Unit Four Practice

In lending to Vanessa, Alison expects the inflation rate to be 8% over the next year. Vanessa agrees to pay Alison a 10% interest rate on the loan, but Vanessa expects inflation to be 9%. At the end of the year, if the inflation rate is 9%, then: a. Alison's real rate of interest is 1%. b. Alison's real rate of interest is 9%. c. Vanessa ends up paying a lower real interest rate than she had expected. d. Alison ends up receiving a higher real interest rate than she had expected. e. Alison's real rate of interest is 2%.

a. Alison's real rate of interest is 1%.

Buying your friend a birthday present with a $20 bill means money is functioning as a: a. medium of exchange b. store of value c. unit of account d. standard of deferred payment e. form of near money

a. medium of exchange

When a corporation borrows money from a bank to expand its factory plan, the corporation is: a. taking out a loan b. issuing bonds c. issuing stocks d. liquidating a bank deposit e. paying dividends

a. taking out a loan

Which of the following is an accurate formula for the Budget Balance? a. taxes - government spending b. transfers - government spending c. taxes + government spending d. savings + taxes e. taxes - savings

a. taxes - government spending

When an individual decides to hold money instead of other assets: a. that individual is giving up the interest that could have been earned by holding other types of assets. b. that individual becomes more likely to suffer from money illusion. c. that individual is not affected by unanticipated inflation. d. that individual is able to maintain a higher standard of living. e. that individual is investing in illiquid assets.

a. that individual is giving up the interest that could have been earned by holding other types of assets.

Holding everything else constant, if the required reserve ratio falls, then: a. the money multiplier increases b. a $1 loan can lead to a smaller change in the money supply than before the change in the required reserve ratio c. the amount of excess reserves falls also d. the money multiplier decreases e. the money supply will decrease

a. the money multiplier increases

The value of all accumulated savings of a household is considered: a. wealth b. income c. debt d. wages e. salaries

a. wealth

Suppose that the reserve ratio is 10% when the Fed sells $11,000 of US Treasury bills to the banking system. If the banking system does NOT want to hold any excess reserves, _____ will be _____ the money supply. a. $110,000; added to b. $110,000; subtracted from c. $250,000; subtracted from d. $250,000; added to e. $1,100,000; subtracted from

b. $110,000; subtracted from

When a waiter deposits his cash tips in his savings account: a. M2 increases b. M1 decreases c. M2 decreases d. M1 increases e. Neither M1 or M2 change

b. M1 decreases

A decrease in the demand for money would result from a. an increase in income b. a decrease in real GDP c. an increase in the price level d. an increase in nominal GDP e. an increase in the supply of money

b. a decrease in real GDP

A shift away from taxing asset income towards taxing consumption would lead to: a. a larger demand for loanable funds, a higher interest rate, and slower economic growth. b. a larger supply of loanable funds, a lower interest rate, and faster economic growth. c. a larger government budget deficit and slower economic growth. d. a smaller supply of loanable funds, a higher interest rate, and faster economic growth. e. a larger supply of loanable funds, a lower interest rate, and slower economic growth.

b. a larger supply of loanable funds, a lower interest rate, and faster economic growth.

If the interest rate was r which of the following would cause the quantity of loanable funds supplied to decrease below q? a. firms become less optimistic about future profitability b. consumers begin to consume a larger fraction of disposable income c. foreign investors increase the quantity of funds invested d. the government runs a budget surplus e. firms see investment projects as having a higher rate of return

b. consumers begin to consume a larger fraction of disposable income

If the interest rate in the market for loanable funds is above the equilibrium interest rate, we know that: a. there is a shortage of loanable funds b. savings exceed investment spending c. the quantity demanded of loanable funds exceeds the quantity supplied of loanable funds d. consumption is smaller than savings e. the interest rate will begin to rise to clear the surplus of loanable funds

b. savings exceed investment spending

A share in the ownership of a company held by a shareholder is considered a(n): a. bond b. stock c. dividend d. IOU e. mortgage

b. stock

If the interest rate on CDs increases from 5% to 10%, the opportunity cost of holding money will _____ and the quantity demanded of money will ____. a. remain unchanged; remain unchanged b. increase; increase c. decrease; increase d. decrease; decrease e. increase; decrease

