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STUDY GUIDE FOR EXAM 3 -CHPS 15,16,18

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

1. 

Which of the following does not appear on the asset side of a bank's balance sheet?
a.
Required reserves.
b.
Checkable deposits.
c.
Loans.
d.
Excess reserves.
 

2. 

Which of the following appears on the asset side of a bank's balance sheet?
a.
Required reserve deposits.
b.
Loans.
c.
Excess reserves.
d.
All of the above.
 

3. 

Which of the following would not appear on the asset side of a commercial bank balance sheet?
a.
Reserves.
b.
Checkable deposits.
c.
Loans.
d.
Securities.
 

4. 

Banks normally hold few excess reserves because this practice is:
a.
subject to an excess-reserves tax.
b.
not profitable.
c.
against Fed policy.
d.
illegal.
 

5. 

A bank's required reserves are either held as vault cash or:
a.
used to purchase Treasury bonds.
b.
deposited with the Fed.
c.
invested in the stock market.
d.
loaned out to other commercial banks.
 

6. 

Which of the following is not an interest-bearing asset of commercial banks?
a.
Required reserves.
b.
Checkable deposits.
c.
Customer savings accounts.
d.
All of the above are interest-bearing assets of commercial banks.
e.
None of the above are interest-bearing assets of commercial banks.
 

7. 

Which of the following is a valid statement?
a.
Required-reserve ratio = required reserves as a percentage to total deposits.
b.
Required reserves = the maximum reserves required by the Fed.
c.
Excess reserves = total reserves plus required reserves.
d.
All of the above.
 

8. 

The major assets and liabilities of a bank are:
a.
checkable deposits and total reserves, respectively.
b.
checkable deposits and gold, respectively.
c.
total reserves and checkable deposits, respectively.
d.
total reserves and excess reserves, respectively.
e.
checkable deposits and excess reserves, respectively.
 

9. 

The amount of assets that a bank must hold at all times is determined by the:
a.
banks' actual reserves.
b.
required reserve ratio.
c.
actual reserve requirement.
d.
fractional reserve requirement.
e.
excess reserve requirement.
 

10. 

An individual bank can lend out at most its:
a.
actual reserves.
b.
fractional reserves.
c.
legal reserves.
d.
checkable deposits.
e.
excess reserves.
 

11. 

If a bank has $100,000 in checkable deposits, reserves of $20,000, and no excess reserves, then the required reserve ratio is:
a.
10 percent.
b.
20 percent.
c.
25 percent.
d.
30 percent.
e.
50 percent.
 

12. 

The balance sheet for a commercial bank shows the bank's:
a.
required reserves as assets and excess reserves as liabilities.
b.
loans as assets and required reserves as liabilities.
c.
loans as assets and checkable deposits as liabilities.
d.
checkable deposits as assets and loans as liabilities.
e.
excess reserves as assets and required reserves as liabilities.
 

13. 

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 deposit, then its required reserves balance will be:
a.
$0.
b.
$90.
c.
$100.
d.
$900.
e.
$910
 

14. 

If loans are $69,000, excess reserves are $1,400, and checkable deposits are $80,000, then the required reserve ratio must be:
a.
1.75 percent.
b.
12 percent.
c.
13.75 percent.
d.
17.5 percent.
e.
0.12 percent.
 

15. 

If your bank receives a checkable deposit of $20,000, and the banking system makes loans totaling $180,000, the maximum possible, then the required reserve ratio must be:
a.
0.10.
b.
0.20.
c.
0.25.
d.
0.40.
e.
0.50.
 
 
Exhibit 15-2 Balance Sheet of Springfield National Bank

Assets
Liabilities
Total reserves         $500
Demand deposits        $1,000
Loans                  $500
 
 

16. 

In Exhibit 15-2, if Springfield National has excess reserves equal to $300, and then its customers write checks for $200, its excess reserves will fall to:
a.
$0.
b.
$100.
c.
$140.
d.
$160.
e.
$200.
 

17. 

In Exhibit 15-2, if Springfield National has excess reserves equal to $300, and the required reserve ratio increases to 35 percent, it will:
a.
be able to cover its increased reserve requirements from its excess reserves.
b.
have to call in loans worth $350.
c.
have to call in loans worth $250.
d.
have to call in loans worth $200.
e.
have to call in loans worth $150.
 

18. 

Best National Bank is subject to a 10 percent required-reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of:
a.
$100.
b.
$900.
c.
$1,000.
d.
$10,000.
 

19. 

If a bank that is subject to a 10 percent required-reserve ratio has $20,000 in excess reserves, it can make new loans of:
a.
$2,000.
b.
$18,000.
c.
$20,000.
d.
$200,000.
 

20. 

Suppose the required reserve ratio is 3 percent, and currency and reserves total $10 million. The maximum money supply that can be supported is:
a.
$13 million.
b.
$30 million.
c.
$97 million.
d.
$333.3 million.
 

21. 

If a single banks faces a required reserve ratio of 20 percent, has total reserves of $500,000, and checkable deposit liabilities of $400,000, what is the maximum amount of money this bank could create (add to the money supply)?
a.
$420,000.
b.
$100,000.
c.
$80,000.
d.
$2,100,000.
 

22. 

Suppose a bank has checkable deposits of $100,000 and the required reserve ratio is 20 percent. If the bank currently has $100,000 in reserves, it could expand the money supply by as much as:
a.
$100,000.
b.
$400,000.
c.
$0.
d.
$20,000.
e.
$80,000.
 

