AP ECON (MACRO) UNIT 4
The diagram shows the effect of a monetary policy action on aggregate demand. Which of the following will shift the aggregate demand curve in the direction shown in the diagram above? A A decrease in the money supply B A decrease in the monetary base C A decrease in the overnight interbank lending rate D An increase in the required reserve ratio E The sale of bonds to the private sector by the central bank
C A decrease in the overnight interbank lending rate
One way in which the Federal Reserve works to change the United States money supply is by changing the A number of banks in operation B velocity of money C price level D prime rate E discount rate
E discount rate
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 A $10 B $100 C $900 D $1,000 E $1,100
C $900
Assume that the nominal interest rate is 10 percent. If the expected inflation rate is 5 percent, the real interest rate is A 0.5% B 2% C 5% D 10% E 15%
C 5%
In the country of Agronomia, banks charge 10 percent interest on all loans. If the general price level has been increasing at the rate of 4 percent per year, the real rate of interest in Agronomia is A 14% B 10% C 6% D 4% E 2.5%
C 6%
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 A $500 B $1,000 C $2,000 D $4,000 E $4,500
E $4,500
Suppose that the central bank buys $100 worth of bonds on the open market. Assume that the required reserve ratio is 10 percent, banks keep no excess reserves, and there are no cash leakages. After banks have made all adjustments, reserves, demand deposits, and loans will increase by which of the following? A Reserves: $1,000; Demand Deposits: $1,000; Loans: $1,000 B Reserves: $1,000; Demand Deposits:$900; Loans: $1,000 C Reserves:$900; Demand Deposits:$1,000; Loans: $900 D Reserves:$100; Demand Deposits: $1,000; Loans: $1,000 E Reserves:$100; Demand Deposits: $1,000; Loans: $900
E Reserves:$100; Demand Deposits: $1,000; Loans: $900
The Federal Reserve decreases the federal funds rate by A decreasing the reserve requirement B decreasing the discount rate C increasing the discount rate D selling government bonds on the open market E buying government bonds on the open market
E buying government bonds on the open market
The table below gives the value of various monetary measures, in millions of dollars. Cash in Circulation: $100 Cash in Bank Vaults: $2 Bank Reserves:$10 Demand Deposits: $1,000 Traveler's Checks: $20 Based on the table above, what is the value of the monetary base? A $100 million B $102 million C $110 million D $112 million E $1,112 million
C $110 million
Suppose that the Federal Reserve buys $400 billion worth of government securities from the public. If the required reserve ratio is 20 percent, the maximum increase in the money supply is A $1,600 billion B $1,800 billion C $2,000 billion D $2,200 billion E $2,400 billion
C $2,000 billion
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 A $15,000 B $12,000 C $3,000 D $1,800 E 0
C $3,000
The annual inflation rate is expected to be 5 percent over the next 3 years. Juan plans to take out a 3-year loan to purchase an automobile. If Juan decides not to take out the loan if the real interest rate exceeds 3 percent, the highest nominal interest rate he is willing to pay is A 2 percent B 3 percent C 8 percent D 15 percent E 25 percent
C 8 percent
An increase in the equilibrium nominal interest rate could be caused by which of the following changes? A An increase in the monetary base B An increase in the money supply C An increase in real income D A decrease in the amount of cash the public wants to hold E A decrease in the price level
C An increase in real income
In the short run, which of the following would occur to bond prices and interest rates if a central bank bought bonds through open-market operations? A Bond Prices: No change; Interest Rates: Increase B Bond Prices: Increase; Interest Rates: Increase C Bond Prices: Increase; Interest Rates: Decrease D Bond Prices: Decrease; Interest Rates: Increase E Bond Prices: Decrease; Interest Rates: Decrease
C Bond Prices: Increase; Interest Rates: Decrease
The table gives the value of selected assets and liabilities of a commercial bank's T-account. What is the money multiplier? A 1 B 2 C 4 D 5 E 20
D 5
The table gives the value of selected assets and liabilities of a commercial bank's T-account. What is the maximum amount of new loans the bank could lend with the given amounts of reserves? A $10,000 B $20,000 C $30,000 D $50,000 E $70,000
A $10,000
