U4 MCQ

Answer B When the central bank buys government bonds, the money supply increases, which decreases the nominal interest rate. This increases interest-sensitive spending and increases aggregate demand, real output, and the price level.

A country's central bank purchases government bonds from the public in the open market. How would this action affect the nominal interest rate and the price level in the short run? A. There would be a decrease in the nominal interest rate and a decrease in the price level. B. There would be a decrease in the nominal interest rate and an increase in the price level. C. There would be an increase in the nominal interest rate and a decrease in the price level. D. There would be an increase in the nominal interest rate and a decrease in the price level. E. There would be an increase in the nominal interest rate and no change in the price level.

Answer C A rise in the price level causes the money demand curve to shift to the right, causing the nominal interest rate to rise. Nominal interest rates and bond prices move in opposite directions. Therefore, an increase in the nominal interest rate will result in a decrease in the price of previously issued bonds.

An increase in the price level will affect the money market and bond market in which of the following ways? A. The nominal interest rate rises, and the price of previously issued bonds rises. B. The nominal interest rate falls, and the price of previously issued bonds is unaffected. C. The nominal interest rate rises, and the price of previously issued bonds falls. D. The nominal interest rate falls, and the price of previously issued bonds rises. E. The nominal interest is unaffected, and the price of previously issued bonds rises.

Answer D House, bonds, savings account, cash are listed in order from least liquid to most liquid.

Cash, a house, bonds, and a savings account are all financial assets. Which of the following rankings lists these assets from the least liquid to the most liquid? A. Cash, bonds, house, savings account B. Bonds, house, savings account, cash C. Savings account cash, bonds, house D. House, bonds, savings account, cash E. Cash, savings account, bonds, house

Answer E The expected real interest rate is calculated as the nominal interest rate minus the expected inflation rate; 5%-(-2%)=7%.

If the interest rate on a one-year loan is 5% and the expected inflation rate is -2% for the same period what is the expected real interest rate on the loan? A. -7% B. -2% C. 2% D. 3% E. 7%

Answer D M1 is composed of currency in circulation and demand deposits. M2 is composed of M1 and other short-term and long-term savings accounts. Therefore, transferring money from checking accounts to savings accounts will reduce M1 but will not affect M2.

Mia transferred $1,000 from her checking account to her savings account. How will M1 and M2 measures of the money supply change? A. M1 will increase and M2 will decrease B. M1 will increase and M2 will increase C. M1 will decrease and M2 will increase D. M1 will decrease and M2 will not change E. M1 will not change and M2 will increase

Answer E Nathan is incorrect because the opportunity cost of holding money is the interest income that could have been earned from holding other financial assets, such as bonds.

Nathan has been unable to trust banks since the failure of his savings and loan bank. He claims that storing his hard-earned money at home is costless. Is Nathan correct? A. Yes, because money is the most liquid form of financial assets. B. Yes, because there is no opportunity cost in holding money. C. Yes, because the opportunity cost of holding money is the real value of goods and services it can purchase. D. No, because money is the least liquid form of financial assets. E. No, because the opportunity cost of holding money is the lost interest he could have earned on other financial assets.

Answer D Since the bank keeps no excess reserves, all excess reserves will be lent out and will result in a maximum increase in loans of $200 million, which is the product of excess reserves (=deposits-required reserves=$50 million-$10million=$40million) and the money multiplier (=1/required reserve ratio=1/(required reserves/deposits)=1/($10million/$50million)=1/0.2=5). Therefore, the money supply will increase by a maximum of $200 million.

Northern City Bank keeps no excess reserves. Assume Northern City Bank receives a deposit of $50 million dollars. As a result of the deposit, Northern City Bank's required reserves increase by $10 million. What is the maximum possible change in the money supply in the banking system that could result from the $50 million deposit? A. The money supply will increase by a maximum of $10 million B. The money supply will increase by a maximum of $40 million C. The money supply will increase by a maximum of $50 million D. The money supply will increase by a maximum of $200 million E. The money supply will increase by a maximum of $250 million

Answer E The money multiplier is the inverse of the required reserve ratio and is equal to 1/0.05=20. The bank can lend out its excess reserves up to $8 million. When the bank lends out all its excess reserves, loans in the banking system can increase by a maximum of $160 million which is equal to the product of the bank's excess reserves and the money multiplier; $8 million*20=$160 million.

Southern City Bank has $100 million in deposits and has $8 million in excess reserves. If the required reserve ratio is 5% which of the following is true? A. The money multiplier is 20, and the bank can lend out up to $160 million. B. The money multiplier is 8, and the bank can lend out up to $20 million. C. The money multiplier is 8, and the bank can lend out up to $5 million. D. The money multiplier is 8, and loans can increase in the banking system by a maximum of $8 million. E. The money multiplier is 20, and loans can increase in the banking system by a maximum of $160 million.

