ECON 102 Sample Test 2
This year Pizza Hut makes a total investment of $1.3 billion in new stores. Its depreciation in this year is $300 million. Pizza Hut's gross investment is ________ and its net investment is ________.
$1.3 billion; $1.0 billion
The table above shows the balance sheet for Ralph's Bank. If the desired reserve ratio is 15 percent, Ralph's Bank has excess reserves of ________.
$50
At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's net investment for the year totaled
1 machine.
The above table presents the balance sheet of the TBK commercial bank. What is this bank's actual reserve ratio?
20 percent
The above table gives the initial balance sheet for Mini Bank. Mini Bank's actual reserve ratio equals ________.
25 percent
At the beginning of the year, Tom's Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tom's gross investment for the year totaled
3 machines
When the monetary base increases by $2 billion, the quantity of money increases by $10 billion. Thus, the money multiplier equals
5.
If the nominal interest rate is 8 percent and the inflation rate is 2 percent, the real interest rate is approximately
6 percent.
If the nominal interestrate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately
6 percent.
Which of the following explains why the demand for loanable funds is negatively related to the real interest rate?
A lower real interest rate makes more investment projects profitable.
When a bank has excess reserves
Both answers A and B are correct.
Which part of the Federal Reserve System meets every 6 weeks to determine the nation's monetary policy?
Federal Open Market Committee
Which of the following are major influences on the expected profit from an investment?
I only
Which of the following is TRUE? I.As the real interest rate increases, people increase the quantity they save. II.The supply of loanable funds curve is downward sloping. III.As disposable income increases, the supply of loanable funds curve becomes steeper.
I only
Investment is financed by which of the following?
II and III only
The Fed buys $100 million of government securities from Bank A. What is the effect on Bank A's balance sheet?
Securities decrease by $100 millionand reserves increase by $100 million.
In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of an increase in financial innovation such as the introduction of ATMs?
The demand for money curve would shift leftward to MD0.
In the above figure, suppose the economy is initially on the demand for money curve MD1. What is the effect of an increase in the use of credit cards?
The demand for money curve would shift leftward to MD0.
In the above figure, the economy is at point aon the initial supply of loanable funds curve SLF0. What happens if disposable income decreases?
The supply of loanable funds curve would shift leftward to a curve such as SLF1.
In the above figure, the economy is at point a on the initial supply of loanable funds curve SLF0. What happens if real wealth decreases?
The supply of loanable funds curve would shift rightward to a curve such as SLF2.
As a result of the recession in 2008, the default risk increased. How did this change affect the loanable funds market?
There was a leftward shift in the supply of loanable funds curve.
Suppose the United States spends more on foreign goods and services than foreigners spend on our goods and services and the United States sells no foreign assets. Then the
United States must borrow an amount equal to imports minus exports.
When part of the quantity of money is heldin currency, then
a currency drain occurs.
Which of the following will shift the supply of loanable funds curve leftward?
a decrease in disposable income
Which of the following shifts the demand for loanable funds curve leftward?
a decrease in the expected profit
When the Fed is ________ it is ________.
adjusting the amount of money in circulation; conducting monetary policy
When the Fed lowers the federal funds rate, it can lead to
an increase in lending by banks.
The sale of $1 billion of securities to a bank or some other business by the Fed is an example of
an open market operation.
In the short run, when the Fed decreases the quantity of money
bond prices fall and the interest rate rises.
Which of the following is TRUE regarding the real interest rate?
both I and II
Depository institutions do all the following EXCEPT
create required reserve ratios.
A rise in the real interest rate
creates a movement upward along the demand for loanable funds curve
The monetary base is the sum of
currency and reserves of depository institutions
n the above figure, suppose the economy is at point a. If there is an increase in real GDP, there is a movement to point such as
d.
A decrease in the demand for loanable funds and a leftward shift of the demand for loanable funds curve results from
decreases in the expected profit.
An increase in the currency drain
decreases the size of the money multiplier.
In the figure above, if the interest rate is 4 percent, there is a $0.1 trillion excess
demand for money and bond prices will fall.
Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond increases from $1,000 to $1,250, then the interest rate on the bond
falls from 10 percent to 8 percent
The funds used to buy and operate physical capital are
financial capital.
If foreigners spend more on U.S.-made goods and services than we spend on theirs
foreigners must borrow from the United States or sell U.S. assets to make up the difference.
The crowding-out effect refers to
government investment crowding out private investment.
The opportunity cost of holding money refers to
he interest that could have been earned if the money balances had been changed into an interest-bearing asset.
When a government has a budget surplus,the surplus
helps finance investment.
In the absence of the Ricardo-Barro effect, an increase in thegovernment deficit results in a ________ real interest rate and a ________ equilibrium quantity of investment.
higher; lower
According to the Ricardo-Barro effect
households increase their personal saving when governments run budget deficits.
If an economy has a velocity of circulation of 3, then
in a year the average dollar is exchanged 3 times to purchase goods and services in GDP.
When price levels rise, the quantity of nominal money demanded will ________ and the quantity of real money demanded will ________.
increase; stay the same
The quantity of real money demanded is
independent of the price level
required reserve ratio
is the fraction of a bank's total deposits that is required to be held in reserves.
Due to the recession in 2008, firms decreased their profit expectations. As a result, there was a ________ shift in the ________ loanable funds curve.
leftward; demand for
In the figure above, if the interest rate is 8 percent, people demand $0.1 trillion
less money than the quantity supplied and bond prices will rise.
