economics: ch.21 exam
Assume that the Federal Reserve increases the monetary base by $1 billion when the reserve requirement is 10 percent. The money supply will increase by:
$10 billion
When the reserve ratio is 20%, the Fed buys $500,000 worth of government bonds in the open market. What is the maximum amount that the money supply could increase?
$2.5 million
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?
1%
Let us assume that the price level remains constant and the nominal gross domestic product is $8 trillion and the money supply is $2 trillion. Use the equation of exchange (MV=PY) to determine what the velocity of money would be.
4
If a country has a money supply of 20 billion dollars, a real GDP of 100 billion dollars, and a price level of 1, then what's the velocity of money in this country?
5
If nominal GDP = $5,000 billion and the money supply is $1,000 billion, assuming a constant price level, what is the velocity of money?
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, what is the real rate of interest in Athenia?
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?
8%
How would economists graphically illustrate a decrease in the money supply?
A leftward shift of the vertical money supply curve.
What's hyperinflation?
A rise in prices exceeding 50% per month.
If the Federal Reserve suddenly decreases the growth rate of the money supply from 6% to 4% per year, what is likely to happen to aggregate demand and real Gross Domestic Product in the short-run?
Aggregate demand will decrease and real GDP will decline.
When the Fed lowers the discount rate, what will happen?
Banks borrow more from the Fed, so reserves increase.
Why is the Fed referred to as 'the lender of last resort'?
Banks can always borrow directly from the Fed when other banks will not lend to them.
Monetarism is the economic viewpoint that states which of the following?
Excessive expansion of the money supply leads to inflation.
When the central bank raises the reserve ratio from 20% to 25%, how does the multiplier change?
From 5 to 4
According to the quantity theory of money, increasing the money supply will lead to what?
Higher economic output in the short-run and inflation in the long-run
Which of the following statements BEST explains the velocity of money?
How many times a single dollar is spent, or turned over within a certain time period
If the Federal Reserve lowers reserve requirements, nominal GDP will most likely do which of the following?
Increase
What will the purchase of government bonds from the public in the open market by the central bank do?
Increase the money supply
The quantity theory of money describes the relationship between what fiscal components?
Inflation, the money supply, real output, and prices.
What is the MOST plausible reason why the banks would want to loan less money?
Interest rates have increased
Why does the Federal Reserve require commercial banks to maintain reserves with them?
It gives the Federal Reserve more control over the money supply and interest rates.
In a fractional reserve banking system, how does a decrease in reserve requirements affect the money supply?
It increases the money multiplier and the money supply.
Which of the following is an inaccurate description of The Federal Reserve?
It is the US mint.
Which of the following statements is FALSE regarding the discount rate?
It is the rate that banks charge to other banks when they need more reserves.
Which of the following is FALSE regarding the Federal Reserve?
It issues debit cards.
When the reserve requirement is 20% and banks hold no excess reserves, how will an open market sale of $500,000 of government securities by the Fed affect money supply?
It will decrease the money supply by up to $2.5 million.
How does an increase in the money supply impact economic output within the US economy?
Lower interest rates encourage additional borrowing and investment, leading to higher aggregate demand.
What are some of the objectives of the Fed?
Maximize employment, stabilize prices, and moderate interest rates
The velocity of money is a ratio of what quantities?
Nominal GDP to a measure of the money supply
The purchases and sales of government securities in the open market by the Federal Reserve are referred to as which of the following?
Open market operations
Money supply and inflation are two items that factor into WHAT monetary theory?
Quantity Theory of Money
What is the MOST likely action to be taken by the Fed to slow down an overheating economy and avoid rising inflation?
Raise the discount rate
According to the quantity theory of money, an increase in the money supply results in an increase in which of the following?
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.
Which of the following is FALSE regarding real interest rates?
Real interest rates are determined in the money market
What is directly connected with taking a loan for private investment in the market for loanable funds?
Savings
What entity is involved when banks agree to pay the discount rate for direct borrowing?
The Federal Reserve
Which of the following statements BEST explains how a high velocity of monetary exchange affects the economy?
The changes in the money supply will have a greater effect on nominal GDP
What is the interest rate that the Federal Reserve charges on loans it makes to member banks called?
The discount rate.
How would buying or selling government bonds affect the federal funds rate, if it was the government that initiated the sale?
The government uses the sales of securities to change the money supply, thus changing the federal funds rate.
What happens when the government provides a tax incentive for businesses to invest?
The increased investment leads to a higher demand for loanable funds.
Which of the following accurately describes the discount rate?
The interest rate member banks pay when they borrow directly from the Fed.
If all other factors remain equal, what would happen to interest rates when the amount of money circulating in the economy is increased?
The interest rate would decline.
What is the reserve requirement?
The proportion of customer deposits a bank is required to hold in reserve.
What is the prime rate?
The rate banks charge to their best customers.
What is the most important determinant of saving?
The real interest rate
What happens if the Federal Reserve sells a large amount of government securities in the open market?
The total amount of loans in the banking system will decrease.
What will happen if the Federal Reserve sells a significant amount of government securities in the open market?
The total amount of loans made by commercial banks will decrease.
Which of the following statements is FALSE about the monetary tools of the Federal Reserve?
They include changing tariffs on imported goods.
Why do banks choose to borrow directly from the Fed?
They need additional reserves and cannot borrow from other banks.
How can government overspending cause hyperinflation?
To cover the costs of the overspending, the government borrows from a central bank, which causes the money supply to rise, making the money worth less.
What descriptor associated with money is MOST likely affected by the speed of transportation between markets?
Velocity
The Fed's monetary policy has the greatest positive effect on real Gross Domestic Product under what set of conditions?
When interest rates are low and the interest rate has a large effect on investment spending.
When does investment demand increase?
When investors are more optimistic about the future
The New York branch of the Federal Reserve:
conducts open market actions.
All of the following impacts the velocity of money except
how many years ago the currency was printed
In order to adjust a nominal interest rate for inflation, which of the following formula should be used?
r = n - i
The percentage of total deposits that a bank must maintain on hand at all times is known as a(n) _____.
reserve ratio
Hyperinflation is usually associated with:
the growth rate of the money supply
Economists use the _____ to explain the link between inflation and the money supply.
the quantity theory of money