An increase in government spending will affect the demand for money and nominal interest rates in which of the following ways? A Demand for Money: Increase; Nominal Interest Rates: Increase B Demand for Money: Increase; Nominal Interest Rate: Decrease C Demand for Money: Increase; Nominal Interest Rates: Indeterminate D Demand for Money: Decrease; Nominal Interest Rates: Increase E Demand for Money: Decrease; Nominal Interest Rates: Decrease
A Demand for Money: Increase; Nominal Interest Rates: Increase
A contraction in the money supply will most likely change the nominal interest rate and aggregate demand in which of the following ways in the short run? A Nominal Interest Rate: Increase; Aggregate Demand: Decrease B Nominal Interest Rate: Increase; Aggregate Demand: Increase C Nominal Interest Rate: Increase; Aggregate Demand: Not change D Nominal Interest Rate: Decrease; Aggregate Demand: Decrease E Nominal Interest Rate: Decrease; Aggregate Demand: Increase
A Nominal Interest Rate: Increase; Aggregate Demand: Decrease
If an economy is operating with significant unemployment, an increase in which of the following will most likely cause employment to increase and the interest rate to decrease? A Purchases of government bonds by the central bank B Transfer payments C Reserve requirements D Government expenditures E Investment in basic infrastructure
A Purchases of government bonds by the central bank
Which of the following will happen if the central bank of a nation purchases government bonds on the open market? A The monetary base will increase and the money supply will increase. B The monetary base will increase and the money supply will not change. C The monetary base will decrease and the money supply will increase. D The monetary base will decrease and the money supply will not change. E The monetary base will decrease and the money supply will decrease.
A The monetary base will increase and the money supply will increase.
If the central bank buys government bonds from individuals on the open market and banks do not loan out any excess reserves created by the open market purchase, which of the following will happen? A The money supply will increase. B The money supply will remain unchanged. C Loans to the private sector will increase. D Demand deposits will decrease. E The level of actual reserves will decrease.
A The money supply will increase.
If the central bank conducts an open-market purchase of bonds, which of the following will occur? A The price of bonds will increase. B The money supply will decrease. C Total bank reserves will decrease. D Consumption will decrease. E The government will balance its budget.
A The price of bonds will increase.
In the United States, which event would have caused the shift of the money supply curve from S1 to S2 in the money market shown above? A The purchase of government bonds on the open market by the Federal Reserve B An increase in the required reserve ratio C A short-run increase in output, employment, and income D An increase in general price level in the United States E An increase in the supply of dollars in foreign exchange markets
A The purchase of government bonds on the open market by the Federal Reserve
If the Federal Reserve sells a significant amount of government securities in the open market, which of the following will occur? A The total amount of loans made by commercial banks will decrease. B The total amount of loans made by commercial banks will increase. C The money supply will increase. D Rates of interest will decrease. E Rates of interest and amount of loans made by commercial banks will remain unchanged.
A The total amount of loans made by commercial banks will decrease.
In the narrowest definition of money, M1, savings accounts are excluded because they are A not a medium of exchange B not insured by federal deposit insurance C available from financial institutions other than banks D a store of purchasing power E interest-paying accounts
A not a medium of exchange
If the interest rate on short-term government bonds declined as a result of open market operations by a central bank, the central bank must have A purchased government bonds B sold government bonds to commercial banks C decreased the amount of currency in circulation D increased the supply of bonds E increased the discount rate on loans to commercial banks
A purchased government bonds
The Federal Reserve can cause an increase in interest rates in an attempt to A reduce inflation B reduce cyclical unemployment C reduce structural unemployment D increase aggregate demand E increase investment spending
A reduce inflation
