MacroEconomics 11

Lydia deposits $70,000 into the First National Bank of Ceelo. The required reserve ratio is 10%. How much will the money supply increase if the bank loans out excess reserves? $77,000 $63,000 $6,300 $7,000 $70,000

$63,000

A money market account at the bank offers a 4% nominal interest rate, while inflation is expected to be 3%. What is the real interest rate for this account? 3% 7% 4% 12% 1%

1%

When interest rates go up, the price of existing bonds - There is not enough information to answer without knowing the interest rate. - goes up. - goes down. - stays the same. - isn't connected to interest rates

goes down

Which of the following is not included in M2? - certificates of deposit - cash and coins - savings accounts - gold - checkable deposit

gold

According to the quantity theory of money, increasing the money supply will lead to - lower economic output in the short-run and inflation in the long-run - higher economic output in the short-run and deflation in the long-run - higher economic output in the short-run and inflation in the long-run - an increase in the nation's long-run production possibilities - higher unemployment and deflation in the long-run

higher economic output in the short-run and inflation in the long-run

The velocity of money refers to - how many dollars are in circulation. - how high the denominations for money are in circulation. - how often the money supply changes within a certain time period. - how many times a single dollar is spent, or turned over within a certain time period. - how fast the central bank's monetary policy actions take place.

how many times a single dollar is spent, or turned over within a certain time period.

Which of the following does not have an impact on the velocity of money? - economic variables - how many years ago the currency was printed - interest rates - quantity of ATM machines - the number of financial institutions

how many years ago the currency was printed

*When GDP is rising, money demand will most likely - decrease as consumers demand more money for transactions. - increase as consumers demand more money as a financial asset. - increase as consumers demand more money for transactions. - increase as consumers demand more money as a financial asset. - decrease as consumers demand more money as a financial asset.

increase as consumers demand more money for transactions.

*As the price level decreases, the value of money - increases, so people want to hold more of it. - increases, so people want to hold less of it. - decreases, so people want to hold less of it. - stays constant, so people want to hold less of it. - decreases, so people want to hold more of it.

increases, so people want to hold less of it.

The quantity theory of money describes the relationship between - the money supply, the Phillips curve, and the circular flow of economic activity - the value of money and the price of gold - the money supply and the unemployment rate - inflation, unemployment, interest rates, and real output - inflation, the money supply, real output, and prices.

inflation, the money supply, real output, and prices.

Money serves as a standard of deferred payment when: - when it is no longer divisible. - it can be exchanged for goods and services. - only when it has intrinsic value. - it can be used to buy something now and make payments later on. - it can be used to buy now and pay now

it can be used to buy something now and make payments later on.

Most bonds pay interest: - Monthly - Quarterly - Semi-annually - Annually

semi-annually

When a deposit is made into a bank, the bank - loans out 120% of it. - pays this amount to another bank. - sets aside a required reserve and loans out the rest. - sets aside the entire amount for safekeeping. - transfers all of it to the Federal Reserve.

sets aside a required reserve and loans out the rest.

*The demand curve for money - shifts up when transfer costs decrease - shifts down as Real GDP increases - shifts down as the price level decreases - shifts up as the price level decreases - shifts up as interest rates increase

shifts down as the price level decreases

Because the central bank controls the money supply, - they also control the demand for products and services. - they also control market interest rates. - they also control the demand for money. - they also control taxes on savings and investment. - they also control exchange rates.

they also control market interest rates

Most bonds have par values of: $25 $1,000 $500 $10,000

$1,000

*When $1,000 gets deposited into the banking system, and the reserve ratio is 10%, what is the total amount the money supply could increase? $1,000 $10,000 $900 $5,000 $7,500

$10,000

According to the T-account shown, if the required reserve ratio is 10%, what is the maximum amount of additional loans this bank can make? Hint: First calculate the amount of reserves necessary to hold, then compare to actual Assets: Liabilities reserves $6,000 Demand Deposit $20,000 Loans made: $14,000 - $14,000 - $20,000 - $4,000 - $6,000 - $26,000

