Macroeconomics Unit 5 Review

Assets Liabilities Total Reserves: $15,000 Demand deposits:$100,000 Securities: $70,000 Loan: $15,000 A bank is facing the above conditions if the reserve ratio is 12% and the bank does not sell any of its securities, the maximum amount of additional lending this bank can undertake is:

$3,000

If a bank has no excess reserves and the reserve requirement is 10%, what is the value of new loans this single bank can issue if a new customer deposits $10,000?

$9,000(=10,000-(.10 x $10,000))

When a central bank sells securities in the open market, which of the following set of events is most likely to occur?

A decrease in the money supply, an increase in interest rates, and a decrease in aggregate demand.

When an economy is at full employment, which of the following will most likely create demand-pull inflation in the short run?

A decrease in the real rate of interest

The required reserve ratio is 0.2 and the Federal Reserve sells $1 million in securities. If there are no leakages and banks do not hold excess reserves, then which of the following is the change in the money supply?

A decrease of $5 million

Expansionary monetary policy can affect the economy through which of the following chains of events?

Buying bonds increases the money supply, which lowers the interest rate

According to the theory of rational expectations, a fully anticipated expansionary monetary policy will

Have no impact on real output

Which of the following actions by the Federal Reserve reduces the ability of the banking system to create money?

Increasing the reserve requirement

If the Federal Reserve institutes a policy to reduce inflation, which of the following is most likely to increase?

Interest rates

When the Federal Reserve buys government securities in the open market, which of the following will decrease in the short run?

Interest rates

When an economy is operating below the full-employment level of output, an appropriate monetary policy would be to increase which of the following?

Open market purchases of government bonds

During a mild recession, if policymakers want to reduce unemployment by increasing investment, which of the following policies would be most appropriate?

Purchase of government securities by the Federal Reserve

Which of the following is most likely to increase if the public decides to increase its holdings of currency?

The interest rate

Which of the following most undermines the ability of a nation's currency to store value?

a decrease in the purchasing power of the currency

When an economy is at full-employment, which of the following will most likely create demand-pull inflation in the short run?

a decrease in the real rate of interest

Which of the following is not a function fiat (token) money?

a source of intrinsic value

The United States' M2 money supply includes

all of the above (currency and coinage, checkable deposits, money market mutual funds, small time deposits and saving accounts)

Money functions as a

all of the above (store of value, standard of value, medium of exchange, unit of account)

Assume that the reserve requirement is 20% but banks voluntarily keep some excess reserves. A $1 million increase in new reserves will result in

an increase in the money supply of less than $5 million

The federal funds rate is the interest rate that

banks charge one another for short-term loans.

Monetary policy is expected to have the greatest impact on

business investment

Which of the following would be included as a liability on a commercial banks' balance sheet?

demand deposits

Which of the following monetary and fiscal policy combinations would most likely result in a decrease in aggregate demand?

discount rate: raise open market operations: sell bonds government spending: decrease

Which of the following is most likely to cause an increase in the international value of the US dollar?

higher US real interest rates

To stimulate investment in new plant and equipment, without increasing the level of real output, the best policy mix is to:

increase the money supply and decrease government spending

To stimulate investment in new plants and equipment without increasing the level of real output, the best policy mix is to

increase the money supply and decrease government spending

Assume that the world operates under a flexible exchange rate system. If the central bank of Mexico increases its money supply but other countries do not change theirs, Mexico's inflation rate and the international value of the Mexican peso will most likely change in which of the following ways?

inflation rate: increase international value of the peso: depreciate

With a constant money supply, if the demand for money increases, the equilibrium interest rate and quantity of money will change in which of the following ways?

interest rate: increase quantity of money: not change

If there is a leftward shift of the demand for loanable funds, what would happen to the interest rate, level of investment, economic growth rate, and aggregate demand?

interest rates decrease, investment increases, economic growth increases, and aggregate demand shifts right

Under which of the following circumstances would increasing the money supply be most effective in increasing real gross domestic product?

interest rates: high employment: less than full business optimism: high

When a bank is rapidly repaid, the supply of money

is decreased

The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves

is larger, the smaller the required reserve ratio

Which of the following is true of the quantity of money demanded?

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

Under a fractional reserve banking system banks are required to

keep part of their demand deposits are reserves

Assume 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 rate: 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?

nominal interest rates: increase bond prices: decrease

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?

output: decrease price level: decrease

If the quantity of money demanded exceeds the quantity supplied,

the interest rate will rise

If the economy is operating at full employment and there is a substantial increase in the money supply, the quantity theory of money predicts an increase in

the price level

If the quantity of money demanded is greater than the quantity of money supplied, which of the following will occur?

the quantity of bonds offered for sale will increase