23. 

Jeff Kaufman decides to bank with Paris First National Bank (PFN). He opens a checking account by depositing $1,000. According to the PFN balance sheet, after this initial $1,000 checkable deposit, there are $1,000 in:
a.
reserves and $1,000 in checkable deposits.
b.
liabilities and $2,000 in checkable deposits.
c.
checkable deposits and $0 in assets.
d.
assets and $0 in liabilities.
e.
reserves and $0 in liabilities.
 

24. 

If Matt Taylor gets his $800 loan from the Paris First National Bank in cash rather than in the form of a new checkable deposit, the:
a.
Paris First National Bank will get $800 in new reserves.
b.
Paris First National Bank will not get $800 in new reserves.
c.
assets of the Paris First National Bank will increase by $800.
d.
assets of the Paris First National Bank will decease by $88.
e.
liabilities of the Paris First National Bank will increase by $800.
 
 
Exhibit 15-6a Balance sheet of Tucker National Bank

Assets
Liabilities
Required reserves   $  20,000
Checkable deposits   $200,000
Excess reserves             0
 
Loans                 180,000
                             
 

25. 

Assume all banks in the system started with balance sheets as shown in Exhibit 15-6a and the Fed made a $20,000 open-market purchase. The result would be a (an):
a.
$200,000 expansion of the money supply.
b.
$20,000 expansion of the money supply.
c.
$20,000 contraction of the money supply.
d.
infinite contraction of the money supply.
 

26. 

If your bank faces a 20 percent required reserve ratio and receives a checkable deposit of $4,000, it can make additional loans worth a maximum of:
a.
$800.
b.
$3,200.
c.
$4,000.
d.
$16,000.
e.
$20,000.
 

27. 

Assume a simplified banking system subject to a 10 percent required-reserve ratio. If there is an initial increase in excess reserves of $90,000 and all possible loans are made, the money supply:
a.
increases $90,000.
b.
increases $900,000.
c.
increases $990,000.
d.
decreases $90,000.
 

28. 

Assume a simplified banking system subject to a 20 percent required-reserve ratio. If there is an initial increase in excess reserves of $100,000, the money supply:
a.
increases $100,000.
b.
increases $500,000.
c.
increases $600,000.
d.
decreases $500,000.
 

29. 

In a simplified banking system with a 20 percent required-reserve ratio, a $1,000 open-market sale by the Fed would cause the money supply to:
a.
increase by $200.
b.
decrease by $200.
c.
decrease by $5,000.
d.
increase by $5,000.
 

30. 

Which of the following events would reduce the size of the "real-world" money multiplier?
a.
Banks hold more excess reserves.
b.
Households hold less currency.
c.
The Fed increases the discount rate.
d.
The Fed reduces the required reserve ratio.
 

31. 

If the required reserve ratio decreases, the:
a.
money multiplier increases.
b.
money multiplier decreases.
c.
amount of excess reserves the bank has decreases.
d.
money multiplier stays the same.
e.
amount of excess reserves stays the same.
 

32. 

The money multiplier equals:
a.
1/excess reserves.
b.
excess reserves/loans.
c.
required reserve ratio/excess reserves.
d.
1/actual reserves.
e.
1/required reserve ratio.
 

33. 

If a bank keeps some of its excess reserves, the money multiplier:
a.
increases.
b.
stays the same.
c.
goes to zero.
d.
decreases.
e.
increases, then decreases.
 

34. 

If a bank receives a new deposit of $10,000, and the required reserve ratio is 25 percent, then the new money that can be created by the banking system, including the initial deposit, is:
a.
$25,000.
b.
$2,500.
c.
$4,000.
d.
$40,000.
e.
$10,000.
 

35. 

When the required reserve ratio is lowered,
a.
the money multiplier increases, and the amount of excess reserves increases in the banking system.
b.
the money multiplier decreases, and the amount of excess reserves increases in the banking system.
c.
the money multiplier decreases, and the amount of excess reserves decreases in the banking system.
d.
the money multiplier increases, and the amount of excess reserves decreases in the banking system.
e.
there is no change in either the money multiplier or the amount of excess reserves in the banking system.
 

36. 

When the required reserve ratio is changed,
a.
the money multiplier is changed but the amount of excess reserves in the banking system is unchanged.
b.
the money multiplier is unchanged but the amount of excess reserves in the banking system is changed.
c.
the size of the money multiplier and the amount of excess reserves change in the opposite direction from the required reserve ratio.
d.
the size of the money multiplier and the amount of excess reserves change in the same direction as the required reserve ratio.
e.
neither the money multiplier nor the amount of excess reserves change.
 

37. 

Decisions regarding purchases and sales of government securities by the Fed are made by the:
a.
Federal Deposit Insurance Commission (FDIC).
b.
Discount Committee (DC).
c.
Federal Open Market Committee (FOMC).
d.
Federal Funds Committee (FFC).
 

38. 

Which of the following is in charge of the buying and selling of government securities by the Fed?
a.
The president.
b.
The Federal Open Market Committee.
c.
The Congress.
d.
None of the above.
 

39. 

In a simplified banking system in which all banks are subject to a 10 percent required reserve ratio, a $1,000 open market sale by the Fed to a bank would cause the money supply to:
a.
increase by $1,000.
b.
increase by $100,000.
c.
decrease by $10,000.
d.
decrease by $1,000.
e.
remain unchanged.
 

