Notes

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

If aggregate demand is growing faster than long-run aggregate supply, the Federal Reserve is most likely to (A) increase the interest rate on reserve balances B increase bond prices C increase income taxes D decrease the discount rate E decrease the required reserve ratio

(A) increase the interest rate on reserve balances

What is the maximum amount of new loans the bank could lend with the given amounts of reserves? (A $10,000 B $20,000 C $30,000 D $50,000 (E $70,000

A 10,000

Which of the following shifts the money demand curve to the right? A An increase in the price level B A decrease in the price level C An increase in interest rates D A decrease in interest rates E A decrease in the nominal gross domestic product

A An increase in the price level

In a country whose banking system has limited reserves, which of the following actions by the central bank increases the money supply? A Buying government bonds on the open market B Selling government bonds on the open market C Increasing the reserve requirement D Increasing the discount rate E Increasing the federal funds rate

A Buying government bonds on the open market

If aggregate demand is growing faster than long-run aggregate supply, the Federal Reserve is most likely to A Increase the interest rate on the reserve balances B increase bond prices C increase income taxes D decrease the discount rate E decrease the required reserve ratio

A Increase the interest rate on the reserve balances

Which of the following is a monetary policy action used to counteract a recession? A Lowering the interest paid on reserves B Lowering tax rates C Increasing the required reserve ratio D Increasing the discount rate E Increasing government spending

A Lowering the interest paid on reserves

Which of the following describes a major difference between stocks and bonds? (A) Stocks represent ownership in a corporation, and bonds represent a loan to a corporation. B Bonds represent ownership in a corporation, and stocks represent a loan to a corporation. (C Stocks are counted in gross domestic product, and bonds are not counted. D Bonds are counted in gross domestic product, and stocks are not counted. E Bonds pay dividends, and stocks earn interest.

A Stocks and represent ownership in a corporation

Assume a country's banking system has limited reserves. Which of the following policy actions will directly increase the money supply? A The central bank purchases government bonds on the open market. B The central bank sells government bonds on the open market. C The government increases taxes without changing its spending. D The government decreases taxes without changing its spending. E The government decreases taxes while simultaneously decreasing its spending.

A The central bank purchases government bonds on the open market.

If an economy is operating with significant unemployment, a decrease in which of the following will most likely cause employment to increase and the interest rate to decrease? A The central bank's administered interest rates B Transfer payments C Income tax rates D Government expenditures E Investment in basic infrastructure

A The central bank's administered interest rates

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 marke purchase, which of the following will happen? (A) The money supply will increase. B The money supply will remain unchanged. C Loans to the private sector will increase. D Demand deposits will decrease. E The level of actual reserves will decrease.

A The money supply will increase

If the central bank decreases administered interest rates, which of the following will occur? (A) The price of bonds will increase. B The money supply will decrease C Total bank reserves will decrease. D Consumption will decrease. E The government will balance its budget.

A The price of bonds will increase

If the interest rate on short-term government bonds declined as a result of open market operations by a central bank, the central bank must have A purchased government bonds B sold government bonds to commercial banks C decreased the amount of currency in circulation D increased the supply of bonds E increased the discount rate on loans to commercial banks

A purchased government bonds

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 A $10 million (B) $20 million (C $80 million D $100 million E $200 million

B 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 (A) 2% B 3% C 5% D 7% E 10%

B 3%

If the required reserve ratio is 0.2, a $1 billion increase in bank reserves can lead to an increase in M1 of at most A $6 billion B $5 billion C $1 billion D 8 billion E 2 billion

B 5 billion

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

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 account. As a result of your deposit, the money supply can increase by a maximum of (A) $800 B $900 C $1.000 D $1,100 E $1.200

B 900

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

An increase in the price level will most likely cause which of the following? A A leftward shift of the aggregate demand curve B An increase in the demand for money C An increase in the real interest rate D A decrease in the nominal interest rate E An increase in the supply of money

B An increase in the demand for money

Fred Jones withdraws $1,000 in cash from his savings account. What immediate effect does this transaction have on the monetary aggregate measures of MI and M2? A M1 will increase; M2 will decrease B M1 will increase; M2 will not change C M1 will decrease; M2 will not change D MI will not change; M2 will decrease E M1 will not change; M2 will not change

B M1 increases, M2 no change

Nominal interest rates and prices of previously issued bonds will be affected in which of the following ways when money demand exceeds money supply? A Nominal interest rates will decrease, and bond prices will decrease. B Nominal interest rates will increase, and bond prices will decrease. C Nominal interest rates will decrease, and bond prices will increase. D Nominal interest rates will increase, and bond prices will increase. E Nominal interest rates will not change, and bond prices will not change.

B Nominal interest rates will increase, and bond prices will decrease.

Which of the following is a cause of hyperinflation? A Rapid growth of real gross domestic product B Rapid growth of the money supply C Unanticipated decrease in aggregate demand D Unanticipated increase in aggregate supply E Unanticipated rise in real interest rates

B Rapid growth of the money supply

Which of the following accurately describes the federal funds rate? A The interest rate that banks charge state governments B The interest rate that banks charge other banks for overnight loans C The interest rate that banks pay on long-term savings D The interest rate on personal loans E The interest rate on government bonds

B The interest rate that banks charge other banks for overnight loans

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 a decrease in taxes B a decrease in the money supply C an increase in government spending D an increase in consumption spending E an increase in the price level

B a decrease in the money supply

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

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 gradut 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

Assume a country's banking system has limited reserves. Suppose that the central bank buys $400 billion worth of government securities from the public. If the required reserve ratio is 20 percent, the maximum increase in the money supply is A $1,600 billion (B) $1,800 billion C $2,000 billion D $2,200 billion (E) $2,400 billion