e. increase; decrease

If the money supply is currently at MS1 and the central bank chooses to buy bonds, then the resulting short-run shift in the supply of savings (loanable funds) may be represented by a shift of the: a. money supply curve to MS2 that raises the interest rate. b. supply of loanable funds right and a lower interest rate c. supply of loanable funds left and a higher interest rate d. interest rate from iA to iB e. supply of loanable funds left with no impact on the interest rate

b. supply of loanable funds right and a lower interest rate

The reserve requirement is 20%, and Leroy deposits his $1000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves. What is the maximum expansion in the money supply possible? a. $1000 b. $1800 c. $4000 d. $5000 e. $10000

c. $4000

Suppose a bank already has excess reserves of $800 and the reserve ratio is 30%. If Andy deposits $1000 of cash into his checking account and the bank lends $600 to Melanie, that bank can lend an additional: a. $100 b. $800 c. $900 d. $300 e. $600

c. $900

Which of the following is part of M1? a. short-term certificate of deposits (CDs) b. shares of corporate stock c. currency in a person's purse d. money market fund account balances e. treasury bills

c. currency in a person's purse

Banks decide to do away with fees charged when other banks' customers use the bank's own ATM. The demand for money will ____, and the real supply of money will ____. a. increase; not change b. increase; decrease c. decrease; not change d. decrease; increase e. decrease; decrease

c. decrease; not change

To change the money supply, the Fed most frequently uses: a. changes in the required reserve ratios b. changes in the discount rate c. open-market operations d. changes in the inflation rate e. moral suasion

c. open-market operations

Bank reserves are: a. the fraction of deposits kept in gold with the Federal Reserve b. the deposits lent to finance illiquid investments c. the currency kept in the bank's vault plus deposits with the Federal Reserve d. gold kept in the bank's vault e. the mortgages banks make to home buyers

c. the currency kept in the bank's vault plus deposits with the Federal Reserve

When government spending is less than net taxes: a. there is a budget deficit b. government savings is negative c. there is a budget surplus d. the economy is moving towards a budget balance e. net exports are positive

c. there is a budget surplus

If a bank has deposits of $100,000, loans of $75,000, cash on hand of $10,000, and $15,000 on deposit at the Federal Reserve, then its reserve ratio is: a. 5% b. 10% c. 12.5% d. 25% e. 75%

d. 25%

If you transfer $1000 from your savings account to your checking account: a. M1 decreases by $1000, and M2 increases by $1000. b. M1 increases by $1000, and M2 decreases by $1000. c. M1 and M2 don't change. d. M1 increases by $1000, but M2 doesn't change. e. M2 decreases by $1000, but M1 doesn't change.

d. M1 increases by $1000, but M2 doesn't change.

Which of the following financial assets is likely to be the most liquid? a. stocks b. bonds c. mutual funds shares d. bank demand deposits e. individual retirement accounts (IRAs)

d. bank demand deposits

When a mutual fund creates a stock portfolio by buying and holding shares in companies and then selling shares of the stock portfolio to individual investors, the mutual fund is performing the role of a. increasing transaction costs b. decreasing financial liquidity c. financial oversight d. reducing risk through diversification e. tax collection

d. reducing risk through diversification

The accompanying graph shows the money market. In this market, if the current interest rate is rL, we would expect to see the interest rate ____ because there is _____ of money in the market. a. fall; a surplus b. fall; a shortage c. rise; a surplus d. rise; a shortage e. remain constant; equilibrium

d. rise; a shortage

The three main monetary policy tools are: a. interest rates, taxes, and transfers. b. currency, near-moneys, and the reserve ratio. c. deposit insurance, discount rate, and the money multiplier. d. open-market operations, the discount rate, and the money multiplier. e. reserve requirements, the discount rate, and open-market operations.

e. reserve requirements, the discount rate, and open-market operations.

Now that fast food places such as McDonald's are accepting credit card payments: a. the demand for money has increased b. the supply of money has decreased c. the demand for money has not been affected d. the supply of money has increased e. the demand for money has decreased

e. the demand for money has decreased