40. 

When the Fed wishes to reduce the economy's money supply, it:
a.
lowers the discount rate.
b.
lowers the required reserve ratio.
c.
reduces the margin requirement.
d.
sells some of its government securities.
e.
prints more money.
 

41. 

When the Fed buys government securities, it:
a.
lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public.
b.
raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public.
c.
increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public.
d.
increases the amount of excess reserves that banks hold, discouraging them from making loans to the general public.
e.
decreases the amount of excess reserves that banks hold, discouraging them from making loans to the general public.
 

42. 

When the Fed buys federal government bonds on the open market from commercial banks, then, over time, the:
a.
assets of these banks fall.
b.
assets of the banks stay the same.
c.
assets of the banks rise.
d.
liabilities of the bank rise.
e.
liabilities of the bank fall.
 

43. 

Assets of a bank will increase over time when:
a.
the Fed sells government bonds to the bank on the open market.
b.
the Treasury sells government bonds to the bank on the open market.
c.
depositors take funds out of their checkable deposit accounts.
d.
the Fed buys government bonds from the bank on the open market.
e.
the Fed lowers the discount rate.
 

44. 

When the Fed sells government bonds to a bank, the initial effect is that the bank's:
a.
assets increase.
b.
assets remain the same.
c.
liabilities decrease.
d.
assets decrease.
e.
liabilities increase.
 

45. 

During a period of inflation, the Fed is likely to:
a.
sell government bonds to banks in order to reduce the amount of loanable funds.
b.
buy government bonds from banks in order to reduce the amount of loanable funds.
c.
raise taxes in order to reduce the money supply.
d.
cut the required reserve ratio in order to reduce the amount of excess reserves banks have to loan out.
e.
cut the discount rate in order to increase the affordability of loanable funds.
 

46. 

The discount rate is the interest rate charged by:
a.
major banks to their best customers.
b.
banks for overnight loans to other banks.
c.
the Fed on loans of reserves to banks.
d.
banks for loans of less than 24 hours.
 

47. 

Which of the following policy actions by the Fed would cause the money supply to decrease?
a.
An open-market purchase of government securities.
b.
A decrease in required-reserve ratios.
c.
An increase in the discount rate.
d.
A decrease in the discount rate.
 

48. 

The interest rate which the Fed charges banks that borrow reserves from it is the:
a.
federal funds rate.
b.
discount rate.
c.
reserved rate.
d.
investment rate.
e.
check rate
 

49. 

The federal funds rate is the interest rate charged by:
a.
banks for loans to other banks.
b.
the Fed for overnight loans.
c.
the Fed for borrowed reserves.
d.
the federal government on loans to member banks.
 

50. 

The interest rate on loans made by banks in the market in which they lend and borrow reserves from each other for very short periods of time is known as the:
a.
discount rate.
b.
legal reserve rate.
c.
federal funds rate.
d.
open market rate.
e.
margin rate.
 

51. 

The federal funds market is the market in which:
a.
banks borrow from the Fed.
b.
bank customers borrow from their banks
c.
banks borrow from each other.
d.
the federal government borrows from the Fed.
e.
the federal government borrows from members of the general public.
 

52. 

Assume that the Paris First National Bank is a thriving bank with deposits of $20 million. If the required reserve ratio is 20 percent and the bank is fully loaned out, the bank will have outstanding loans totaling:
a.
$2 million.
b.
$4 million.
c.
$10 million.
d.
$16 million.
e.
$20 million.
 

53. 

Which of the following actions by the Fed would increase the money supply?
a.
Increasing the required-reserve ratio.
b.
Selling government bonds in the open market.
c.
Increasing the discount rate.
d.
Reducing the required-reserve ratio.
 

54. 

The Fed's countercyclical policy during expansion and prosperity includes:
a.
raising the required reserve ratio, raising the discount rate, and selling government bonds on the open market.
b.
raising the required reserve ratio, raising the discount rate, and buying government bonds on the open market.
c.
raising the required reserve ratio, cutting the discount rate, and selling government bonds on the open market.
d.
raising the required reserve ratio, cutting the discount rate, and buying government bonds on the open market.
e.
lowering the required reserve ratio, cutting discount rates, and buying government bonds on the open market.
 

55. 

When the economy is at full employment and inflation is present, the government could create a surplus budget by cutting its own spending and raising taxes. The Fed would be expected to:
a.
reduce the required reserve ratio, increase the discount rate, and buy securities on the open market.
b.
reduce the required reserve ratio, reduce the discount rate, and sell securities on the open market.
c.
reduce the required reserve ratio, reduce the discount rate, and buy securities on the open market.
d.
increase the required reserve ratio, reduce the discount rate, and sell securities on the open market.
e.
increase the required reserve ratio, increase the discount rate, and sell securities on the open market.
 
 
Exhibit 15-3 Balance sheet of Tucker National Bank

Assets
Liabilities
Required reserves     $ 20,000
Checkable deposits $100,000
Excess reserves              0
 
Loans                   80,000
 
Total                 $100,000
Total              $100,000
 

56. 

Assume the Fed purchases a government security from a private dealer and pays with a Fed check of $100,000. If this check is deposited by the dealer in the bank shown in Exhibit 15-3, the bank can extend new loans in the amount of:
a.
$20,000.
b.
$80,000.
c.
$100,000.
d.
$120,000.
 
