Unit 4

When consumers hold money rather than bonds because they expect the interest rate to increase in the future, they are holding money for which of the following purposes?

Speculation

Which of the following will most likely result in a lower real interest rate in a nation?

The citizens of the nation increase their savings for retirement.

If an economy is operating with significant unemployment, an increase in which of the following will most likely cause employment to increase and the interest rate to decrease?

Purchases of government bonds by the central bank

A barter economy is different from a money economy in that a barter economy

involves higher costs for each transaction

Assume that the reserve requirement is 20 percent. If a bank initially has no excess reserves and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loans is

8000

Which of the following is true for bonds but not for stocks?

Bonds are interest-bearing assets.

Which of the following is a monetary policy that can be used to counteract a recession?

Buying bonds in the open market

Which of the following actions by the Federal Reserve of the United States increases the money supply?

Buying government bonds on the open market

A bank has $800 million in demand deposits and $100 million in reserves. If the reserve requirement is 10 percent, the bank's excess reserves equal

$20 million

Cash in Circulation $100 Cash in Bank Vaults $2 Bank Reserves $10 Demand Deposits $1,000 Traveler's Checks $20 what is the value of M1, a measure of the money supply?

1,120

If on receiving a checking deposit of $300 a bank's excess reserves increased by $255, the required reserve ratio must be

15%

The required reserve ratio is 0.2 and the Federal Reserve sells $1 million in securities. If there are no leakages and banks do not hold excess reserves, then which of the following is the change in the money supply?

A decrease of $5 million

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

A fractional reserve banking system

Which of the following changes would most likely cause an increase in interest rates in the short run?

An increase in government spending financed by borrowing

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

An increase in reserve requirements

Which of the following constitutes the largest component of the United States money supply (MI)?

Checkable deposits (demand deposits)

If investors feel that business conditions will deteriorate in the future, the demand for loans and real interest rate in the loanable funds market will change in which of the following ways in the short run?

Demand for loans (decrease) real interest rate (decrease)

With a constant money supply, if the demand for money decreases, the equilibrium interest rate and quantity of money will change in which of the following ways?

Interest rate ( Decrease) Quantity of money (No change)

When the Federal Reserve buys government securities on the open market, which of the following will decrease in the short run?

Interest rates

Which of the following will lead to an increase in the money supply?

Open-market purchase of securities by the central bank

Which of the following will happen when interest rates increase in an economy?

The opportunity cost of holding money will increase.

The graph above shows two aggregate demand curves, AD1 and AD2, and an aggregate supply curve, AS. The shift in the aggregate demand curve from AD1 to AD2 could be caused by

a decrease in the money supply

All of the following changes will shift the investment demand curve to the right EXCEPT

an increase in the real interest rate

Assume that the reserve requirement for demand deposits is 20 percent, that banks hold no excess reserves, and that the public holds no currency. If the central bank sells $10,000 worth of government securities to commercial banks, the total money supply will

decrease by $50,000

The amount of money that the public wants to hold in the form of cash will

decrease if interest rates increase

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

discount rate

An increase in government spending will affect the demand for money and nominal interest rates in which of the following ways?

nominal interest rates (increase) Demand for money (increase)

If the Federal Reserve pursues a contractionary monetary policy, output and the price level will change in which of the following ways in the short run?

output (decrease) Price level (decrease)