Aside from being a means of payment, the other functions of money are
medium of exchange, unit of account, and store of value.
Controlling the quantity of money and interest rates to influence aggregate economic activity is called
monetary policy.
A nation's investment must be financed by
national saving plus borrowing from the rest of the world
The capital stock increases whenever
net investment is positive
If the economy's capital stock increases over time
net investment is positive.
Credit cards are
not part of money because they represent a loan of money to the user.
In the above figure, the initial supply of loanable funds curve is SLF0and the initial demand for loanable funds curve is DLF0. An increase in the expected profit would
only shift the demand for loanable funds curve rightward to a curve such as DLF1.
The table above gives the quantity of money and money demand schedules. Suppose that the interest rate is equal to 6 percent. The effect of this interest rate in the money market is that
people buy bonds and the interest rate falls.
The table above gives the quantity of money and money demand schedules. Suppose that the interest rate is equal to 3 percent. The effect of this interest rate in the money market is thatA) the money market is in equilibrium.
people sell bonds and the interest rate rises.
The term "crowding out" relates to the decrease in
private investment from a government budget deficit.
Which of the following are included in the supply of loanable funds?
private saving
U.S. investment is financed from
private saving, government budget surpluses, and borrowing from the rest of the world.
According to the quantity theory of money, in the long run, changes in the price level are the result of changes in the
quantity of money.
Whenthe nominal interest rate rises, the opportunity cost of holding money
rises and people hold less money.
In the loanable funds market, the supply comes from
saving, the government budget surplus and international borrowing.
n the figure above, an increase in the monetary base would create a change such as a
shift from the supply of money curve MS0to the supply of money curve MS1.
In the above figure, new expectations of booming business conditions and a higher expected profit will
shift the demand for loanable funds curve rightward.
In the above figure, technological progress that increases the expected profit will
shift the demand for loanable funds curve rightward.
In the above figure, the initial supply of loanable funds curve is SLF0and the initial demand for loanable funds curve is DLF0. An economic expansion that raises disposable income and the expected profit would
shift the supply of loanable funds curve rightward to a curve suchas SLF1, and shift the demand for loanable funds curve rightward to a curve such as DLF1.
Greater optimism about the expected profits from investment projects
shifts the demand for loanable funds curve rightward.
The larger the public's currency drain from the banking system, the
smaller is the money multiplier.
If net taxes exceed government expenditures, the government sector has a budget ________ and government saving is ________.
surplus; positive
For a commercial bank, the term "reserves" refers to
the cash in its vaults and its deposits at the Federal Reserve.
If the real interest rate increases from 3 percent to 5 percent
there will be a movement up along the demand for loanable funds curve.
Frank spends Saturday afternoon at the Dodge dealership looking at new trucks. The model that he is interested in has a sticker price of $29,000. The fact that the price is quoted in dollars is an example of money used as a
unit of account
If you lend a dollar for a year and at the end of the year the price level has risen by 10 percent
you must have earned a nominal interest rate of 10 percent to maintain the purchasing power of your loan.
Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio is 20 percent. How many deposits can Bank A create?
zero, because Bank A has no excess reserves
According to the quantity theory of money, in the long run, an increase in the quantity of money results in an equal percentage increase in ________.
the price level
If velocity is 6 and the quantity of money is $2 trillion, what is nominal GDP?
$12 trillion
In January 2015, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2015, Tim spent $200,000 on new machines. During 2015, Tim's gross investment totaled
$200,000
Use the information in the table above to calculate the value of private saving.
$25 million
The quantity of money in an economy is $9 million, and the velocity of circulation is 3. Nominal GDP in this economy is
$27 million
Use the information in the table above to calculate the value of government saving.
$5 million
Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio is 15 percent. How many loanscan Bank A create atBank A?
$50
According to the table above, the value of M1 is ________ and the value of M2 is ________.
$813 billion; $3303 billion
According to the table above, the value of M1 is ________ and the value of M2 is ________.
$910 billion; $3,660 billion
In January 2015, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2015, Tim spent $200,000 on new machines. During 2015, Tim's net investment totaled
-$100,000.
The above table gives the initial balance sheet for Mini Bank. If the bank's desired reserve ratio is 10 percent, how much does this bank have in excess reserves?
$60
Suppose a bond promises to pay its holder $100 a year forever. The interest rate on the bond rises from 4 percent to 5 percent. The price of the bond
falls from $2,500 to $2,000
The Ricardo-Barro effect says that
government budget deficits have no crowding out effect because taxpayers increase their savings to match the quantity of loanable funds demanded by the government.
In the short run, when the Fed increases the quantity of money
bond prices rise and the interest rate falls.
In the absence of a Ricardo-Barro effect, a government budget deficit ________ the demand for loanable funds and ________ investment.
increases; decreases
The most direct way in which money eliminates the need for a double coincidence of wants is through its use as a
medium of exchange
Which of the following items are considered physical capital?
II and III
The Fed buys $100 million of government securities from Bank A. What is the effect on the Federal Reserve's balance sheet?
Securities increase by $100 million and reserves of Bank A increase by $100 million.
Suppose that you took out a $1000 loan in January and had to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is CORRECT?
The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent.
Checks are NOT money because they
are merely instructions to transfer money.
Use the figure above to answer this question. Suppose the economy is operating at point a. A move to ________ could be explained by ________.
point c; an increase in theuse of credit cards
In the figure above, a decrease in the monetary base would create a change such as a
shift from the supply of money curve MS1to the supply of money curve MS0.