The loanable funds market is best described as bringing together A savers and borrowers B investors and borrowers C financial institutions and investors D savers and lenders E banks and savers
A savers and borrowers
If aggregate demand is growing faster than long-run aggregate supply, the Federal Reserve is most likely to A sell securities on the open market B increase bond prices C increase income taxes D decrease the discount rate E decrease the required reserve ratio
A sell securities on the open market
The demand for money increases when national income increases because A spending on goods and services increases B interest rates increase C the budget deficit increases D the money supply increases E the public becomes more optimistic about the future
A spending on goods and services increases
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 A $10 million B $20 million C $80 million D $100 million E $200 million
B $20 million
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 A $6 billion B $5 billion C $1 billion D $0.8 billion E $0.2 billion
B $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 A $2,000 B $8,000 C $10,000 D $20,000 E $50,000
B $8,000
Suppose the required reserve ratio is 20 percent and a single bank with no excess reserves receives a $100 deposit from a new customer. The bank now has excess reserves equal to A $20 B $80 C $100 D $400 E $500
B $80
Assume that the required reserve ratio is 10 percent, banks keep no excess reserves, and borrowers deposit all loans made by banks. Suppose you have saved $100 in cash at home and decide to deposit it in your checking account. As a result of your deposit, the money supply can increase by a maximum of A $800 B $900 C $1,000 D $1,100 E $1,200
B $900
Assume that the reserve requirement is 10 percent. Marwa deposits $1 million in cash into her checking account at First Bank. The deposit will initially increase excess reserves at First Bank by A $100,000 B $900,000 C $1 million D $9 million E $10 million
B $900,000
If on receiving a checking deposit of $300 a bank's excess reserves increased by $255, the required reserve ratio must be A 5% B 15% C 25% D 35% E 45%
B 15%
An increase in money demand will cause which of the following? A A decrease in the nominal interest rate B A decrease in bond prices C A decrease in the money supply D An increase in the price level E An increase in the natural rate of unemployment
B A decrease in bond prices
A commercial bank's ability to create money depends on which of the following? A The existence of a central bank B A fractional reserve banking system C Gold or silver reserves backing up the currency D A large national debt E The existence of both checking accounts and savings accounts
B A fractional reserve banking system
An increase in the price level will most likely cause which of the following? A A leftward shift of the aggregate demand curve B An increase in the demand for money C An increase in the real interest rate D A decrease in the nominal interest rate E An increase in the supply of money
B An increase in the demand for money
The aggregate demand curve is downward sloping because an increase in the general price level will cause the demand for money, interest rates, and investment to change in which of the following ways? A Demand for Money: Increase; Interest Rates: Increase; Investment: Increase B Demand for Money: Increase; Interest Rates: Increase; Investment: Decrease C Demand for Money: Increase; Interest Rates: Decrease; Investment: Increase D Demand for Money: Decrease; Interest Rates: Increase; Investment: Decrease E Demand for Money: Decrease; Interest Rates: Decrease; Investment: Increase
B Demand for Money: Increase; Interest Rates: Increase; Investment: Decrease
Assume that the reserve requirement is 15 percent and that a bank receives a new checking deposit of $200. Which of the following will most likely occur in the bank's balance sheet? A Liabilities: Increase by $200; Required Reserves: Increase by $170 B Liabilities: Increase by $200; Required Reserves: Increase by $30 C Liabilities: Increase by $200; Required Reserves: Not change D Liabilities: Decrease by $200; Required Reserves: Decrease by $30 E Liabilities: Decrease by $200; Required Reserves: Decrease by $170
B Liabilities: Increase by $200; Required Reserves: Increase by $30
An increase in inflationary expectations will most likely affect nominal interest rates and bond prices in which of the following ways in the short run? A Nominal Interest Rates: Increase; Bond Prices: No change B Nominal Interest Rates: Increase; Bond Prices: Decrease C Nominal Interest Rates: No change; Bond Prices: Increase D Nominal Interest Rates: Decrease; Bond Prices: Increase E Nominal Interest Rates: Decrease; Bond Prices: Decrease
