macro-unit 4
The table below gives the value of various monetary measures, in millions of dollars. Cash in Circulation$100Certificates of Deposit$2Bank Reserves$10Demand Deposits$1,000Savings Deposits$20 Based on the table above, what is the value of M1, a measure of the money supply?
$1,120 million.
If on receiving a checking deposit of $300 a bank's excess reserves increased by $255, the required reserve ratio must be
15%
Which of the following changes would most likely cause an increase in interest rates in the short run?
An increase in government spending financed by borrowing
Which of the following will cause an increase in the equilibrium real interest rate?
An increase in investment demand
An increase in the price level will most likely cause which of the following?
An increase in the demand for money
Which of the following shifts the money demand curve to the right?
An increase in the price level
Based on the balance sheets above for three different banks, which of the following is true, if the reserve requirement is 10 percent?
Bank B can increase its loans by $40.
Assume that a country's government increases borrowing. What will most likely happen to the prices of previously issued bonds and the price level in the short run?
Bond Prices:Decrease Price Level: Increase
Which of the following is true for bonds but not for stocks?
Bonds are interest-bearing assets.
In a country whose banking system has limited reserves, which of the following actions by the central bank increases the money supply?
Buying government bonds on the open market
When there is excess demand in the loanable funds market, which of the following will occur?
Real interest rates will increase.
If there is an increase in nominal income, which of the following will most likely occur in the short run?
The demand for money will increase.
An increase in investment demand for capital goods accompanied by an increase in household savings will result in which of the following in the market for loanable funds?
The equilibrium quantity of loanable funds will increase, but the impact on the real interest rate is indeterminate.
Which of the following measures the opportunity cost of holding currency?
The forgone interest on alternative assets
Which of the following accurately describes the federal funds rate?
The interest rate that banks charge other banks for overnight loans
ABC Bank is a commercial bank in Country �. Assume the required reserve ratio is 25% and banks in Country � keep no excess reserves. If Maria deposits $1,000 in cash at ABC Bank, what will happen to the money supply after all adjustments are made in the banking system? Responses
The money supply will increase by a maximum of $3,000.
Expansionary fiscal policy will most likely result in
an increase in nominal interest rates
Which of the following is considered the most liquid asset?
currency
All of the following are components of the money supply in the United States EXCEPT
gold bullion
An increase in government spending with no change in taxes leads to a
higher interest rate
Assume that the public holds part of its money in cash and the rest in checking accounts. The banking system has limited reserves. If the central bank lowers the reserve requirement from 16 percent to 8 percent, the money supply will
increase by less than double
To reduce inflation, the central bank would be most likely to
increase its administered interest rates
If aggregate demand is growing faster than long-run aggregate supply, the Federal Reserve is most likely to
increase the interest rate on reserve balances
In the long run, a fully anticipated increase in the inflation rate will
increase the nominal interest rate
Commercial banks can create money by
lending excess reserves to customers
The transaction demand for money is very closely associated with money's use as a
medium of exchange
In the short run, government deficit spending will most likely
raise nominal interest rates
Assume a country has limited reserves in its banking system. To decrease the money supply, the country's central bank can do which of the following?
Sell government bonds
Which of the following describes a major difference between stocks and bonds?
Stocks represent ownership in a corporation, and bonds represent a loan to a corporation.
When Stephanie took out a one-year fixed-rate loan, she expected to pay a real interest rate of 3 percent. At the end of the year, the real interest rate had fallen to 2 percent. Which of the following could have caused the decrease in the real interest rate?
The actual inflation rate was greater than the expected inflation rate.
Assume that the inflation rate is 10 percent and a bank account effectively yields a real rate of interest of negative 5 percent per year. Would a person be better off keeping money in the bank account or in cash?
The bank account, because the loss is less than it is when holding cash.
When purchasing her house, Ms. Jones took out a 15-year mortgage loan from a local bank at a fixed interest rate of 7 percent. The rate of expected inflation at the time was 3 percent. If the actual rate of inflation was 4.5 percent, which of the following is true?
The bank lost because the real rate of interest decreased by 1.5%.
The purchase of bonds by a central bank will have the greatest effect on real gross domestic product if which of the following situations exists in the economy?
The banking system has limited reserves, the required reserve ratio is low, and the interest rate has a large effect on investment spending.
On the island of Mabera, the local money is called "favoli." The price of every good in Mabera is expressed as the number of favolis needed to buy the good. The use of favolis to express the price of goods describes which function of money?
Unit of account
Which of the following would be true if the actual rate of inflation were less than the expected rate of inflation?
People who borrowed funds at the nominal interest rate during this time period would lose.
The table above shows the current entries in the T-account of XYZ Bank. Kim purchases a bond issued by the central bank for $50,000 and pays for the bond by drawing on her company's account at XYZ Bank. What is the effect of Kim's purchase of the bond on the required and excess reserves of XYZ Bank and the total money supply?
Required:decrease Excess:decrease Money Supply:decrease
If a central bank increases its administered interest rates, it is most likely responding to which of the following?
Rising price levels
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
8%
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
8000
Assume that the required reserve ratio is 10 percent, banks keep no excess reserves, and borrowers deposit all loans made by banks. Suppose you have saved $100 in cash at home and decide to deposit it in your checking account. As a result of your deposit, the money supply can increase by a maximum of
900
Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal reserve requirement is 10 percent. If Maggie deposits the $100 bill she received as a graduation gift from her grandmother into her checking account, the maximum increase in the total money supply will be
900
Assume that the nominal interest rate is 10 percent. If the expected inflation rate is 5 percent, the real interest rate is
5%
A bank has $200 million in demand deposits and $150 million in reserves. The reserve ratio is 20 percent. What is the maximum amount of loans the bank can make from its reserves?