 
Exhibit 15-4 Balance sheet of Tucker National Bank

Assets
Liabilities
Required reserves      $ 4,000
Checkable deposits      $20,000
Excess reserves         16,000
 
Loans                    ____0
                               
Total                  $20,000
Total                   $20,000
 

57. 

Assume all banks in the system started with the balance sheet shown in Exhibit 15-4 and the Fed makes a $1,000 open-market purchase. The result would be a (an):
a.
infinite contraction of the money supply.
b.
infinite expansion of the money supply.
c.
$1,000 expansion of the money supply.
d.
$5,000 expansion of the money supply.
 
 
Exhibit 15-5 Balance sheet of Tucker National Bank

Assets
Liabilities
Required reserves     $_______
Checkable deposits     $100,000
Excess reserves          5,000
 
Loans                   70,000
                       ________
Total                 $100,000
Total                  $100,000
 

58. 

If all banks in the system shown in Exhibit 15-5 were identical to Tucker National Bank, the money multiplier for the system would be:
a.
4.
b.
5.
c.
10.
d.
25.
 
 
Exhibit 15-7 Lower Walloon National Bank

Assets
Liabilities
Reserves         $10,000
Demand deposits   $10,000
 

59. 

In Exhibit 15-7, if the required reserve ratio is increased to 25 percent, the Lower Walloon National bank needs to keep:
a.
$2,000 on reserve at all times.
b.
$2,500 on reserve at all times.
c.
$10,000 on reserve at all times.
d.
$0 on reserve at all times.
e.
legal and excess reserves equal to each other at all times.
 

60. 

In Exhibit 15-7, if the required reserve ratio is 20 percent for all banks, and every bank in the banking system loans out all of its excess reserves, then the $10,000 in checkable deposits could create for the entire banking system:
a.
$8,000 worth of new money.
b.
$2,000 worth of new money.
c.
$10,000 worth of new money.
d.
$40,000 worth of new money.
e.
no new money.
 

61. 

Keynes called money people hold to make routine day-to-day purchases the:
a.
transactions demand for holding money.
b.
precautionary demand for holding money.
c.
speculative demand for holding money.
d.
store of value demand for holding money.
 

62. 

The stock of money people hold to pay everyday predictable expenses is the:
a.
transactions demand for holding money.
b.
precautionary demand for holding money.
c.
speculative demand for holding money.
d.
store of value demand for holding money.
 

63. 

The transactions demand for holding money is when people hold money:
a.
instead of near money.
b.
to transact purchases they expect to make.
c.
as insurance against unexpected expenses.
d.
to speculate in the stock market.
e.
to take advantage of changes in interest rates.
 

64. 

Keynes called the money people hold in order to pay unforeseen or unexpected expenses the:
a.
transactions demand for holding money.
b.
precautionary demand for holding money.
c.
speculative demand for holding money.
d.
store of value demand for holding money.
 

65. 

The demand for money that households keep for emergency purposes is known as the:
a.
precautionary demand.
b.
emergency demand.
c.
speculative demand.
d.
transactions demand.
e.
temporary demand.
 

66. 

Which of the following statements is true?
a.
The speculative demand for money at possible interest rates gives the demand for money curve its upward slope.
b.
There is an inverse relationship between the quantity of money demanded and the interest rate.
c.
According to the quantity theory of money, any change in the money supply will have no effect on the price level.
d.
All of the above are true.
 

67. 

The speculative demand for holding money is when people hold money:
a.
instead of near money.
b.
to transact purchases they expect to make.
c.
as insurance against unexpected needs.
d.
to speculate in the stock market.
e.
to take advantage of changes in interest rates.
 

68. 

Other things being equal, the quantity of money that people wish to hold can be expected to:
a.
increase as the interest rate increases.
b.
decrease as the interest rate increases.
c.
decrease as real GDP increases.
d.
none of the above.
 

69. 

Which of the following statements is true?
a.
The speculative demand for money at possible interest rates gives the demand for money curve its upward slope.
b.
There is an inverse relationship between the quantity of money demanded and the interest rate.
c.
According to the quantity theory of money, any change in the money supply will have no effect on the price level.
d.
All of the above.
 

70. 

Keynesians identify three principal motives for demanding money. They are the:
a.
transactions demand, precautionary demand, and liquidity motive.
b.
transactions demand, precautionary demand, and convertibility motive.
c.
transactions demand, speculative demand, and volatility motive.
d.
transactions demand, speculative demand, and liquidity motive.
e.
transactions demand, speculative demand, and precautionary demand.
 

71. 

The three functions of money are medium of exchange,
a.
measure of value, and standard of value.
b.
measure of value, and store of value.
c.
standard of value, and store of value
d.
medium of value, and store of value.
e.
measure of value, and deferred value.
 

72. 

In Keynes's view, an excess quantity of money demanded causes people to:
a.
sell bonds and the interest rate rises.
b.
buy bonds and the interest rate falls.
c.
buy bonds and the interest rate rises.
d.
increase speculative balances.
 

73. 

Which of the following falls when bond prices rise?
a.
Stock prices.
b.
Interest rates.
c.
Money demand.
d.
Money supply.
 

74. 

Assume the Fed decreases the money supply and the demand for money curve is fixed. In response, people will:
a.
sell bonds, thus driving up the interest rate.
b.
buy bonds, thus driving down the interest rate.
c.
buy bonds, thus driving up the interest rate.
d.
sell bonds, thus driving down the interest rate.
 