B Nominal Interest Rates: Increase; Bond Prices: Decrease
Assume that the economy is in equilibrium. If aggregate demand increases, nominal interest rates and bond prices will most likely change in which of the following ways? A Nominal Interest Rates: Increase; Bond Prices: Increase B Nominal Interest Rates: Increase; Bond Prices: Decrease C Nominal Interest Rates: Increase; Bond Prices: Not change D Nominal Interest Rates: Decrease; Bond Prices: Increase E Nominal Interest Rates: Decrease; Bond Prices: Decrease
B Nominal Interest Rates: Increase; Bond Prices: Decrease
Assume that the government finances its spending by borrowing from the public. If the government increases deficit spending, the price of previously issued bonds and the real interest rate will change in which of the following ways? A Price of Bonds: Decrease; Real Interest Rate: Decrease B Price of Bonds: Decrease; Real Interest Rate: Increase C Price of Bonds: Increase; Real Interest Rate: Decrease D Price of Bonds: Increase; Real Interest Rate: No change E Price of Bonds: Increase; Real Interest Rate: Increase
B Price of Bonds: Decrease; Real Interest Rate: Increase
Expansionary monetary policy will most likely cause interest rates and investment to change in which of the following ways in the short run? A Interest Rates: Increase; Investment: Increase B Interest Rates: Increase; Investment: Decrease C Interest Rates: Decrease; Investment: Increase D Interest Rates: Decrease; Investment: Decrease E Interest Rates: No change; Investment: Increase
C Interest Rates: Decrease; Investment: Increase
An increase in the money supply is most likely to have which of the following short-run effects on real interest rates and real output? A Real Interest Rates: Decrease; Real Output: Decrease B Real Interest Rates: Decrease; Real Output: Increase C Real Interest Rates: Increase; Real Output: Decrease D Real Interest Rates: Increase; Real Output: No change E Real Interest Rates: No change; Real Output: Increase
B Real Interest Rates: Decrease; Real Output: Increase
The table above shows the current entries in the T-account of XYZ Bank. Kim purchases a bond issued by the Federal Reserve Bank for $50,000 and pays for the bond by drawing on her company's account at XYZ Bank. What is the effect of Kim's purchase of the bond on the required and excess reserves of XYZ Bank and the total money supply? A Required: Increase; Excess: Decrease; Money Supply: Decrease B Required: Decrease; Excess: Decrease; Money Supply: Decrease C Required: No change; Excess: Decrease; Money Supply: No change D Required: Increase; Excess: No change; Money Supply: Increase E Required: Decrease; Excess: Increase; Money Supply: Increase
B Required: Decrease; Excess: Decrease; Money Supply: Decrease
Which of the following is a monetary policy action a central bank would implement to control inflation? A Target a lower overnight interbank lending rate B Sell government bonds to the public C Lower the discount rate D Lower the required reserve ratio E Increase the monetary base
B Sell government bonds to the public
Which of the following will most likely result in a lower real interest rate in a nation? A The nation provides an investment tax credit to new businesses. B The citizens of the nation increase their savings for retirement. C The nation is experiencing political instability and economic risk. D The nation's central bank sells government bonds in the open market. E The nation's government increases its borrowing to finance spending on capital projects.
B The citizens of the nation increase their savings for retirement.
Last year both a borrower and a lender expected an inflation rate of 3 percent when they signed a long-term loan agreement with fixed nominal interest rates of 5 percent. If the actual inflation rate were lower than expected, then which of the following would be true? A The borrower would benefit. B The lender would benefit. C The real interest rate would be lower than expected. D The nominal interest rate would be higher than expected. E The nominal interest rate would increase.
B The lender would benefit.
The amount of money that the public wants to hold is $10 billion. With a monetary base of $2 billion and a money multiplier of 4, which of the following will most likely occur? A The monetary base will increase. B The nominal interest rate will increase. C The money multiplier will increase. D The money demand curve will shift right. E Spending will increase.
B The nominal interest rate will increase.
