Unit 4 Econ MCQs

Assume that in a banking system in which banks hold no excess reserves, the public holds part of its money in cash and the rest in checking accounts. If the required reserve ratio is 10 percent, actual reserves are $10 million, and currency in circulation is equal to $20 million, M1 will be equal to

$120 million

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

Total Reserves: $15k, Securities: $70k, Loan: $15k. A commercial bank is facing the conditions given above. If the reserve requirement is 12 percent and the bank does not sell any of its securities, the maximum amount of additional lending this bank can undertake is

$3,000

Assume that Atlantic National Bank has demand deposits of $100,000 and no excess reserves,and that the reserve requirement is 10 percent.A customer withdraws $5,000 from the bank.To meet the reserve requirement, the bank must increase its reserves by

$4,500

If the required reserve ratio is 0.2, a $1 billion increase in bank reserves can lead to an increase in M1 of at most

$5 billion

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

$8,000

Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal reserve requirement is 10 percent. If Maggie deposits the $100 bill she received as a graduation gift from her grandmother into her checking account, the maximum increase in the total money supply will be

$900

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

15%

Assume the nominal interest rate on a 15-year fixed-rate mortgage loan is 5 percent. If the expected inflation rate is 2 percent, the expected real interest rate is

3%

During a mild recession, if policymakers want to reduce unemployment by increasing investment, which of the following policies would be most appropriate?

A decrease in administered interest rates

Assume a banking system with LIMITED reserves. During a recession, an increase in the money supply would result in which of the following?

A decrease in interest rates, an increase in interest-sensitive spending, and an increase in real output

Assuming a banking system with limited reserves, which of the following is most likely to occur if the central bank engages in open market operations to reduce inflation?

A decrease in reserves in the banking system

Which of the following most undermines the ability of a nation's currency to store value?

A decrease in the purchasing power of the currency

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

A fractional reserve banking system

If currently at FULL EMPLOYMENT, which of the following would most likely cause the United States economy to fall into a recession?

An increase in administered interest rates

Which of the following changes in the loanable funds market will decrease the equilibrium real interest rate?

An increase in foreign financial capital inflows

Which of the following will increase the supply of loanable funds?

An increase in household saving

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

An increase in the price level

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

Bonds are interest-bearing assets.

In a country whose banking system has limited reserves, which of the following actions by the central bank increases the money supply?

Buying government bonds on the open market

Which of the following is considered the most liquid asset?

Currency

Country H's current domestic output is lower than its potential domestic output. Assume that the central bank now decreases its administered interest rates. What will be the short-run effects of the central bank's action on cyclical unemployment and real income?

Cyclical unemployment will decrease, and real income will increase.

Which of the following is a monetary policy used to counter the effect on employment of a negative supply shock in the short run?

Decreasing administered interest rates

An increase in the demand for loanable funds could be best explained by which of the following?

Firms are optimistic about the future performance of the country's economy.

Which of the following accurately describes the difference between how open market operations are used in a banking system with limited reserves compared to a banking system with ample reserves?

In a banking system with limited reserves, open market operations are used to indirectly influence the nominal interest rate by changing the money supply, whereas in a banking system with ample reserves, open market operations are used to maintain sufficient reserves.

A country's economy is in equilibrium at point H, to the right of LRAS. Which of the following policies would be most effective to reduce the price level in the short run?

Increasing interest on reserves

Expansionary monetary policy will most likely cause interest rates and investment to change in which of the following ways in the short run?

Interest Rates: Decrease ; Investment: Increase

Assuming a banking system with limited reserves, when the central bank buys government securities on the open market, which of the following will decrease in the short run?

Interest rates

If the Federal Reserve institutes a policy to reduce inflation, which of the following is most likely to increase?

Interest rates

Fred Jones withdraws $1,000 in cash from his savings account. What immediate effect does this transaction have on the monetary aggregate measures of M1 and M2 ?

M1 will not change; M2 will not change

An increase in administered interest rates will most likely change the nominal interest rate and aggregate demand in which of the following ways in the short run?