Answer E The actual inflation rate is the difference between the nominal interest rate and the actual interest rate, 9%-3%=6%.

Spencer took a 9 percent one-year fixed-rate loan to buy a new car. He expected to pay a real interest rate of 5 percent. If at the end of the year, Spencer only paid a 3 percent real interest rate, which of the following is true? A. The nominal interest rate was 3%. B. The nominal interest rate was 5%. C. The actual inflation rate was 2%. D. The actual inflation rate was 4%. E. The actual inflation rate was 6%.

Answer C Decreasing the discount rate is an expansionary monetary policy action that will encourage commercial banks to borrow funds from the central bank and extend new loans, thereby expanding the money supply. Expanding the money supply will decrease nominal interest rates, which will increase interest-sensitive spending, moving the economy back towards full employment.

Suppose the economy has entered a recession. Which of the following is a monetary policy action a central bank can take to restore full-employment output? A. Selling government bonds B. Decreasing government spending C. Decreasing the discount rate D. Increasing the federal funds rate E. Increasing the required reserve ratio

Answer B The economy is current in long-run equilibrium producing the full-employment output. A contractionary monetary policy will cause the AD curve to shift to the left, leading to a decrease in the price level and the real output level. Real output will be lower than full employment and the economy will be in a recessionary gap.

Use the graph to answer the question Country X's economic situation is depicted by the graph above. Which of the following will happen if Country X's central bank conducts a contractionary monetary policy? A. The economy will be in a recessionary gap, the price level will decrease, and the real output level will increase. B. The economy will be in a recessionary gap the price level and the real output level will decrease. C. The economy will be at full employment, the price level and the real output level will increase. D. The economy will be in an inflationary gap, the price level and the real output level will increase. E. The economy will be in an inflationary gap, the price level will increase, and the real output level will decrease.

Answer D At i3 the quantity of money demanded is greater than the quantity of money supplied; therefore, there is a shortage in the money market. Money market and bond market

Use the graph to answer the question Which of the following is true at the nominal interest rate (i3)? A. The money market is at equilibrium because the quantity demanded is equal to the quantity supplied B. There is a surplus in the money market because the quantity demanded is less than the quantity supplied C. There is a surplus in the money market because the quantity demanded is greater than the quantity supplied D. There is a shortage in the money market because the quantity demanded is greater than the quantity supplied E. There is a shortage in the money market because the quantity demanded is less than the quantity supplied

Answer E As the nominal interest rate falls, people hold more money because the opportunity cost of holding money decreases, which leads to a downward-sloping money demand curve.

Which of the following describes the relationship between the nominal interest rate and the quantity of money people want to hold as depicted by the money demand curve? A. Positive, and the money demand curve is upward sloping. B. Positive, and the money demand curve is downward sloping. C. Positive, and the money demand curve is vertical. D. Inverse, and the money demand curve is upward sloping. E. Inverse, and the money demand curve is downward sloping.

Answer C The amount predicted by the simple money multiplier may be overstated because it does not take into account a bank's desire to hold excess or the public holding more currency.

Which of the following explains why the amount predicted by the value of the simple money multiplier may be overstated? A. It does not take into account the amount of bank loans B. It does not take into account the marginal propensity to consume C. It does not take into account a bank's desire to hold excess reserves D. It does not take into account changes in expected inflation E. It does not take into account changes in savings

Answer E Real values are adjusted for inflation. A real interest rate is adjusted for inflation.

Which of the following is adjusted by the actual inflation rate? A. Nominal wages B. Automatic stabilizers C. Unemployment rate D. Price of previously issued bonds E. Real interest rates

Answer A The monetary base includes currency in circulation and bank reserves.

Which of the following is included in the monetary base? A. Currency held by the public and commercial bank reserves held with the central bank B. Currency held by the public, demand deposits at depository institutions, and commercial bank reserves held with the central bank C. Currency held by the public, demand deposits, savings deposits, and certificates of deposits D. Currency held by the public and small and large time deposits E. Currency held by the public, small and large time deposits, and commercial bank reserves held with the central bank

Answer B Bonds and stocks are easily converted to cash by selling them in financial markets in order to be used as a medium of exchange.

Which of the following is true for both stocks and bonds? A. They are interest-bearing assets. B. They are easily converted to cash. C. They are risk-free assets. D. They are equity. E. They are the most liquid form of financial assets.

Answer C M1 is composed of currency in circulation and checkable deposits. This transaction will keep M1 unchanged because currency will decrease and checkable deposits will increase by the same amount.

Which of the following transactions will keep M1 unchanged? A. Sam transferred money from his savings account to his checking account. B. Mike purchased government bonds and paid with a check. C. Leila deposited coins from her piggy bank into her checking account. D. Sandy withdrew money from her savings account. E. Patty increased her monthly cash deposits to her retirement funds.