75. 

When the interest rate falls,
a.
the opportunity cost of holding money rises.
b.
people shift out of holding interest-yielding bonds into holding money.
c.
the quantity of money people will hold decreases.
d.
investment spending decreases.
e.
real GDP will decrease.
 
 
Exhibit 16-1 Money market demand and supply curves

internet_study_guid_files/i0830000.jpg
 

76. 

Starting from an equilibrium at E1 in Exhibit 16-1, a leftward shift of the money supply curve from MS1 to MS2 would cause an excess:
a.
demand for money, leading people to sell bonds.
b.
demand for money, leading people to buy bonds.
c.
supply of money, leading people to sell bonds.
d.
supply of money, leading people to buy bonds.
 

77. 

Beginning from an equilibrium at E1 in Exhibit 16-1, a decrease in the money supply from $300 billion to $200 billion causes people to:
a.
sell bonds and drive the price of bonds down.
b.
sell bonds and drive the price of bonds up.
c.
buy bonds and drive the price of bonds down.
d.
buy bonds and drive the price of bonds up.
 
 
Exhibit 16-3 Money market demand and supply curves

internet_study_guid_files/i0860000.jpg
 

78. 

In Exhibit 16-3, assume an equilibrium at E2 with the money supply at $100 billion and the interest rate at 15 percent. The Fed uses its policy tools to move the economy to a new equilibrium at E1 with a money supply of 150 billion and an interest rate of 10 percent. As part of the adjustment to the new equilibrium, we would expect the:
a.
price of bonds to rise.
b.
price of bonds to remain unchanged.
c.
price of bonds to fall.
d.
none of the above.
 

79. 

An increase in the money supply:
a.
lowers the interest rate, causing a decrease in investment and an increase in GDP.
b.
lowers the interest rate, causing an increase in investment and a decrease in GDP.
c.
lowers the interest rate, causing an increase in investment and an increase in GDP.
d.
raises the interest rate, causing an increase in investment and an increase in GDP.
e.
raises the interest rate, causing a decrease in investment and a decrease in GDP.
 

80. 

A decrease in the money supply:
a.
raises the interest rate, causing an increase in investment and an increase in GDP.
b.
lowers the interest rate, causing an increase in investment and an increase in GDP.
c.
raises the interest rate, causing a decrease in investment and a decrease in GDP.
d.
lowers the interest rate, causing a decrease in investment and an increase in GDP.
e.
lowers the interest rate, causing a decrease in investment and a decrease in GDP.
 

81. 

If the economy is inflationary, the Fed would most likely:
a.
encourage banks to provide loans by lowering the discount rate.
b.
encourage banks to provide loans by raising the discount rate.
c.
restrict bank lending by lowering the discount rate.
d.
restrict bank lending by raising the discount rate.
e.
restrict bank lending by lowering the federal funds rate.
 

82. 

If there is a recession, the Fed would most likely:
a.
increase bank reserves by raising the discount rate.
b.
increase bank reserves by buying government securities.
c.
decrease bank reserves by raising the discount rate.
d.
decrease bank reserves by selling government securities.
e.
decrease bank reserves by lowering the legal reserve requirement.
 

83. 

According to Keynesian economists, which of the following is not a consequence of increasing the money supply?
a.
A lower interest rate.
b.
Greater investment.
c.
Lower real GDP.
d.
Higher real GDP.
 

84. 

Keynesians believe that an increase in the money supply will lead to:
a.
both c and d.
b.
all of the following.
c.
an increase in the price level.
d.
an decrease in nominal GDP.
e.
an increase in real GDP.
 

85. 

The Keynesian cause-and-effect sequence predicts that a decrease in the money supply will cause interest rates to:
a.
fall, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP.
b.
fall, boosting investment and shifting the AD curve rightward, leading to a decrease in real GDP.
c.
rise, cutting investment and shifting the AD curve rightward, leading to an increase in real GDP.
d.
rise, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP.
e.
rise, cutting investment and shifting the AD curve leftward, leading to a decrease in real GDP.
 
 
Exhibit 16-5 Money, investment and product markets

internet_study_guid_files/i0950000.jpg
 

86. 

In Exhibit 16-5, when the money supply increases from S1 to S2, the equilibrium interest rate:
a.
remains unchanged.
b.
increases from i2 to i1, increasing investment spending from I1 to I2.
c.
increases from i2 to i1, decreasing investment spending from I2 to I1.
d.
decreases from i1 to i2, increasing investment spending from I1 to I2.
e.
decreases from i1 to i2, decreasing investment spending from I2 to I1.
 

87. 

In Exhibit 16-5, a shift in aggregate demand from AD1 to AD2:
a.
cannot raise real GDP because the economy is at full employment.
b.
cannot raise real GDP because the aggregate supply curve is upward sloping at GDP2.
c.
will raise real GDP because the economy typically operates below the full-employment level.
d.
will cause the interest rate to increase from i2 to i1.
e.
will raise real GDP but will also significantly raise the price level.
 

88. 

According to the equation of exchange, if M = 200, P = 100, and Q = 10, the V is:
a.
20.
b.
2.
c.
10.
d.
5.
e.
2,000.
 

89. 

According to the equation of exchange, if V = 5, P = 100, and Q = 10, the M is:
a.
20.
b.
10.
c.
500.
d.
1,000.
e.
200.
 