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 could be caused by A a decrease in taxes B a decrease in the money supply C an increase in government spending D an increase in consumption spending E an increase in the price level
B a decrease in the money supply
An inflationary gap can be eliminated by all of the following EXCEPT A an increase in personal income taxes B an increase in the money supply C an increase in interest rates D a decrease in government spending E a decrease in net exports
B an increase 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 A an increase in the money supply of $5 million B an increase in the money supply of less than $5 million C a decrease in the money supply of $1 million D a decrease in the money supply of $5 million E a decrease in the money supply of more than $5 million
B an increase in the money supply of less than $5 million
The federal funds rate is the interest rate that A the Federal Reserve charges the federal government on its loans B banks charge one another for short-term loans C banks charge their best customers D equalizes the yield on government bonds and corporate bonds E is equal to the inflation rate
B banks charge one another for short-term loans
Open market operations take place when the A central bank buys or sells stocks B central bank buys or sells government bonds C central bank increases or decreases the discount rate to monitor the money supply D central bank increases or decreases reserve requirements for depository institutions E commercial banks borrow reserves from the central bank
B central bank buys or sells government bonds
If the reserve requirement is 25 percent and banks hold no excess reserves, an open market sale of $400,000 of government securities by the Federal Reserve will A increase the money supply by up to $1.6 million B decrease the money supply by up to $1.6 million C increase the money supply by up to $300,000 D increase the money supply by up to $100,000 E decrease the money supply by up to $100,000
B decrease the money supply by up to $1.6 million
All of the following are components of the money supply in the United States EXCEPT A paper money B gold bullion C checkable deposits D coins E demand deposits
B gold bullion
A barter economy is different from a money economy in that a barter economy A encourages specialization and division of labor B involves higher costs for each transaction C eliminates the need for a double coincidence of wants D has only a few assets that serve as a medium of exchange E promotes market exchanges
B involves higher costs for each transaction
The money demand curve is downward sloping because A the transaction demand for money decreases as interest rates fall B people hold less money as the opportunity cost of holding money rises C money is less liquid as interest rates rise, so people are able to hold less of it D banks are more willing to create money when interest rates fall E with higher incomes, people are willing to hold smaller percentages of their money
B people hold less money as the opportunity cost of holding money rises
Which of the following best describes the nominal interest rate on a mortgage loan that a bank offers to a customer? A It is the real interest rate divided by the price level. B It is the real interest rate minus the expected inflation rate. C It is the interest rate charged by the bank. D It is the interest rate charged by the bank minus the expected inflation rate. E It is the interest rate charged by the bank minus the interest rate the bank pays to its depositors.
C It is the interest rate charged by the bank.
Sam pays monthly installments on a five-year fixed interest rate auto loan. If the expected inflation rate increases, which of the following will happen? A Sam will pay a lower nominal interest rate. B Sam will pay a higher nominal interest rate. C Sam will pay a lower real interest rate. D Sam will pay a higher real interest rate. E Sam will pay higher monthly installments.
C Sam will pay a lower real interest rate.
Open market operations refer to which of the following activities? A The buying and selling of stocks in the New York stock market B The loans made by the Federal Reserve to member commercial banks C The buying and selling of government securities by the Federal Reserve D The government's purchases and sales of municipal bonds E The government's contribution to net exports
C The buying and selling of government securities by the Federal Reserve
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 ABC Bank sells $20 million worth of government bonds to Country X's central bank, what will happen to the money supply after all adjustments are made in the banking system? A The money supply will increase by a maximum of $5 million. B The money supply will decrease by a maximum of $5 million. C The money supply will increase by a maximum of $80 million. D The money supply will decrease by a maximum of $80 million. E The money supply will decrease by a maximum of $500 million.
C The money supply will increase by a maximum of $80 million.
An increase in which of the following will cause an increase in the demand for money? A The interest rate B The supply of money C The price level D The velocity of money E The trade deficit
C The price level
The purchase of bonds by the Federal Reserve will have the greatest effect on real gross domestic product if which of the following situations exists in the economy? A The required reserve ratio is high, and the interest rate has a large effect on investment spending. B The required reserve ratio is high, and the interest rate has a small effect on investment spending. C The required reserve ratio is low, and the interest rate has a large effect on investment spending. D The required reserve ratio is low, and the marginal propensity to consume is low. E The marginal propensity to consume is high, and the interest rate has a small effect on investment spending.
C The required reserve ratio is low, and the interest rate has a large effect on investment spending.