$4,000

Assume that the reserve requirement is 25%. If banks have excess reserves of $10,000, which of the following is the maximum amount of additional money that can be created by the banking system through the lending process? $50,000 $25,000 $250,000 $40,000 $2,500

$40,000

A bank has demand deposits of $50,000 and actual reserves of $5,000. If the reserve requirement is 10%, what is the maximum the bank can loan out at this time? $45,000 $50,000 $35,000 $65,000 $15,000

$45,000

* $10,000 gets deposited into the Ceelo First National Bank. As a result, excess reserves go up by $8,000. This means that the required reserve ratio must be: 18% 2% 10% 20% 80%

20%

If banks have excess reserves of $5,000, and the money supply increased by $20,000, what is the reserve ratio? 20% 40% 25% 10% 15%

25%

If the nominal gross domestic product is $6 trillion and the money supply is $2 trillion, assuming a constant price level, the velocity of money is 1/3 8 3 12 4

3

Assuming that the price level remains constant, if the nominal gross domestic product is $8 trillion and the money supply is $2 trillion, the velocity of money would be what? 4 16 2 1/4 8

4

If nominal GDP = $5,000 billion and the money supply is $1,000 billion, assuming a constant price level, velocity must be 4,000 5 6,000 500 -5

5

In the country of Athenia, banks charge 10% interest on all loans. If the general price level has been increasing at a rate of 2% per year, the real rate of interest in Athenia is 8% 10% 5% 2% 12%

8%

The real interest rate for a consumer loan is 5%, and the expected inflation rate is 3%. What is the nominal interest rate on this consumer loan? 2% 3% 15% 5% 8%

8%

George reaches into his wallet and pulls out a $20 US bill. What type of financial asset is this? -Coin - All of these answers mean the same thing - cash. - Currency - Money - Legal Tender

All of these answers mean the same thing - cash.

What is the contractual obligation associated with stock? - A commitment to the owner of stock to make the value of the stock increase, no matter what. - None of these answers are correct. - The promise by a central bank to keep the economy strong so the business represented by the stock can be financially stable. - An ownership interest in a company. - Commitment by the company that issued the stock to buy the stock of cash whenever the holder of the stock request

An ownership interest in a company.

When calculating the coupon rate, you should: - Multiply the interest - Semi-annualize the interest - Annualize the interest - Ignore the interest

Annualize the interest

What is a coupon rate? - Annualized coupon divided by par value. - Quarterly coupon dividend by par value. - Semi-annual dividend divided by current value. - Quarterly dividend dividend by future value.

Annualized coupon divided by par value.

Which of the following is not true regarding the role of banks in the economy? - Banks control the fiscal policy of the country. - Banks are required to set aside a fraction of all deposits. - Banks provide the funds that people need to invest. - Banks increasing the money supply. - Banks connect savers with borrowers.

Banks control the fiscal policy of the country.

Why is gold NOT considered money? - Because despite being a medium of exchange, it is not a store of value. - Because despite being a medium of exchange, it is not a standard of deferred payment. - Because despite being a unit of account, it is not a store of value. - Because despite being a store of value, it is not a medium or exchange or a unit of account. - Because despite being a standard of deferred payment, it is not a store of value.

Because despite being a store of value, it is not a medium or exchange or a unit of account.

Why is money is a medium of exchange? - Because it was first used at the stock exchange. - Because two bills of like denomination can be exchanged. - Because it fuels the stock market. - Because it is accepted and can be used for the purchase of goods and services. - Because two bills of like denomination have the same value.

Because it is accepted and can be used for the purchase of goods and services.

Which of the following financial assets is a debt instrument - a promise by the issuer to pay the holder their principal plus interest at some future date? - Legal Tender - Stock - Money - Bonds - None of the financial assets listed are debt instruments.

Bonds

*What is the most important determinant of saving? - The money supply. - The budget deficit. - The current cost of living. - The real interest rate. - The tax rate.