90. 

According to the quantity theory of money,
a.
the velocity of money is highly variable.
b.
the money supply directly affects real GDP.
c.
the money supply inversely affects velocity.
d.
real GDP increases as the price level increases.
e.
P = MV/Q.
 

91. 

According to the quantity theory of money, if M's growth is lower than Q's, then:
a.
V falls.
b.
V rises.
c.
P stays the same
d.
P falls.
e.
P rises
 

92. 

Classical economists traditionally believed that:
a.
there are three motives for demanding money.
b.
a change in the money supply can affect real GDP.
c.
the transactions demand for money influences the velocity of money.
d.
the velocity of money is constant.
e.
the economy does not always operate at full employment.
 

93. 

The belief that the velocity of money is not constant but highly predictable is associated with the:
a.
classical school.
b.
Keynesian school.
c.
supply-side school.
d.
rational expectations school
e.
monetarist school
 

94. 

Monetarists believe:
a.
the cause-and-effect relationship hypothesized by the Keynesians understates the impact of stimulative monetary policy.
b.
the cause-and-effect relationship hypothesized by the Keynesians is an accurate description of how monetary policy works.
c.
since the economy is operating at full employment, any stimulative monetary policy will cause the inflation rate to rise.
d.
the cause-and-effect relationship hypothesized by the Keynesians is backwards, and decreases in the money supply actually stimulate economic activity.
e.
the cause-and-effect relationship hypothesized by Keynesians will not work because investment does not respond to changes in interest rates.
 

95. 

If M = 200, P = 100, and Q = 10, then V is:
a.
20.
b.
2.
c.
10.
d.
5.
e.
2,000.
 

96. 

Monetarists and classical economists:
a.
assume that stimulative monetary policy will create high levels of GDP without inflation.
b.
assume that stimulative monetary policy will create high levels of GDP and slightly high prices.
c.
assume the economy operates at full employment and stimulative monetary policy will only cause the price level to rise.
d.
assume that the economy operates at full employment and stimulative monetary policy will increase both aggregate supply and aggregate demand.
e.
assume that the Keynesian description of monetary policy underestimates the true stimulative effect of an increase in the money supply.
 

97. 

Monetarists argue that the Federal Reserve should allow the money supply to grow:
a.
counter to the business cycles.
b.
faster than 10 percent annually.
c.
only during recessions.
d.
at a constant rate.
 

98. 

Which of the following is a reason for the Keynesian view that monetary policy plays a minor role in affecting the economy?
a.
The money demand curve is vertical.
b.
The investment curve is very steep.
c.
The money demand curve is horizontal at any interest rate.
d.
The monetary rule.
 

99. 

Which of the following characterizes the Monetarist viewpoint?
a.
They believe that money can never affect investment.
b.
They believe that monetary policy is transmitted to the economy only through its effects on the interest rate and investment.
c.
Both a and b are part of the debate.
d.
Neither a or b are part of the debate.
 

100. 

Without trade, the consumption possibilities for two nations are:
a.
outside their production possibilities curve.
b.
inside their production possibilities curve.
c.
along their production possibilities curve.
d.
at a point equal to the world production possibilities curve.
 
 
Exhibit 18-1 Production possibilities curves

internet_study_guid_files/i1110000.jpg
 

101. 

In Exhibit 18-1, the production possibilities curves of wheat and corn for Nabia and Pada are presented. If these two nations trade, Nabia should specialize in the production of:
a.
corn.
b.
corn and wheat.
c.
neither product since Pada has the comparative advantage in the production of both.
d.
neither product since Pada has the absolute advantage in the production of both.
e.
wheat.
 
 
Exhibit 18-2 Production possibilities curves for U. S. and Mexico

internet_study_guid_files/i1130000.jpg
 

102. 

As shown in Exhibit 18-2, in Mexico, producing 1 additional ton of wheat costs:
a.
1/2 ton of cloth.
b.
2/3 ton of cloth.
c.
1 ton of cloth.
d.
1 1/2 tons of cloth.
 

103. 

A country is said to have a comparative advantage in the production of a good when it:
a.
has the lower opportunity cost of producing the good.
b.
can produce the good using fewer resources than another country.
c.
requires fewer labor hours to produce the good.
d.
all of the above.
 

104. 

A nation benefits from international trade if it:
a.
exports more than it imports.
b.
imports more than it exports.
c.
imports goods for which it is a low opportunity cost producer.
d.
exports goods for which it is a low opportunity cost producer.
 

105. 

A nation should specialize in the production of the product for which it has a(n):
a.
absolute advantage.
b.
exchange rate.
c.
specialization.
d.
comparative advantage.
e.
terms of trade.
 

106. 

If a country has a comparative advantage in the production of all goods, it should:
a.
specialize in the production of goods with the lowest opportunity cost.
b.
specialize in the production of goods with the highest opportunity cost.
c.
specialize in the production of goods with the absolute advantage.
d.
specialize in the production of goods without the absolute advantage.
e.
not specialize at all and produce all the goods itself.
 

107. 

If a country has a comparative advantage in oil, then this means that the opportunity cost of producing oil is:
a.
high.
b.
low.
c.
zero.
d.
infinite.
e.
equal to all other goods.
 

108. 