Expansionary fiscal policy will most likely result in A a decrease in the money supply B an increase in the marginal propensity to consume C an increase in nominal interest rates D a decrease in the level of output E a decrease in the price level
C an increase in nominal interest rates
The Federal Reserve can increase the money supply by A selling gold reserves to the banks B selling foreign currency holdings C buying government bonds on the open market D buying gold from foreign central banks E borrowing reserves from foreign governments
C buying government bonds on the open market
The amount of money that the public wants to hold in the form of cash will A be unaffected by any change in interest rates or the price level B increase if interest rates increase C decrease if interest rates increase D increase if the price level decreases E decrease if the price level remains constant
C decrease if interest rates increase
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 A pursue an expansionary monetary policy because it is required to do so by law whenever output is below the full-employment level B pursue an expansionary fiscal policy because it is required to do so by law whenever output is below the full-employment level C lower the discount rate and buy bonds on the open market to generate an increase in output D lower the required reserve ratio and sell bonds on the open market to generate an increase in output E raise the discount rate and lower the required reserve ratio to generate an increase in output
C lower the discount rate and buy bonds on the open market 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 A interest rates are high B the velocity of money is rising C people hold a portion of their money in the form of currency D the unemployment rate is low E the government's budget is in deficit
C people hold a portion of their money in the form of currency
In the short run, government deficit spending will most likely A raise the unemployment rate B lower the inflation rate C raise nominal interest rates D lower private savings E raise net exports
C raise nominal interest rates
If the required reserve ratio is 10 percent, actual reserves are $10 million, and currency in circulation is equal to $20 million, M1 will at most be equal to A $20 million B $30 million C $90 million D $120 million E $150 million
D $120 million
Assume that Linda deposits in her checking account the $1,000 cash she was keeping at home for an emergency. If the required reserve ratio is 0.20, what is the maximum change in the money supply from her deposit? A $1,000 B $1,250 C $2,000 D $4,000 E $5,000
D $4,000
If the reserve requirement is 20 percent, the existence of $100 worth of excess reserves in the banking system can lead to a maximum expansion of the money supply equal to A $20 B $100 C $300 D $500 E $750
D $500
If a commercial bank has no excess reserves and the reserve requirement is 10 percent, what is the value of new loans this single bank can issue if a new customer deposits $10,000 ? A $100,000 B $90,333 C $10,000 D $9,000 E $1,000
D $9,000
Which of the following changes in the loanable funds market will decrease the equilibrium real interest rate? A A decrease in private savings B A decrease in the expected inflation rate C An increase in government spending on highways financed by borrowing D An increase in foreign financial capital inflows E An investment tax credit for plant and equipment
D An increase in foreign financial capital inflows
Based on the balance sheets above for three different banks, which of the following is true, if the reserve requirement is 10 percent? A Bank A has no excess reserves. B Bank B has no excess reserves. C Bank B can increase its loans by $500. D Bank B can increase its loans by $40. E Bank C has excess reserves.
D Bank B can increase its loans by $40.
If the loanable funds market is in equilibrium, then which of the following must be true? A Government spending equals tax revenues. B Investment spending equals national savings. C Investment spending equals private savings. D Borrowing equals lending. E Foreign inflows of financial capital equal investment spending.
D Borrowing equals lending.
If the Federal Reserve lowers the reserve requirement, which of the following would most likely occur? A Imports will rise, decreasing the trade deficit. B The rate of saving will increase. C Unemployment and inflation will both increase. D Businesses will purchase more factories and equipment. E The budget deficit will increase.
D Businesses will purchase more factories and equipment.
If investors feel that business conditions will deteriorate in the future, the demand for loans and real interest rate in the loanable funds market will change in which of the following ways in the short run? A Demand for Loans: Increase; Real Interest Rate: Increase B Demand for Loans: Increase; Real Interest Rate: Decrease C Demand for Loans: Decrease; Real Interest Rate: Increase D Demand for Loans: Decrease; Real Interest Rate: Decrease E Demand for Loans: Decrease; Real Interest Rate: Not change
D Demand for Loans: Decrease; Real Interest Rate: Decrease
If the Federal Reserve institutes a policy to reduce inflation, which of the following is most likely to increase? A Tax rates B Investment C Government spending D Interest rates E Gross domestic product
D Interest rates
If the Federal Reserve pursues a contractionary monetary policy, output and the price level will change in which of the following ways in the short run? A Output: Increase; Price Level: Increase B Output: Increase; Price Level: No change C Output: Increase; Price Level: Decrease D Output: Decrease; Price Level: Decrease E Output: Decrease; Price Level: Increase
D Output: Decrease; Price Level: Decrease
If a central bank significantly increases its sales of government bonds, it is most likely responding to which of the following? A Slow economic growth B An appreciating domestic currency C Rising unemployment D Rising price levels E Rising imports and declining exports
D Rising price levels
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? A Store of value B Medium of exchange C Means of payment D Unit of account E Store of wealth
D Unit of account
The money demanded for the purpose of purchasing goods and services is known as A an asset demand B a derived demand C excess reserves D a transactions demand E balance of payments
D a transactions demand
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 central bank sells $10,000 worth of government securities to commercial banks, the total money supply will A increase by $10,000 B increase by $50,000 C decrease by $10,000 D decrease by $50,000 E not change
D decrease by $50,000
An increase in the money supply will have the greatest effect on real gross domestic product if A the marginal propensity to consume is low B unemployment is very low C investment spending is not sensitive to changes in interest rates D the quantity of money demanded is not very sensitive to interest rates E the required reserve ratio is high
D the quantity of money demanded is not very sensitive to interest rates
The table below gives the value of various monetary measures, in millions of dollars. Cash in Circulation: $100 Cash in Bank Vaults: $2 Bank Reserves: $10 Demand Deposits: $1,000 Traveler's Checks: $20 Based on the table above, what is the value of M1, a measure of the money supply? A $100 million B $102 million C $112 million D $1,000 million E $1,120 million
E $1,120 million
If the public's desire to hold money as currency increases, what will the impact be on the banking system? A Banks would be more able to reduce unemployment. B Banks would be more able to decrease aggregate supply. C Banks would be less able to decrease aggregate supply. D Banks would be more able to expand credit. E Banks would be less able to expand credit.