Nominal Interest Rate: Increase ; Aggregate Demand: Decrease

Nominal interest rates and prices of previously issued bonds will be affected in which of the following ways when money demand exceeds money supply?

Nominal interest rates will increase, and bond prices will decrease.

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

Real interest rates will increase.

Which of the following describes a major difference between stocks and bonds?

Stocks represent ownership in a corporation, and bonds represent a loan to a corporation.

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.

Assume that the inflation rate is 10 percent and a bank account effectively yields a real rate of interest of negative 5 percent per year. Would a person be better off keeping money in the bank account or in cash?

The bank account, because the loss is less than it is when holding cash.

The purchase of bonds by a central bank will have the greatest effect on real gross domestic product if which of the following situations exists in the economy?

The banking system has limited reserves, the required reserve ratio is low, and the interest rate has a large effect on investment spending.

If there is an increase in nominal income, which of the following will most likely occur in the short run?

The demand for money will increase.

Which of the following measures the opportunity cost of holding currency?

The forgone interest on alternative assets

ABC Bank is a commercial bank in Country X. Assume the required reserve ratio is 25% and banks in Country X keep no excess reserves. If Maria deposits $1,000 in cash at ABC Bank, what will happen to the money supply after all adjustments are made in the banking system?

The money supply will increase by a maximum of $3,000.

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

The opportunity cost of holding money will increase.

If the central bank decreases administered interest rates, which of the following will occur?

The price of bonds 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.

Which of the following is a defining characteristic of a fractional reserve banking system?

The requirement that banks maintain a certain percentage of their reserves as a deposit in an account at the central bank

Which of the following is a determinant of the amount of money the commercial banking system can create?

The reserve requirement

Assume a country's banking system has limited reserves. If the central bank sells a significant amount of government securities in the open market, which of the following will occur?

The total amount of loans made by commercial banks will decrease.

Assume that banks hold no excess reserves. A decrease in the required reserve ratio will cause total reserves in banks, the money multiplier, and the money supply to change in which of the following ways?

Total Reserves: No change ; Money multiplier: Increase ; Money Supply: Increase

For which of the following sets of unemployment and inflation rates will a central bank be most reluctant to decrease its administered interest rates?

Unemployment Rate: 5% ; Inflation Rate: 10%

On the island of Mabera, the local money is called "favoli." The price of every good in Mabera is expressed as the number of favolis needed to buy the good. The use of favolis to express the price of goods describes which function of money?

Unit of account

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 (LEFTWARD) could be caused by

a decrease in the money supply

Assume that the reserve requirement is 20 percent, but banks voluntarily keep some excess reserves. A $1 million increase in new reserves will result in

an increase in the money supply of less than $5 million

The federal funds rate is the interest rate that

banks charge one another for short-term loans

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 banking system has limited reserves and the central bank sells $10,000 worth of government securities to commercial banks, the total money supply will

decrease by $50,000

If the interest rate on short-term government bonds declined as a result of policy actions by a central bank, the central bank must have

decreased its administered interest rates

The Federal Reserve decreases the federal funds rate by

decreasing its administered interest rates

All of the following are components of the money supply in the United States EXCEPT

gold bullion

To reduce inflation, the central bank would be most likely to

increase its administered interest rates

If aggregate demand is growing faster than long-run aggregate supply, the Federal Reserve is most likely to:

increase the interest rate on reserve balances

In the long run, a fully anticipated increase in the inflation rate will

increase the nominal interest rate

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

involves higher costs for each transaction

Commercial banks can create money by

lending excess reserves to customers

If a country's economy is operating below the full-employment level of output at a very low inflation rate, the central bank of the country is most likely to

lower administered interest rates to generate an increase in output

The money-creating ability of the banking system will be less than the maximum amount indicated by the money multiplier when

people hold a portion of their money in the form of currency

The loanable funds market is best described as bringing together

savers and borrowers

The narrowest definition of money, M1, includes which of the following

savings accounts

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

What is the opportunity cost of holding money?

the interest that could have been earned from holding other financial assets.