Macro Unit 4 Test

26. Which of the following most undermines the ability of a nation's currency to store value? A. A decrease in the purchasing power of the currency B. The use of credit and debit cards as mediums of exchange C. An increase in the prices of federal bonds D. Appreciation of the currency in the international money market E. An increase in the supply of foreign currencies in the international money market

A. A decrease in the purchasing power of the currency

4. In the country of Agronomia, banks charge 10 percent interest on all loans. If the general price level has been increasing at the rate of 4 percent per year, the real rate of interest in Agronomia is A. 14% B. 10% C. 6% D. 4% E. 2.5%

C. 6%

24. Under a fractional reserve banking system, banks are required to A. keep part of their demand deposits as reserves B. expand the money supply when requested by the central bank C. insure their deposits against losses and bank runs D. pay a fraction of their interest income in taxes E. charge the same interest rate on all their loans

A. keep part of their demand deposits as reserves

25. In the narrowest definition of money, M1, savings accounts are excluded because they are A. not a medium of exchange B. not insured by federal deposit insurance C. available from financial institutions other than banks D. a store of purchasing power E. interest-paying accounts

A. not a medium of exchange

23. Assume that the reserve requirement is 10 percent. Marwa deposits $1 million in cash into her checking account at First Bank. The deposit will initially increase excess reserves at First Bank by A. $100,000 B. $900,000 C. $1 million D. $9 million E. $10 million

B. $900,000

18. 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%

30. Which of the following is most likely to occur if the Federal Reserve engages in open market operations to reduce inflation? A. A decrease in interest rates B. A decrease in reserves in the banking system C. A decrease in the government deficit D. An increase in the money supply E. An increase in exports

B. A decrease in reserves in the banking system

16. A commercial bank's ability to create money depends on which of the following? A. The existence of a central bank B. A fractional reserve banking system C. Gold or silver reserves backing up the currency D. A large national debt E. The existence of both checking accounts and savings accounts

B. A fractional reserve banking system

The table above shows the current entries in the T-account of XYZ Bank. Kim purchases a bond issued by the Federal Reserve 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 Excess Money Supply A. Increase Decrease Decrease Required Excess Money Supply B. Decease Decrease Decrease Required Excess Money Supply C. No Change Decrease No Change Required Excess Money Supply D. Increase No Change Increase E. Decrease Increase Increase

B. Decease Decrease Decrease Required Excess Money Supply

11. 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

27. 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? A. The monetary base will increase. B. The nominal interest rate will increase. C. The money multiplier will increase. D. The money demand curve will shift right. E. Spending will increase.

B. The nominal interest rate will increase.

21. Assume that the reserve requirement is 20 percent, but banks voluntarily keep some excess reserves. A $1 million increase in new reserves will result in A. an increase in the money supply of $5 million B. an increase in the money supply of less than $5 million C. a decrease in the money supply of $1 million D. a decrease in the money supply of $5 million E. a decrease in the money supply of more than $5 million

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

13. Of the following, the most liquid asset is ... A. mutual funds B. currency C. time deposits D. demand deposits E. savings deposits

B. currency

19. A barter economy is different from a money economy in that a barter economy A. encourages specialization and division of labor B. involves higher costs for each transaction C. eliminates the need for a double coincidence of wants D. has only a few assets that serve as a medium of exchange E. promotes market exchanges

B. involves higher costs for each transaction

15. 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 A. $15,000 B. $12,000 C. $3,000 D. $1,800 E. 0 $100,000 x .12 = $12,000.

C. $3,000 (Maximum to lend out is $15,000. So, $3,000.)

17. 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 A. $10 B. $100 C. $900 D. $1,000 E. $1,100

C. $900

8. Assume that the nominal interest rate is 10 percent. If the expected inflation rate is 5 percent, the real interest rate is A. 0.5% B. 2% C. 5% D. 10% E. 15%

C. 5%

29. An increase in the equilibrium nominal interest rate could be caused by which of the following changes? A. An increase in the monetary base B. An increase in the money supply C. An increase in real income D. A decrease in the amount of cash the public wants to hold E. A decrease in the price level

C. An increase in real income

9. In the short run, which of the following would occur to bond prices and interest rates if a central bank bought bonds through open-market operations? Bond Prices Interest Rates A. No Change Increase Bond Prices Interest Rates B. Increase Increase Bond Prices Interest Rates C. Increase Decrease Bond Prices Interest Rates D. Decrease Increase Bond Prices Interest Rates E. Decrease Decrease

C. Increase Decrease Bond Prices Interest Rates (Recall that bond prices and interest rates traditionally move in opposite directions.)

6. Which of the following best describes the nominal interest rate on a mortgage loan that a bank offers to a customer? A. It is the real interest rate divided by the price level. B. It is the real interest rate minus the expected inflation rate. C. It is the interest rate charged by the bank. D. It is the interest rate charged by the bank minus the expected inflation rate. E. It is the interest rate charged by the bank minus the interest rate the bank pays to its depositors.

