Economics Unit 4 Multiple Choice

When consumers hold money rather than bonds because they expect the interest rate to increase in the future, they are holding money for which purpose?

Speculation

Which is true of the quantity of money demanded?

it falls when interest rates rise, because the opportunity cost of holding money increases

commercial banks create money by:

lending excess reserves to customers

assume that the nominal interest rate is 10 percent. If the expected inflation rate is 5 percent, the real interest rate is:

5%

assume that the reserve requirement ratio 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:

8,000

if the required reserve ratio is 10 percent, actual reserves are 10 million, and the currency in circulation is equal to 20 million, M1 will at most be equal to

120 million

a commercial bank's ability to create money depends on which of the following?

a fractional reserve banking system

the money demanded for the purpose of purchasing goods and services is known as

a transactions demand

what will NOT shift the investment demand curve to the right?

an increase in the real interest rate

in the short run, which would occur to bond prices and interest rates if a central bank bought bonds through open-market operations?

bond prices - increase interest rates - decrease

the real interest rate earned is:

cost of borrowing adjusted for the rate of change in the price level

the amount of money that the public wants to hold in the form of cash will

decrease if interest rates increase

which of the following constitutes the largest component of the United States money supply?

demand deposits

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 what way in the short run?

demand for loans - decrease interest rate - decrease

one way in which the Federal Reserve works to change the United States money supply is by changing the

discount rate

which is NOT a component of the money supply in the United States?

gold bullion

assume that the reserve requirement for demand deposits is 20%, that banks hold no excess reserves, and that the public holds no currency. If the central bank sells 10,000 dollars worth of government securities to commericial banks, the total money supply will

no change

a contraction in the money supply will most likely change the nominal interest rate and AD in what way?

nominal interest rate - increase AD - 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?

nominal interest rates - increase bond prices - decrease

which would be true if the actual rate of inflation were less than the expected rate of inflation?

people who had borrowed funds at the nominal interest rate during this time would lose

if the government increases deficit spending, the price of bonds and the real interest rate will change in which way?

price of bonds - decrease real interest rates - increase

a barter economy is different from a money economy in that a barter economy:

promotes market exchanges

the loanable funds market is best described as bringing together

savers and borrowers

if AD is growing faster than LRAS, the Federal Reserve is most likely to:

sell securities on the open market

which of the following accurately describes the federal funds rate?

the interest rate that banks charge other banks for overnight loans

what will happen when interest rates increase in the economy?

the opportunity cost of holding money will increase