CH 7 & 8
t the beginning of the year, your wealth is $10,000. During the year, you have an income of $80,000and you spend $90,000 on consumption. You pay no taxes. Your wealth at the end of the year is
$0.
The _________ interest rate approximately equals the ___________ interest rate minus _________ .
eal; nominal; the inflation rate
Liquidity is the
ease with which an asset can be converted into money.
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.
Suppose a firm has an investment project which will cost $200,000 and result in $30,000 profit. The firm will not undertake the project if the interest rate is
greater than 15 percent
If a customer deposits $10,000 in currency into a checking account, the bank's total reserves
increase.
The demand for nominal money
increases as the price level increases.
An open market purchase of securities by the Fed
increases banks' reserves and decreases banks' securities.
Saving by households
increases when the real interest rate rises.
If the government begins to run a larger budget deficits, then assuming there is no Ricardo-Barro effect, the demand for loanable funds ________ and the real interest rate ___________ .
increases; rises
The households expect an increase in their future incomes, they will save
less and consume more today.
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.
Monetary policy is conducted
only by the Federal Reserve.
Which of the following is a tool that is used by the Fed to control the quantity of money?
open market operations
If the government runs a budget deficit, then
part of household and business saving finances the deficit.
Depository institutions undertake all the following activities EXCEPT they do not
print money
As the ___________ interest rate increases, the quantity of loanable funds demanded ____________.
real; decreases
The minimum percentage of deposits that a depository institution must hold and cannot use for lendingis known as the
required reserve ratio.
commercial bank puts the funds it receives from various sources into
securities, cash assets and loans
When the quantity of money demanded is greater than the quantity of money supplied, people bonds and the interest rate .
sell; rises
The discount rate is the interest rate
that the Fed charges on its last resort loans.
The idea that a government budget deficit decreases investment is called
the crowding-out effect
The opportunity cost of holding money is
the nominal interest rate
Reserves are
cash in a bank's vault plus its deposits at Federal Reserve banks
Suppose a bank has $1,500,000 in deposits and the desired reserve ratio is 12 percent. If the bank iscurrently holding $200,000 in reserves, the bank's unplanned reserves are equal to
$20,000.
n January 2017, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2017, Tim spent $200,000 on new machines. During2017, Tim's net investment totaled
-$100,000.
Suppose that you took out a $1,000 loan in January and had to pay $75 in annual interest. During theyear, 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.
Which of the following shifts the demand for loanable funds curve leftward?
a decrease in the expected profit
Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond increasesfrom $1,000 to $1,250, then the interest rate on the bond
alls from 10 percent to 8 percent
When the Fed lowers the federal funds rate, it can lead to
an increase in lending by banks
Checks ________ money and credit cards _________ money.
are not; are not
Money is created by
banks making loans
In the short run, when the Fed decreases the quantity of money
bond prices fall and the interest rate rises.
Depository institution create liquidity when they
borrow short and lend long
If the real interest rate is below the equilibrium real interest rate
borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will rise.
Which of the following is TRUE regarding the real interest rate? I. The real interest rate is the opportunity cost of borrowed funds. II. The real interest rate equals the nominal interest rate adjusted for inflation
both I and II
All of the following are sources of loanable funds EXCEPT
business investment.
When the Fed wants to undertake open market operations, it
buys or sells securities in the open market.