C. It is the interest rate charged by the bank. (The nominal interest rate is the unadjusted, stated rate of interest charged by the bank, independent of any expected changes in the price level.)

12. Sam pays monthly installments on a five-year fixed interest rate auto loan. If the expected inflation rate increases, which of the following will happen? A. Sam will pay a lower nominal interest rate. B. Sam will pay a higher nominal interest rate. C. Sam will pay a lower real interest rate. D. Sam will pay a higher real interest rate. E. Sam will pay higher monthly installments.

C. Sam will pay a lower real interest rate. (The real interest rate is the nominal interest rate adjusted for inflation and is equal to the nominal interest rate minus the expected inflation rate. Therefore, if the expected inflation rate increases, the real interest rate paid on the loan will decrease.)

10. 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? A. The bank gained because the real rate of interest increased by 1.5%. B. The bank gained because the real rate of interest became 3.5%. C. The bank lost because the real rate of interest decreased by 1.5%. D. Ms. Jones gained because the nominal rate of interest increased by 1.5%. E. Ms. Jones lost because the nominal rate of interest became 3.5%.

C. The bank lost because the real rate of interest decreased by 1.5%.

22. Assume that Linda deposits in her checking account the $1,000 cash she was keeping at home for an emergency. If the required reserve ratio is 0.20, what is the maximum change in the money supply from her deposit? A. $1,000 B. $1,250 C. $2,000 D. $4,000 E. $5,000

D. $4,000

14b. Assume that Pacific Regional Bank has demand deposits of $120,000 and no excess reserves and that the reserve requirement is 12 percent. A customer withdraws $4,000 from the bank. To meet the reserve requirement, the bank must increase its reserves by A. $400 B. $480 C. $1,392 D. $9,920 E. $13,920

D. $9,920 (The Pacific Bank demand deposits decreased by $4,000 to $116,000 with a 12% reserve requirement or $13,920. Previously, the bank had $14,400 in reserves. So, $13,920 minus the $4,000 withdrawal with no excess reserves = $9,920 to meet the new reserve requirement. OR $120,000 - $4,000 = $116,000 x .12 = $13,920 So, $13,920 - $4,000 = $9,920)

28. Which of the following changes in the loanable funds market will decrease the equilibrium real interest rate? A. A decrease in private savings B. A decrease in the expected inflation rate C. An increase in government spending on highways financed by borrowing D. An increase in foreign financial capital inflows E. An investment tax credit for plant and equipment

D. An increase in foreign financial capital inflows

5. The real interest rate earned is the A. same as the nominal interest rate when inflation is moderate B. cost of borrowing in current consumer prices C. cost of borrowing in current producer prices D. cost of borrowing adjusted for the rate of change in the price level E. nominal interest rate adjusted for the growth rate of the economy

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

14a. 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 A. $500 B. $1,000 C. $2,000 D. $4,000 E. $4,500

E. $4,500 (The Atlantic Bank demand deposits decreased by $5,000 to $95,000 with a 10% reserve requirement or $9,500. Previously, the bank had $10,000 in reserves. So, $9,500 minus the $5,000 withdrawal with no excess reserves = $4,500 to meet the new reserve requirement. OR $100,000 - $5,000 = $95,000 x .10 = $9,500 So, $9,500 - $5,000 = $4,500)

7. Which of the following is true of the opportunity cost of holding cash? A. It is zero. B. It is represented by the value of the dollar. C. It is equal to the price level. D. It decreases as the price level rises. E. It increases as the interest rate rises.

E. It increases as the interest rate rises. (Recall that the opportunity cost is the value of the best alternative that you pass up, so if you are hoarding cash and interest rates keep rising, you keep losing that opportunity of interest on savings.)

Which of the following is true about the expected real interest rate? A. It is equal to the nominal interest rate plus the expected inflation rate. B. It is equal to the ratio of the nominal interest rate to the inflation rate. C. It increases as the price level increases. D. It is always positive. E. It is negative if the expected inflation rate exceeds the nominal interest rate.

E. It is negative if the expected inflation rate exceeds the nominal interest rate.

2. If the interest rate on loans before adjusting for inflation is 9%, and the expected inflation rate is 4%, then which of the following must be true? A. Lenders are expected to receive an additional 4% on their loaned funds. B. Borrowers are expected to pay an additional 4% on their borrowed funds. C. The expected real interest rate is 9%. D. The expected real interest rate is 13%. E. The nominal interest rate is 9%.

E. The nominal interest rate is 9%.

3. Which of the following will happen when interest rates increase in an economy? A. The cost of borrowing will decrease. B. The spending multiplier will decrease. C. Investment spending will increase. D. The price of previously issued bonds will increase. E. The opportunity cost of holding money will increase.

E. The opportunity cost of holding money will increase. (The opportunity cost of holding money is the interest that could have been earned from holding other financial assets. An increase in interest rates therefore increases the opportunity cost of holding money.)