The real interest rate.

How do banks make money? -They do not make money. They only move it around - Loaning out required reserves - Fundraising - Loaning out their excess reserves - Collecting interest on deposits

Loaning out their excess reserves

Which of the following statements is true regarding the money supply? - M1 is more liquid than M2 - M2 is more liquid than M1 - M1 is larger than M2 - M2 is composed primarily of coins in circulation - M2 is no longer used by the Federal Reserve

M1 is more liquid than M2

Which of the following measures of the money supply is largest? - coins and currency - checkable deposits - time deposits - M2 - M1

M2

Which of the following lists is in the correct order, from least to most, of the market value of each type of financial asset discussed in this lesson? -Money, Bonds, Stock - The US economy has the same amount of cash, stock, and bonds, as measured by market capitalization. - Bonds, Stock, Money - Money, Stock, Bonds - Stock, Money, Bonds

Money, Stock, Bonds

Who determines the demand for loanable funds? - The government. - It's determined by chance. - The money supply. - The real interest rate. - The tax rate on individuals.

The real interest rate.

Which of the financial assets discussed in this lesson is most important? - None of the three financial assets discussed can be considered 'most important.' All three are needed for a healthy, functioning economy. - Bonds, because bonds are the primary mechanism to get savers' deposits to borrowers' so they can grow the economy. - Money, because without a medium of exchange, production and exchange would be severely limited. - Together stocks and cash are the most important; bonds only exist as an investment option for people that aren't risky. - Stocks, because stocks grow in value, thereby creating wealth.

None of the three financial assets discussed can be considered 'most important.' All three are needed for a healthy, functioning economy.

In the formula C = i / p, what does the p represent? - Interest rate - Present value - Property value - Par value

Par value

According to the quantity theory of money, an increase in the money supply results in an increase in which of the following? - interest rate - unemployment - Real GDP - tax rates - the Phillips Curve

Real GDP

How will an increase in national saving affect the real interest rate and therefore investment? - Real interest rate will fall and investment will rise. - Real interest rate will stay the same but investment will rise. - Real interest rate will rise and investment will fall. - Both real interest rate and investment will fall. - Real interest rate will fall and investment will remain the same.

Real interest rate will fall and investment will rise.

Besides being known as the reserve ratio, what is the fraction of a customer's deposits that a bank is required to hold in reserve is also called? - Actual reserves - Excess reserves - Federal Reserve - Required reserves - Total reserves

Required reserves

What is the Money Multiplier relationship between? - Reserves in a banking system and the money supply. - Required reserves and the money supply. - Reserves in the banking system and the interest rate. - Reserves loaned out by banks and the total reserves. - Central bank and the government.

Reserves in a banking system and the money supply.

What is directly connected with borrowing for private investment in the market for loanable funds? - Demand - Exports - Tax rate - Savings - The money supply.

Savings

*Which of the following is true about private investment? - The higher the interest rate is, the less people and businesses want to borrow for private investment. - The lower the interest rate is, the less people and businesses want to borrow for private investment. - The more progressive the interest rate is, the more people and businesses want to borrow for private investment. - The cheaper the interest rate is, the less people and businesses want to borrow for private investment. - The higher the interest rate is, the more people and businesses want to borrow for private investment.

The higher the interest rate is, the less people and businesses want to borrow for private investment.

What happens when the government provides a tax incentive for businesses to invest? - The increased investment causes tax rates to go down. - The increased investment leads to lower demand for loanable funds. - The increased investment causes a negative supply shock in the economy. - The increased investment leads to a greater supply of loanable funds. - The increased investment leads higher demand for loanable funds.

The increased investment leads higher demand for loanable funds.

Which of the following statements is not true regarding the money market? - The supply of money is controlled by the central bank. - The supply curve for money is upward sloping. - Equilibrium occurs at the interest rate where supply and demand intersect. - The supply curve for money is vertical. - It is an economic model that describes the supply and demand for money.

The supply curve for money is upward sloping.