The average National Basketball Association player is over 6 feet tall. The average horse jockey is shorter than 5 1/2 feet tall. This is because height provides NBA players with:
a.
d and e.
b.
an absolute advantage for horse racing.
c.
an absolute disadvantage for other sports in general.
d.
a comparative disadvantage in horse racing.
e.
a comparative advantage in basketball.
 

109. 

A country is said to have an absolute advantage in the production of a good when:
a.
its opportunity cost of producing the good is lower than another country.
b.
it can produce the good using fewer resources than another country.
c.
it specializes in the production of the good.
d.
all of the above.
 

110. 

If nation A has a comparative advantage over nation B in the production of a product, this implies:
a.
it requires fewer resources in A to produce the good than in B.
b.
the cost of producing the good in terms of some other good's production that must be sacrificed is lower in A than in B.
c.
that nation B could not benefit by engaging in trade with A.
d.
that nation A should acquire this product by trading with B.
e.
that nation A could not benefit by engaging in trade with B.
 

111. 

If nation A has an absolute advantage over nation B in the production of a product, this implies that:
a.
it requires fewer resources in A to produce the good than in B.
b.
the cost of producing the good in terms of some other good's production that must be sacrificed is lower in A than in B.
c.
nation B could not benefit by engaging in trade with A.
d.
nation A should acquire this product by trading with B.
e.
nation A could not benefit by engaging in trade with B.
 

112. 

If Dana can paint his house faster than Luke, a professional house painter, then:
a.
Dana has a comparative advantage in house painting.
b.
Dana has an absolute advantage in house painting.
c.
Luke has a comparative advantage in house painting.
d.
Luke has an absolute advantage in house painting.
e.
Dana should always paint his own house.
 
 
Exhibit 18-3 Potatoes and wheat output (tons per day)

Country
Potatoes
Wheat
United States
4
2
Ireland
3
1
 

113. 

In Exhibit 18-3, the United States has a comparative advantage in producing:
a.
potatoes.
b.
wheat.
c.
both.
d.
neither.
 

114. 

If each nation in Exhibit 18-3 specializes in producing the good for which it has a comparative advantage, then:
a.
Ireland would produce neither potatoes or wheat.
b.
the United States would produce both potatoes and wheat.
c.
the United States would produce potatoes.
d.
Ireland would produce potatoes.
 
 
Exhibit 18-4 Coffee and tea output (pounds per hour)

Country
Coffee
Tea
Brazil
10 
5
China
8
8
 

115. 

As shown in Exhibit 18-4, the opportunity cost to Brazil of producing one pound of coffee is:
a.
1 pound of tea.
b.
5 pounds of tea.
c.
1/2 pound of tea.
d.
10 pounds of tea.
 

116. 

If specialization were carried out by each country in Exhibit 18-4 on the basis of comparative advantage, then:
a.
Brazil would produce neither coffee or tea.
b.
China would produce both coffee and tea.
c.
Brazil would produce tea and China would produce coffee.
d.
Brazil would produce coffee and China would produce tea.
 

117. 

A tariff is a tax on ________ goods that is designed to ________.
a.
exported; protect domestic industries
b.
exported; hurt foreign industries
c.
imported; made domestic consumers pay more
d.
imported; protect domestic industries
e.
domestic; discourage imports
 

118. 

The WTO was:
a.
formed shortly after World War II.
b.
authorized in the American Constitution.
c.
formed in 1994.
d.
formed in 1876.
e.
formed to unify the European continent.
 

119. 

The rules of the WTO:
a.
apply only to domestic trade within a nation.
b.
apply to both domestic trade within a nation and international trade with other nations.
c.
apply only to trade among nations.
d.
include a prohibition of tariffs.
e.
encourage high tariffs.
 

120. 

The principal objective of WTO is to:
a.
reduce the level of all tariffs.
b.
establish fair prices for all goods traded internationally.
c.
act as the world's police officer to prevent dumping.
d.
prevent the trading of services across nations' borders.
e.
encourage countries to establish quotas.
 

121. 

A limit on the quantity of a good that may be imported in a given time period is called:
a.
an embargo.
b.
a tariff.
c.
a quota.
d.
dumping.
 

122. 

The infant industry argument is based on the idea that:
a.
competitive pressure from established foreign firms would encourage the infant industry's prospects for future growth.
b.
failure to shelter these infant industries tends to lead to political instability.
c.
small firms must be protected.
d.
none of the above.
 

123. 

Trade restrictions imposed in the name of national security have been recommended by protectionists in order to:
a.
develop strong defense-related industries.
b.
avoid dependence on foreign suppliers during wartime.
c.
reduce the necessity of stockpiling strategic supplies.
d.
all of the above.
 

124. 

The main explanation for why the cheap foreign labor argument is a poor reason for restricting international trade is that:
a.
workers who get paid less tend to have lower productivity than those who get paid more.
b.
all firms and workers gain when there are no restrictions on international trade.
c.
infant industries such as steel and automobiles need to be protected.
d.
specialization and free trade usually raise the prices of all the traded goods, so that the workers can get paid more.
e.
labor costs tend to be the same worldwide in the long run because of worker mobility.
 

125. 

The term "balance of payments" refers to a nation's:
a.
goods exports minus imports.
b.
record of all international transactions.
c.
capital inflows minus outflows.
d.
official reserves inflows minus outflows.
 

126. 

The account which records a nation's foreign economic transactions is called:
a.
the Trade Account.
b.
the Stock Market.
c.
the Exchange Market.
d.
the Balance of Payments.
e.
a bill of lading.
 