C 2,000 billion

The table below shows monetary assets for a banking sector at the end of a year. Based on the data provided, what is the value of total reserves held by depository institutions? A $500 million B $1, 500 million C $2, 500 million D $5, 500 million E $8, 000 million

C 2,500 million

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%

Expansionary fiscal policy will most likely result in A a decrease in the money supply B an increase in the marginal propensity to consume C an increase in nominal interest rates (D a decrease in the level of output (E) a decrease in the price level

C An increase in nominal interest rates

Investment in physical capital is most likely to occur as a result of an increase in A interest rates B inflation rates C business confidence D money demand E personal consumption

C Business confidence

If a country's economy is operating below the full-employment level of output at a very low inflation rate, the central bank of the country is most likely to (A) pursue an expansionary monetary policy because it is required to do so by law whenever output is below the full-employment level B pursue an expansionary fiscal policy because it is required to do so by law whenever output is below the full-employment level C lower administered interest rates to generate an increase in output D sell bonds on the open market to generate an increase in output E lower income taxes to generate an increase in output

C Lower administered rates to generate an increase in output

In the short run, government deficit spending will most likely A raise the unemployment rate B lower the inflation rate C raise nominal interest rates D lower private savings E raise net exports

C Raise nominal interest rates

When there is excess demand in the loanable funds market, which of the following will occur? A National savings will exceed investment spending. B The economy will remain at full employment. C Real interest rates will increase. D An inflationary gap will exist. E The money supply will increase.

C Real interest rates will increase

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 perc interest rate is equal to A 3% B 4% C 7% D 11% E 14%

D 11%

Assume that in a banking system in which banks hold no excess reserves, the public holds part of its money in cash and the rest in checking accounts. If the required reserve ratio is 10 percent, million, and currency in circulation is equal to $20 million, M1 will be equal to (A) $20 million (B) $30 million C $90 million D $120 million E $150 million

D 120 million

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? A $5,000 B $45,000 C $55,000 D $450,000 E $500,000

D 450,000

Which of the following changes would most likely cause an increase in interest rates in the short run? A A decrease in reserve requirements B An increase in trade deficits C An open market purchase of government bonds D An increase in government spending financed by borrowing E An increase in the price of bonds

D An increase in government spending financed by borrowing

Which of the following is true for bonds but not for stocks? A Bonds are the least liquid form of assets. B Bonds represent partial ownership in a company. C Bonds earn variable rates of return. D Bonds are interest-bearing assets. E Bonds have zero opportunity cost.

D Bonds are interest bearing assets

If a central bank increases its administered interest rates, it is most likely responding to which of the following? A Slow economic growth B An appreciating domestic currency C Rising unemployment D Rising price levels E Rising imports and declining exports

D Rising price levels

If businesses become optimistic about the profitability of investments in an economy, which of the following will happen in the loanable funds market in the short run? A The supply and demand for loanable funds will increase. B The supply and demand for loanable funds will decrease. C The demand for loanable funds by the private sector will decrease. D The real interest rate will increase E The real interest rate will decrease.

D The real interest rate will increase

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 pric function of money? A Store of value B Medium of exchange C Means of payment D Unit of account E Store of wealth

D Unit of account

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 $10,000 worth of government securities to commercial banks, the total money supply will A increase by $10,000 B increase by $50,000 C decrease by $10,000 D decrease by $50,000 E not change

D decrease by $50,000

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?

Decrease decrease decrease

Based on the table above, what is the value of M1, a measure of the money supply? (A) $100 million B $102 million C $112 million D $1,000 million E $1,120 million

E 1,120 million

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 A Sell Bonds to decrease the interest rate and to increase aggregate demand B Sell Bonds to increase the interest rate and to decrease aggregate demand C Sell Bonds to increase the interest rate and to increase investment D Buy Bonds to decrease the interest rate and to decrease aggregate demand E Buy Bonds to decrease the interest rate and to increase aggregate demand

E Buy Bonds to decrease the interest rate and to increase aggregate demand

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 (A) increase by a maximum of $9,000 B increase by a maximum of $90,000 C decrease by a maximum of $9,000 D decrease by a maximum of $10,000 E decrease by a maximum of $100,000

E Decrease by a maximum of $100,000

To reduce inflation, the central bank would be most likely to A decrease the reserve requirement B decrease the income tax rates C buy government securities D increase the supply of money E increase its administered interest rates

E Increase it's administered interest rates

For which of the following sets of unemployment and inflation rates will a central bank be most reluctant to decrease its administered interest rates?

Unemployment rate of 5% and inflation rate of 10%

banks expand the money supply when? (A) issuing credit cards. (B) printing money. (C) cashing checks. (D) making loans. (E) accepting deposits.

(D) making loans.

If both the nominal interest rate and the expected inflation rate increase, what will happen to the real interest rate? A It will increase because the expected inflation rate has increased. B It will increase because the nominal interest rate has increased. C It will increase if the expected inflation rate increases by more than the nominal interest rate. D It will decrease because the nominal interest rate has increased. E It will decrease if the expected inflation rate increases by more than the nominal interest rate.

E It will decrease if the expected inflation rate increases by more than the nominal interest rate.

Which of the following is a determinant of the amount of money the commercial banking system can create? A The marginal propensity to consume B The marginal propensity to save C The total number of banks D The size of the federal debt E The reserve requirement

E The reserve requirement

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 1 money supply will (A) decrease by more than half B decrease by half C decrease by less than half D exactly double E increase by less than double

E increase by less than double