant velocity of money has output growth of 3 percent, money growth of 7 percent, and a real interest rate of 1 percent. The nominal interest rate is

5 percent.

According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, and velocity is constant over time, the rate of inflation is:

7 percent

A bank accepted $100 million of deposits and decided to choose a 12.5% reserve ratio. All of a sudden, some depositors say they want to withdraw a total of $10 million from the bank. The bank is having a liquidity problem.

False

A firm has $250 million of assets and $30 million of capital (shareholders equity). When the firm loses $50 million of its assets, it becomes insolvent.

True

The major source of government revenue in most countries that are experiencing hyperinflation is

seigniorage.

Hyperinflations tend to occur when -monopoly firms raise prices above competitive levels. -the government prints money to finance expenditure. -the menu costs of price changes become too small. -monetary policymakers act independently of fiscal policy.

the government prints money to finance expenditure.

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then: -the money supply increases. -it cannot be determined whether the money supply increases or decreases. -the money supply decreases. -the money supply does not change.

the money supply decreases.

People in France use euros to post prices. This is an example of using money as a:

unit of account

When the Fed decreases the discount rate, banks will

borrow more from the Fed and lend more to the public. The money supply increases.

If a central bank wants to increase the money supply, it can _____ bonds in open-market operations or _____ reserve requirements.

buy, decrease

The money supply will decrease if the: -monetary base increases -discount rate decreases -reserve-deposit ratio decreases -currency-deposit ratio increases

currency-deposit ratio increases

People use money as a store of value when they -use money as a measure of economic transactions. -hold money to transfer purchasing power into the future. -hold money to gain power and esteem. -use money to buy goods and services.

hold money to transfer purchasing power into the future.

If the Federal Reserve reduces the interest rate it pays on reserves, it will tend to _____ the money multiplier and _____ the money supply.

increase, increase

When the Federal Reserve lowers the target for interest rate, it will use policy tools (such as open market operations) to _____ the money supply, and a lower interest rate tends to _____ investment.

increase, increase

If the money multiplier is 2 and the Fed buys $50,000 worth of bonds, what happens to the money supply?

it increases by $100,000.

People in Germany use euros to buy goods and services. This is an example of using money as a:

medium of exchange

In a system of fractional-reserve banking, lending by banks increase the -amount of excess reserves. -economy's net worth. -money supply. -gross domestic product.

money supply