What happens when the government provides a tax incentive for people to save more? - The supply of loanable funds stays the same. - The supply of loanable funds increases. - The demand for loanable funds decreases. - The demand for loanable funds stays the same. - The supply of loanable funds decreases.

The supply of loanable funds increases.

Which of the following is not true regarding real interest rates? - They are determined in the money market. - They are determined in the market for loanable funds. - Real interest rates have already been adjusted for inflation. - Financial institutions usually don't advertise real rates but nominal rates instead. - Real interest rates are the opposite of nominal interest rates.

They are determined in the money market.

When does the investment demand increases? - When tax rates rise. - When real GDP increases. - When investors are more optimistic about the future. - When the cost of borrowing rises. - When interest rates go up.

When investors are more optimistic about the future.

When two parties to an exchange value the good they would receive as much as the good they would give away, economists call this - an alignment of barter - an exchange - transactions costs - a coincidence of coinage - a coincidence of wants

a coincidence of wants

The time value of money teaches us that - the value of a dollar is the same as the value of a unit of currency anywhere in the world. - a dollar is worth more down the road than it is today. - a dollar is worth more today than it is at some future date. - a dollar's value never changes because it is a unit of account. - the longer it takes to receive a dollar, the more it is worth.

a dollar is worth more today than it is at some future date.

When someone deposits money into a savings account, this demand deposit becomes to the bank. - a risk - a bond - an asset - a liability - a stock

a liability

A bond is - the same as a commodity. - a security that trades overseas based on the price of a commodity. - a promise to pay an amount back in the future that is borrowed today. - a sealant originally used to bind pages together while printing the economic report of the president. - an agent of the intelligence community

a promise to pay an amount back in the future that is borrowed today.

Because money makes exchange easier - more specialization can take place - transactions costs are lower - an economy is more efficient - more goods and services can be exchanged - all these answers are correct

all these answers are correct

*Which of the following will decrease the quantity of money demanded by consumers and businesses? - an increase in interest rates - an increase in incomes - an increase in the supply of money - a decrease in interest rates - an increase in the demand for money

an increase in interest rates

The fractional reserve system's ability to create money is reduced when - borrowers deposit loan proceeds back into bank checking accounts - savings account balances go up - banks only loan to qualified borrowers - the Federal Reserve lowers interest rates - banks hold excess reserves and don't loan them out

banks hold excess reserves and don't loan them out

Which of the following is a component of M1? - certificates of deposit - gold - government bonds - cash and coins in circulation - savings accounts

cash and coins in circulation

When the velocity of money is high, - a larger quantity of higher denomination bills are in circulation. - changes in the price level times the change in interest rates = real GDP. - the central bank issues a traffic citation. - changes in the money supply will have a greater effect on nominal GDP. - changes in the money supply will have a smaller effect on nominal GDP.

changes in the money supply will have a greater effect on nominal GDP.

* Money that has an instrisic value is called - commodity money - fiat money - representative money - barter - gold

commodity money

*Money demand varies - directly with the price level and output. - inversely with the price level and output. - does not vary with prices or output. - directly with prices and inversely with output. - inversely with the marginal cost of production.

directly with the price level and output

When economists illustrate the money market, the demand curve is _ while the supply curve is _. - downward sloping; upward sloping - upward sloping; downward sloping - downward sloping; vertical - horizontal; vertical - upward sloping; vertical

downward sloping; vertical

Monetarism is the economic viewpoint that - the velocity of money is stable and prices aren't affected by the money supply - the money supply should be increased dramatically - excessive expansion of the money supply leads to inflation. - the value of money is directly tied to the price of gold - excessive expansion of the money supply leads to higher output in the long-run

excessive expansion of the money supply leads to inflation.

The present value of a 10-year stream of payments that total $1 million when interest rates are at 5% is worth - more than $1 million today. - not enough information to answer. - less than $1 million today. - exactly $1 million today. - more than $1 million today but less than $1 million in ten years.

less than $1 million today.

