chapter 4 practice

Which of the following is included in the monetary base? A)Currency held by the public and commercial bank reserves held with the central bank B)Currency held by the public, demand deposits at depository institutions, and commercial bank reserves held with the central bank C)Currency held by the public, demand deposits, savings deposits, and certificates of deposit D)Currency held by the public and small and large time deposits E)Currency held by the public, small and large time deposits, and commercial bank reserves held with

A)Currency held by the public and commercial bank reserves held with the central bank

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.

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

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

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%

Which of the following constitutes the largest component of the United States money supply (MI)? A)Silver certificates B)Checkable deposits (demand deposits) C)Currency (paper money) D)Coins E)Large certificates of deposit

B)Checkable deposits (demand deposits)

Which of the following would be included as a liability on a commercial bank's balance sheet? A)Consumer loans B)Demand deposits C)Net worth D)Bank reserves E)Treasury bonds

B)Demand deposits

A country's central bank purchased government bonds from the public in the open market. How would this action affect the nominal interest rate and the price level in the short run? A)There would be a decrease in the nominal interest rate and a decrease in the price level. B)There would be a decrease in the nominal interest rate and an increase in the price level. C)There would be an increase in the nominal interest rate and a decrease in the price level. D)There would be an increase in the nominal interest rate and a decrease in the price level. E)There would be an increase in the nominal interest rate and no change in the price level.

B)There would be a decrease in the nominal interest rate and an increase in the price level.

Which of the following is true for both stocks and bonds? A)They are interest-bearing assets. B)They are easily converted to cash. C)They are risk-free assets. D)They are equity. E)They are the most liquid form of financial assets.

B)They are easily converted to cash.

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

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

Suppose that the economy has entered a recession. Which of the following is a monetary policy action a central bank can take to restore full-employment output? A)Selling government bonds B)Decreasing government spending C)Decreasing the discount rate D)Increasing the federal funds rate E)Increasing the required reserve ratio

C)Decreasing the discount rate

Which of the following is most likely to occur when the Federal Reserve buys government bonds on the open market? A)The demand for money will decrease. B)The government's debt will decrease. C)Interest rates will decrease. D)The discount rate will increase. E)Investment demand will decrease.

C)Interest rates will decrease.

Which of the following is true about the loanable funds market? A)The demand for loanable funds shows a positive relationship between real interest rates and the quantity demanded of loanable funds. B)The supply of loanable funds shows an inverse relationship between real interest rates and the quantity supplied of loanable funds. C)Investment is financed by national savings in a closed economy. D)Investment is financed by government borrowing in an open economy. E)Public savings is the sum of national savings and private savings.

C)Investment is financed by national savings in a closed economy.

Which of the following explains why the amount predicted by the value of the simple money multiplier may be overstated? A)It does not take into account the amount of bank loans. B)It does not take into account the marginal propensity to consume. C)It does not take into account a bank's desire to hold excess reserves. D)It does not take into account changes in expected inflation. E)It does not take into account changes in savings.

C)It does not take into account a bank's desire to hold excess reserves.

Which of the following transactions will keep M1 unchanged? A)Sam transferred money from his savings account to his checking account. B)Mike purchased government bonds and paid with a check. C)Leila deposited coins from her piggy bank into her checking account. D)Sandy withdrew money from her savings accounts. E)Patty increased her monthly cash deposits to her retirement funds

C)Leila deposited coins from her piggy bank into her checking account.Which of the following is included in the monetary base?

When consumers hold money rather than bonds because they expect the interest rate to increase in the future, they are holding money for which of the following purposes? A)Transactions B)Unforeseen expenditures C)Speculation D)Illiquidity E)Exchange

C)Speculation

An increase in the price level will affect the money market and bond market in which of the following ways? A)The nominal interest rate rises, and the price of previously issued bonds rises. B)The nominal interest rate falls, and the price of previously issued bonds is unaffected. C)The nominal interest rate rises, and the price of previously issued bonds falls. D)The nominal interest rate falls, and the price of previously issued bonds rises. E)The nominal interest rate is unaffected, and the price of previously issued bonds rises

C)The nominal interest rate rises, and the price of previously issued bonds falls.

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.

