ECON 102- Study Guide Midterm 3 CH. 8

35) In 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 A) e. B) c. C) d. D) b.

C

48) The quantity of money in an economy is $9 million, and the velocity of circulation is 3. Nominal GDP in this economy is ________. A) $9 million B) $3 million C) $6 million D) $27 million

D

6) Checks are NOT money because they A) are not backed by either gold or silver. B) have value in exchange but little intrinsic value. C) are issued by banks, not by the government. D) are merely instructions to transfer money

D

2) The most direct way in which money eliminates the need for a double coincidence of wants is through its use as a A) medium of exchange. B) store of value. C) standard of deferred payment. D) unit of account

A

25) 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? A) zero, because Bank A has no excess reserves B) $400 C) $200 D) $800

A

27) The larger the public's currency drain from the banking system, the A) smaller is the money multiplier. B) smaller is the monetary base. C) larger is the monetary base. D) larger is the money multiplier

A

29) When the monetary base increases by $2 billion, the quantity of money increases by $10 billion. Thus, the money multiplier equals A) 5. B) 20.0. C) 0.2. D) 0.5.

A

3) 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 A) unit of account B) store of value. C) medium of exchange. D) All of the above answers are correct

A

32) When the nominal interest rate rises, the opportunity cost of holding money A) rises and people hold less money. B) falls and people hold more money. C) rises and people hold more money. D) falls and people hold less money

A

34) Use the figure above to answer this question. Suppose the economy is operating at point a. A move to ________ could be explained by ________. A) point c; an increase in the use of credit cards B) point e; an increase in U.S. exports C) point b; an increase in real GDP D) point b; an increase in the nominal interest rate

A

8) For a commercial bank, the term "reserves" refers to A) the cash in its vaults and its deposits at the Federal Reserve. B) the net interest that it earns on loans. C) a banker's concern ("reservation") in making loans to an individual without a job. D) the profit that the bank retains at the end of the year

A

Component Amount (billions of dollars) Currency 235 Checking deposits 570 Savings deposits 416 Traveler's checks 8 Time deposits 1,144 Money market mutual funds 930 Available credit on credit cards 675 4) According to the table above, the value of M1 is ________ and the value of M2 is ________. A) $813 billion; $3303 billion B) $813 billion; $2490 billion C) $1,488 billion; $3978 billion D) $805 billion; $2490 billion

A

10) When the Fed is ________ it is ________. A) regulating the nation's financial institutions; conducting monetary policy B) adjusting the amount of money in circulation; conducting monetary policy C) issuing government bonds; conducting monetary policy D) adjusting the amount of money in circulation; issuing government bonds

B

12) Which part of the Federal Reserve System meets every 6 weeks to determine the nation's monetary policy? A) the Federal Reserve Banks B) Federal Open Market Committee C) Board of Governors D) depository institutions such as commercial banks

B

13) The monetary base is the sum of A) foreign and domestic deposits at the Fed. B) currency and reserves of depository institutions. C) currency and checkable deposits at depository institutions. D) U.S. Treasury notes and other government securities

B

14) The required reserve ratio A) is higher for banks that make riskier loans. B) is the fraction of a bank's total deposits that is required to be held in reserves. C) is the amount of money that banks require borrowers to reserve in their accounts. D) increases when withdrawals from a bank are made.

B

15) The sale of $1 billion of securities to a bank or some other business by the Fed is an example of A) a change in the required reserve ratio. B) an open market operation. C) a multiple contraction of the quantity of money. D) a last resort loan.

B

26) When part of the quantity of money is held in currency, then A) the Fed will find it beneficial to increase the discount rate. B) a currency drain occurs. C) there is a higher level of excess reserves. D) the money multiplier will increase in value.

B

28) An increase in the currency drain A) results in an increase in deposits. B) results in an increase in required reserves. C) decreases the size of the money multiplier. D) leads to an increase in excess reserves.

C

31) When price levels rise, the quantity of nominal money demanded will ________ and the quantity of real money demanded will ________. A) increase; increase B) increase; decrease C) increase; stay the same D) decrease; increase

C

TBK Bank Balance Sheet Assets Liabilities Reserves $120 Deposits $600 Loans 580 Net worth 100 Total assets $700 Total liabilities $700 19) The above table presents the balance sheet of the TBK commercial bank. What is this bank's actual reserve ratio? A) 20 percent B) 50 percent C) 17.14 percent D) 12 percent

A

36) 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? A) The demand for money curve would shift rightward to MD2. B) The demand for money curve would shift leftward to MD0. C) There would be a movement upward along the demand for money curve MD1. D) There would be a movement downward along the demand for money curve MD1.

B

37) 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? A) The demand for money curve would shift rightward to MD2. B) The demand for money curve would shift leftward to MD0. C) There would be a movement upward along the demand for money curve MD1. D) There would be a movement downward along the demand for money curve MD1.

B

38) In the figure above, an increase in the monetary base would create a change such as a A) movement from point a to point b along the supply of money curve MS0. B) shift from the supply of money curve MS0 to the supply of money curve MS1. C) movement from point b to point a along the supply of money curve MS0. D) shift from the supply of money curve MS1 to the supply of money curve MS0.

B

46) If an economy has a velocity of circulation of 3, then A) the quantity of money is 3 times real GDP. B) in a year the average dollar is exchanged 3 times to purchase goods and services in GDP. C) the quantity of money is $3 for every dollar of GDP. D) nominal GDP is 1/3 the size of the quantity of money.