$110 million
Assume that Atlantic National Bank has demand deposits of $100,000 and no excess reserves,and that the reserve requirement is 10 percent.A customer withdraws $5,000 from the bank.To meet the reserve requirement, the bank must increase its reserves by
4500
Suppose that the real interest rate is equal to seven percent and the expected inflation rate is currently three percent. If an oil crisis in the Middle East increases the expected inflation rate to four percent, the new nominal interest rate is equal to
11%
The table below gives the value of various monetary measures, in millions of dollars. Cash in Circulation$100Certificates of Deposit$2Bank Reserves$10Demand Deposits$1,000Savings Deposits$20 Based on the table above, what is the value of the monetary base?
110 million
A bank has $800 million in demand deposits and $100 million in reserves. If the reserve requirement is 10 percent, the bank's excess reserves equal
20 million
Assume the nominal interest rate on a 15-year fixed-rate mortgage loan is 5 percent. If the expected inflation rate is 2 percent, the expected real interest rate is
3%
A commercial bank is facing the conditions given above. If the reserve requirement is 12 percent and the bank does not sell any of its securities, the maximum amount of additional lending this bank can undertake is
3000
If the required reserve ratio is 10 percent, what is the maximum change in the money supply from John's deposit of $50,000 cash into his checking account?
450,000
The aggregate demand curve is downward sloping because an increase in the general price level will cause the demand for money, interest rates, and investment to change in which of the following ways?
Demand for Money increase Interest Rates increase Investment Decrease
Which of the following would lead to an increase in nominal interest rates?
A contractionary monetary policy accompanied by an increase in the demand for money
During a mild recession, if policymakers want to reduce unemployment by increasing investment, which of the following policies would be most appropriate?
A decrease in administered interest rates
An increase in money demand will cause which of the following?
A decrease in bond prices
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
A commercial bank's ability to create money depends on which of the following?
A fractional reserve banking system
An increase in government spending will affect the demand for money and nominal interest rates in which of the following ways?
Demand for Moneyincrease Nominal Interest RatesIncrease
Assuming a banking system with limited reserves, which of the following actions by the central bank reduces the ability of the banking system to create money?
Increasing the reserve requirement
With a constant money supply, if the demand for money decreases, the equilibrium interest rate and quantity of money will change in which of the following ways?
Interest Rate:decrease Quantity of Money:not change
Which of the following is true of the opportunity cost of holding cash?
It increases as the interest rate rises.
Which of the following is true about the expected real interest rate?
It is negative if the expected inflation rate exceeds the nominal interest rate.
Which of the following is a monetary policy that can be used to counteract a recession?
Lowering the interest rate paid on reserves
Fred Jones withdraws $1,000 in cash from his savings account. What immediate effect does this transaction have on the monetary aggregate measures of M1 and M2 ?
M1 will not change; M2 will not change
If the central bank raises the required reserve ratio in a banking system with limited reserves, the money multiplier and the money supply will change in which of the following ways?
Money Multiplier:Decrease Money Supply: Decrease
An increase in administered interest rates will most likely change the nominal interest rate and aggregate demand in which of the following ways in the short run?
Nominal Interest Rate:increase aggregate demand: 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 RatesIncrease Bond PricesDecrease
Assume a country's banking system has limited reserves. If the central bank buys government bonds from individuals on the open market and banks do not loan out any excess reserves created by the open market purchase, which of the following will happen?
The money supply will increase.
The amount of money that the public wants to hold is $10 billion. With a monetary base of $2 billion and a money multiplier of 4, which of the following will most likely occur?
The nominal interest rate will increase.
Which of the following is true when interest rates rise?
The opportunity cost of holding cash increases.
Which of the following will happen when interest rates increase in an economy?
The opportunity cost of holding money will increase.
If the central bank decreases administered interest rates, which of the following will occur?
The price of bonds will increase.
Which of the following changes will necessarily occur as a result of an increase in the nominal interest rate?
The quantity of money demanded will decrease.
Assume that banks hold no excess reserves. A decrease in the required reserve ratio will cause total reserves in banks, the money multiplier, and the money supply to change in which of the following ways?
Total Reserves:No change Money Multiplier:Increase Money Supply: Increase
The graph above shows two aggregate demand curves, AD1 and AD2, and an aggregate supply curve, AS. The shift in the aggregate demand curve from AD1 to AD2 could be caused by
a decrease in the money supply
Which of the following is NOT a function of fiat money?
a source of intrinsic value
For a country whose banking system has limited reserves, an open-market operation by the country's central bank to reduce the unemployment rate would be to
buy bonds to decrease the interest rate and to increase aggregate demand
Assume that the reserve requirement for demand deposits is 20 percent, that banks hold no excess reserves, and that the public holds no currency. If the banking system has limited reserves and the central bank sells $10,000 worth of government securities to commercial banks, the total money supply will
decrease by $50,000
Assume a country's banking system has limited reserves. If the reserve requirement is 10 percent and the central bank sells $10,000 in government bonds on the open market, the money supply will
decrease by a maximum of $100,000
The amount of money that the public wants to hold in the form of cash will
decrease if interest rates increase
If the interest rate on short-term government bonds declined as a result of policy actions by a central bank, the central bank must have
decreased its administered interest rates
The Federal Reserve decreases the federal funds rate by
decreasing its administered interest rates
Which of the following would be included as a liability on a commercial bank's balance sheet?
demand deposits
Pat deposits a portion of her wages into a personal savings account every week. The saved money can be considered to be primarily a
store of value
The real value of the United States dollar is determined by
the goods and services it will buy
Which of the following is a determinant of the amount of money the commercial banking system can create?
the reserve requirement