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

Cash, a house, bonds, and a savings account are all financial assets. Which of the following rankings lists these assets from the least liquid to the most liquid? A)Cash, bonds, house, savings account B)Bonds, house, savings account, cash C)Savings account, cash, bonds, house D)House, bonds, savings account, cash E)Cash, savings account, bonds, house

D)House, bonds, savings account, cash

Which of the following actions by the Federal Reserve reduces the ability of the banking system to create money? A)Decreasing the federal funds rate B)Decreasing the discount rate C)Increasing the money supply D)Increasing the reserve requirement E)Buying government bonds on the open market

D)Increasing the reserve requirement

Mia transferred $1,000 from her checking account to her savings account. How will M1 and M2 measures of the money supply change? A)M1 will increase and M2 will decrease. B)M1 will increase and M2 will increase. C)M1 will decrease and M2 will increase. D)M1 will decrease and M2 will not change. E)M1 will not change and M2 will increase.

D)M1 will decrease and M2 will not change.

Northern City Bank keeps no excess reserves. Assume Northern City Bank receives a deposit of $50 million dollars. As a result of the deposit, Northern City Bank's required reserves increase by $10 million. What is the maximum possible change in the money supply in the banking system that could result from the $50 million deposit? A)The money supply will increase by a maximum of $10 million. B)The money supply will increase by a maximum of $40 million. C)The money supply will increase by a maximum of $50 million. D)The money supply will increase by a maximum of $200 million. E)The money supply will increase by a maximum of $250 million

D)The money supply will increase by a maximum of $200 million.

Country X's economy is enjoying political stability and attracting foreign financial capital. At the same time Country X's government is borrowing to finance spending. How will these changes affect the loanable funds market in Country X? A)There will be a decrease in the supply of loanable funds. B)There will be a decrease in the demand for loanable funds. C)There will be an increase in the equilibrium nominal interest rate. D)There will be an indeterminate effect on the equilibrium real interest rate. E)There will be an indeterminate effect on the equilibrium quantity of loanable funds.

D)There will be an indeterminate effect on the equilibrium real interest rate.

If the interest rate on a one-year loan is 5% and the expected inflation rate is −2% for the same period, what is the expected real interest rate on the loan? A)−7% B)−2% C)2% D)3% E)7%

E)7%

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)An increase of $1 million B)An increase of $1.2 million C)An increase of $5 million D)A decrease of $1.2 million E)A decrease of $5 million

E)A decrease of $5 million

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.

Which of the following describes the relationship between the nominal interest rate and the quantity of money people want to hold as depicted by the money demand curve? A)Positive, and the money demand curve is upward sloping. B)Positive, and the money demand curve is downward sloping. C)Positive, and the money demand curve is vertical. D)Inverse, and the money demand curve is upward sloping. E)Inverse, and the money demand curve is downward sloping

E)Inverse, and the money demand curve is downward sloping

Nathan has been unable to trust banks since the failure of his savings and loan bank. He claims that storing his hard-earned money at home is costless. Is Nathan correct? A)Yes, because money is the most liquid form of financial assets. B)Yes, because there is no opportunity cost in holding money. C)Yes, because the opportunity cost of holding money is the real value of goods and services it can purchase. D)No, because money is the least liquid form of financial assets. E)No, because the opportunity cost of holding money is the lost interest he could have earned on other financial assets.

E)No, because the opportunity cost of holding money is the lost interest he could have earned on other financial assets.

Which of the following is adjusted by the actual inflation rate? A)Nominal wages B)Automatic stabilizers C)Unemployment rate D)Price of previously issued bonds E)Real interest rates

E)Real interest rates

Spencer took a 9 percent one-year fixed-rate loan to buy a new car. He expected to pay a real interest rate of 5 percent. If at the end of the year Spencer only paid a 3 percent real interest rate, which of the following is true? A)The nominal interest rate was 3%. B)The nominal interest rate was 5% C)The actual inflation rate was 2% D)The actual inflation rate was 4% E)The actual inflation rate was 6%

E)The actual inflation rate was 6%

Southern City Bank has $100 million in deposits and has $8 million in excess reserves. If the required reserve ratio is 5%, which of the following is true? A)The money multiplier is 20, and the bank can lend out up to $160 million. B)The money multiplier is 8, and the bank can lend out up to $20 million. C)The money multiplier is 8, and the bank can lend out up to $5 million. D)The money multiplier is 8, and loans can increase in the banking system by a maximum of $8 million. E)The money multiplier is 20, and loans can increase in the banking system by a maximum of $160 million.

E)The money multiplier is 20, and loans can increase in the banking system by a maximum of $160 million.

To counteract a recession, the Federal Reserve should A)raise the reserve requirement and the discount rate B)sell securities on the open market and raise the discount rate C)sell securities on the open market and lower the discount rate D)buy securities on the open market and raise the discount rate E)buy securities on the open market and lower the discount rate

E)buy securities on the open market and lower the discount rate

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