B

9) Depository institutions do all the following EXCEPT A) pool risks. B) create required reserve ratios. C) create liquidity. D) minimize the cost of obtaining funds

B

Assets Liabilities Reserves $100 Deposits $400 Loans $600 Net Worth $300 Total $700 Total $700 21) 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? A) $90 B) $60 C) $10 D) $40

B

Assets Liabilities Reserves $500 Deposits $3,000 Loans $2,500 Total assets $1,000 Total $3,000 22) 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 ________. A) $2,500 B) $50 C) $500 D) $450

B

Component Amount (billions of dollars) Currency 300 Checking deposits 600 Savings deposits 450 Traveler's checks 10 Time deposits 1,200 Money market mutual funds 1,100 Available credit on credit cards 900 5) According to the table above, the value of M1 is ________ and the value of M2 is ________. A) $900 billion; $3,650 billion B) $910 billion; $3,660 billion C) $910 billion; $3,460 billion D) $900 billion; $3,450 billion

B

Interest rate (percent) Quantity of money (billions of dollars) Money demand (billions of dollars) 2 500 575 3 500 550 4 500 525 5 500 500 6 500 475 7 500 450 40) 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 A) bond prices fall and so the interest rate falls. B) people buy bonds and the interest rate falls. C) the money market is in equilibrium. D) people sell bonds and the interest rate falls.

B

1) Aside from being a means of payment, the other functions of money are A) medium of exchange and the ability to buy goods and services. B) pricing, contracts, and store of value. C) medium of exchange, unit of account, and store of value. D) medium of exchange, unit of account, and means of lending

C

11) Controlling the quantity of money and interest rates to influence aggregate economic activity is called A) foreign policy. B) fiscal policy. C) monetary policy. D) bank antitrust policy.

C

16) When the Fed lowers the federal funds rate, it can lead to A) a decrease in demand deposits. B) the Fed selling government securities. C) an increase in lending by banks. D) a decrease in the quantity of money

C

18) The Fed buys $100 million of government securities from Bank A. What is the effect on the Federal Reserve's balance sheet? A) Securities increase by $100 million and reserves of Bank A decrease by $100 million. B) Securities decrease by $100 million and reserves of Bank A increase by $100 million. C) Securities increase by $100 million and reserves of Bank A increase by $100 million. D) Securities increase by $100 million and Federal Reserve notes (currency) decrease by $100 million

C

39) In the figure above, a decrease in the monetary base would create a change such as a A) movement from point b to point a along the supply of money curve MS0. B) shift from the supply of money curve MS0 to the supply of money curve MS1. C) shift from the supply of money curve MS1 to the supply of money curve MS0. D) movement from point a to point b along the supply of money curve MS0.

C

43) In the figure above, if the interest rate is 4 percent, there is a $0.1 trillion excess A) demand for money and bond prices will rise. B) quantity of money and bond prices will rise. C) demand for money and bond prices will fall. D) quantity of money and bond prices will fall.

C

49) According to the quantity theory of money, in the long run, changes in the price level are the result of changes in the A) real interest rate. B) velocity of circulation. C) quantity of money. D) prime interest rate

C

50) 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 ________. A) the growth rate of real GDP B) the growth rate of potential GDP C) the price level D) the inflation level

C

7) Credit cards are A) a part of money because they are used in so many transactions. B) not part of money because the government has no control over the amount of credit outstanding. C) not part of money because they represent a loan of money to the user. D) a part of money when the transaction approach is used but not when the liquidity approach is used.

C

Assets Liabilities Reserves $100 Deposits $400 Loans $600 Net Worth $300 Total $700 Total $700 20) The above table gives the initial balance sheet for Mini Bank. Mini Bank's actual reserve ratio equals ________. A) 33.3 percent B) 20 percent C) 25 percent D) 12.5 percent

C

17) The Fed buys $100 million of government securities from Bank A. What is the effect on Bank A's balance sheet? A) Securities increase by $100 million and reserves increase by $100 million. B) Securities increase by $100 million and reserves decrease by $100 million. C) Securities decrease by $100 million and deposits decrease by $100 million. D) Securities decrease by $100 million and reserves increase by $100 million.

D

23) When a bank has excess reserves A) it can make loans. B) it can create money. C) it has too many loans. D) Both answers A and B are correct

D

24) Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio is 15 percent. How many loans can Bank A create at Bank A? A) zero, because Bank A has no excess reserves B) $850 C) $200 D) $50

D

30) The quantity of real money demanded is A) proportional to the price level B) negatively related to the price level. C) positively related to the price level. D) independent of the price level.

D

33) The opportunity cost of holding money refers to A) the price level. B) the utility that would have been received if the money balances had been used to buy a good or service. C) the service fees charged to withdraw currency from an ATM. D) the interest that could have been earned if the money balances had been changed into an interest-bearing asset

D

42) In the figure above, if the interest rate is 8 percent, people demand $0.1 trillion A) less money than the quantity supplied and bond prices will fall. B) more money than the quantity supplied and bond prices will fall. C) more money than the quantity supplied and bond prices will rise. D) less money than the quantity supplied and bond prices will rise.

D

44) In the short run, when the Fed increases the quantity of money A) the demand for money increases. B) bond prices fall and the interest rate rises. C) the supply of money curve shifts leftward. D) bond prices rise and the interest rate falls.

D

45) In the short run, when the Fed decreases the quantity of money A) bond prices rise and the interest rate falls. B) the demand for money increases. C) the supply of money curve shifts rightward. D) bond prices fall and the interest rate rises.

D

47) If velocity is 6 and the quantity of money is $2 trillion, what is nominal GDP? A) $6 trillion B) $3 trillion C) $333 billion D) $12 trillion

D

Interest rate (percent) Quantity of money (billions of dollars) Money demand (billions of dollars) 2 500 575 3 500 550 4 500 525 5 500 500 6 500 475 7 500 450 41) 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 that A) the money market is in equilibrium. B) bond prices rise so that the interest rate rises. C) people buy bonds and the interest rate falls. D) people sell bonds and the interest rate rises

D