Banks make money by - making and selling coins. - loaning out all their reserves. - loaning out excess reserves. - paying interest to savers. - borrowing from the Federal Reserve.

loaning out excess reserves.

*When the supply of money is unchanged, an increase in the demand for money leads to - higher money supply - lower money supply - lower interest rates - no change in interest rates - higher interest rates

lower interest rates

*When interest rates are 20%, the demand for money is - high and getting higher. - high but falling quickly. - constant. - higher than it would be if interest rates are 2%. - lower than it would be if interest rates are 2%.

lower than it would be if interest rates are 2%.

When everything in an economy can be quoted in the same terms, economists say that: - money is plentiful. - all the money was printed at the same printing press. - money has a terminal value. - money is a unit of account. - the central bank has increased the money supply.

money is a unit of account.

The economics model that describes the demand and supply of money in a nation is called - the product market. - the money market. - the market for loanable funds. - the demand for money. - the money supply.

money market

Every time banks loan out excess reserves, - the price level goes down. - the money supply increases. - interest rates go down. - the money supply decreases. - the long-run aggregate supply curve shifts inward.

money supply increases

The velocity of money is a ratio of - M1 over M2. - the nominal interest rate to a measure of the money supply. - nominal GDP to real interest rates. - real GDP to the price level. - nominal GDP to a measure of the money supply.

nominal GDP to a measure of the money supply.

Which of the following insures that the US dollar maintains its value? - the price of gold - only the promise of the United States government - the price of silver - the instrinsic value of the paper it is printed on - the amount of gold on deposit with the Federal Reserve

only the promise of the United States government

Which of the following is NOT a function of money? - medium of exchange - store of value - unit of account - protection against inflation - standard of deferred payment

protection against inflation

In order to adjust a nominal interest rate for inflation, the following formula should be used: rn = ri r = i x n n = r - i mv = py r = n - i

r = n - i

*The demand for money will fall when - real GDP rises. - the real interest rate rises. - people expect deflation. - the real interest rate falls. - the GDP deflator rises.

real interest rate rises

In economics, the word 'liquid' refers to - the ability to convert money into gold - the amount of free flow involved in the money supply - water used in the sprinkler system at the Federal Reserve bank - the ability to quickly and easily convert an asset to cash - the nature of the product market

the ability to quickly and easily convert an asset to cash

Present value is - cannot be estimated and is only theoretical. - the amount of money today that is equivalent to a single payment or a stream of payments earned in the future. - the value of the next best alternative. - the present worth of the country's total production. - the value where supply and demand are in equilibrium.

the amount of money today that is equivalent to a single payment or a stream of payments earned in the future.

Which of the following statements is true about the quantity theory of money? - when the money supply increases, velocity always increases also - the equation of exchange is MV = PY - government spending is the determining factor in monetary policy - it holds true in the United States only - the equation of exchange is MR = PV

the equation of exchange is MV = PY

When money demand increases and all other things remain constant - the money market finds a new equilibrium and the market interest rate rises. - the money market remains at the same equilibrium. - the money market finds a new equilibrium and the market interest rate falls. - the supply of money falls by an equal amount to compensate. - the demand curve for money shifts leftward, leading to a lower interest rate.

the money market finds a new equilibrium and the market interest rate rises.

* Under fractional banking, when a bank lends to a customer - only a small fraction of deposits gets loaned out. - banks make less money. - banks go bankrupt. - the money supply increases. - the money supply decreases.

the money supply increases.

Which of the following statements correctly describes the relationship between bond prices and interest rates? - when market interest rates go up, all bond prices go up - the price of a bond changes only when the fixed payment changes - the price of an old bond is not based on interest rates - the price of a bond varies inversely with market interest rates - the price of a bond is positively related to its interest rate

the price of a bond varies inversely with market interest rates

Money was created - by Europeans for Europeans - by the central bank to control interest rates - to reduce the costs of making transactions in the economy -as a means of taking advantage of the poor - to provide the government with quick tax revenue

to reduce the costs of making transactions in the economy