E Banks would be less able to expand credit.
Expansionary monetary policy can affect the economy through which of the following chains of events? A Increasing the discount rate lowers the real interest rate, which raises investment. B Reducing taxes lowers the discount rate, which raises consumption. C Increasing government expenditure lowers the interest rate, which raises investment. D Increasing the reserve requirement decreases the interest rate, which increases investment. E Buying bonds increases the money supply, which lowers the interest rate.
E Buying bonds increases the money supply, which lowers the interest rate.
If the central bank raises the required reserve ratio, the money multiplier and the money supply will change in which of the following ways? A Money Multiplier: Increase; Money Supply: Increase B Money Multiplier: Increase; Money Supply: Decrease C Money Multiplier: Increase; Money Supply: No change D Money Multiplier: Decrease; Money Supply: No change E Money Multiplier: Decrease; Money Supply: Decrease
E Money Multiplier: Decrease; Money Supply: Decrease
In the short run, an expansionary monetary policy would most likely result in which of the following changes in the price level and real gross domestic product (GDP) ? A Price Level: Decrease; Real GDP: Increase B Price Level: No change; Real GDP: Decrease C Price Level: Increase; Real GDP: No change D Price Level: Increase; Real GDP: Decrease E Price Level: Increase; Real GDP: Increase
E Price Level: Increase; Real GDP: Increase
During a mild recession, if policymakers want to reduce unemployment by increasing investment, which of the following policies would be most appropriate? A Equal increases in government expenditure and taxes B An increase in government expenditure only C An increase in transfer payments D An increase in the reserve requirement E Purchase of government securities by the Federal Reserve
E Purchase of government securities by the Federal Reserve
If the interest rate on loans before adjusting for inflation is 9%, and the expected inflation rate is 4%, then which of the following must be true? A Lenders are expected to receive an additional 4% on their loaned funds. B Borrowers are expected to pay an additional 4% on their borrowed funds. C The expected real interest rate is 9%. D The expected real interest rate is 13%. E The nominal interest rate is 9%.
E The nominal interest rate is 9%.
Which of the following changes will necessarily occur as a result of an increase in the nominal interest rate? A The money demand curve will shift to the left. B The money demand curve will shift to the right. C The money supply curve will shift to the left. D The quantity of money supplied will decrease. E The quantity of money demanded will decrease.
E The quantity of money demanded will decrease.
If the reserve requirement is 10 percent and the central bank sells $10,000 in government bonds on the open market, the money supply will A increase by a maximum of $9,000 B increase by a maximum of $90,000 C decrease by a maximum of $9,000 D decrease by a maximum of $10,000 E decrease by a maximum of $100,000
E decrease by a maximum of $100,000
Assume that the public holds part of its money in cash and the rest in checking accounts. If the central bank lowers the reserve requirement from 16 percent to 8 percent, the money supply will A decrease by more than half B decrease by half C decrease by less than half D exactly double E increase by less than double
E increase by less than double
Commercial banks can create money by A transferring depositors' accounts at the Federal Reserve for conversion to cash B buying Treasury bills from the Federal Reserve C sending vault cash to the Federal Reserve D maintaining a 100 percent reserve requirement E lending excess reserves to customers
E lending excess reserves to customers