127. 

The balance of payments ____________.
a.
b and e
b.
is always zero
c.
is positive when the nation runs a trade surplus
d.
is negative when the nation runs a trade deficit
e.
is an itemized account of a nation's foreign economic transactions
 

128. 

The balance of payments ____________.
a.
b and e
b.
is always zero
c.
with some nations is different than it is with others
d.
is negative when the nation runs a trade deficit
e.
can only be expanded when the government has foreign exchange reserves
 

129. 

The term "balance of trade" refers to the:
a.
importing and exporting of goods.
b.
importing and exporting of goods and services.
c.
current account trade balance.
d.
capital outflows minus inflows.
 

130. 

A favorable balance of trade occurs when:
a.
exports equal imports.
b.
the balance of payments balances.
c.
the current and capital account in the BOP are equal.
d.
the value of the exports of goods exceeds the value of the imports of goods.
e.
the value of the exports of goods is less than the value of the imports of goods .
 

131. 

An unfavorable balance of trade occurs when:
a.
exports equal imports.
b.
the balance of payments balances.
c.
the current and capital account in the BOP are equal.
d.
the value of the exports of goods exceeds the value of the imports of goods.
e.
the value of the exports of goods is less than the value of the imports of goods .
 

132. 

When the value of our goods exports is less than the value of our goods imports,
a.
d and e.
b.
the value of the dollar must fall.
c.
there will be domestic unemployment.
d.
there will be an unfavorable balance of trade.
e.
foreign currency reserves must fall.
 

133. 

The balance of trade is measured by which of the following expressions?
a.
The value of exported goods and services minus the value of imported goods and services
b.
The value of income receipts on investments minus income payments on investments
c.
The value of goods exports minus the value of goods imports
d.
The value of government spending minus the value of all taxes received
e.
The balance on capital account plus the balance on current account
 

134. 

A U.S. citizen's gift for famine relief in Somalia would be considered a:
a.
capital inflow.
b.
capital outflow.
c.
current account transaction.
d.
service trade transaction.
 

135. 

If Japan has a current account surplus, then it must:
a.
have an offsetting capital account deficit.
b.
also have a surplus in its capital account.
c.
import more goods than it exports.
d.
have a positive balance of payments.
 

136. 

Which of the following would not be counted in the U.S. BOP current account?
a.
Helen, an American oil engineer, is a paid adviser to Middle Eastern countries in the area of petroleum extraction.
b.
General Motors Corporation owns buildings that are situated in Mexico.
c.
France purchases a new jet fighter aircraft from the Boeing Company in the U.S.
d.
Martha receives a $50 dividend check on stock she owns in a business in Germany.
e.
A wealthy Italian purchases numerous antiques in the United States for his villa.
 

137. 

Flexible, or floating, exchange rate is determined by the:
a.
World Bank.
b.
forces of supply and demand.
c.
price of gold.
d.
Federal Reserve.
 

138. 

If the exchange rate of yen for dollars increases from 100 yen = $1 to 110 yen = $1, then:
a.
Japanese-produced goods would become more expensive.
b.
the dollar has depreciated.
c.
the yen has appreciated.
d.
U.S.-produced goods would become more expensive.
e.
U.S. exports would increase.
 

139. 

If the exchange rate between the yen and the dollar changes from 100 yen = $1 to 110 yen = $1, then:
a.
the dollar has depreciated in value.
b.
U.S.-made goods will become less expensive to Japanese citizens.
c.
the dollar has appreciated in value.
d.
Japanese-made goods will become more expensive to U.S. citizens.
e.
there will be an increase in the demand for dollars in the foreign exchange market.
 

140. 

Suppose a U.S.-made machine costs $500 and the exchange rate is 100 yen = $1. A Japanese citizen purchasing this machine would pay:
a.
100 yen.
b.
500 yen.
c.
5,000 yen.
d.
10,000 yen.
e.
50,000 yen.
 

141. 

The exchange rate is the:
a.
value of money.
b.
quantity of dollars, yen, etc. that are traded.
c.
amount of a foreign currency that is brought back to the United States by tourists.
d.
number of units of your currency that it takes to buy one unit of a foreign currency.
e.
number of units of a foreign currency that can be bought with one unit of your own currency.
 
 
Exhibit 18-6 Dollars per British pound

Quantity
Demanded
Dollars
per Pound
Quantity
Supplied
200
5
600
240
4
480
300
3
410
360
2
360
390
1
330
 

142. 

In Exhibit 18-6, the equilibrium exchange rate is:
a.
5.
b.
4.
c.
3.
d.
2.
e.
1.
 

143. 

In Exhibit 18-6, when the exchange rate is 3 dollars per pound,
a.
there is an excess supply of 110 pounds.
b.
there is an excess demand of 110 pounds.
c.
there is an excess supply of 110 dollars.
d.
there is an excess demand of 110 dollars.
e.
the market is in equilibrium.
 

144. 

In Exhibit 18-6, when the exchange rate is 1 dollar per pound,
a.
the market is in equilibrium.
b.
there is a surplus of 30 pounds.
c.
there is a surplus of 60 pounds.
d.
there is a shortage of 30 pounds.
e.
there is a shortage of 60 pounds.
 

145. 

An appreciation in the U.S. dollar benefits which of the following groups of people?
a.
All people living in the United States
b.
U.S. producers who export farm equipment to other countries
c.
U.S. consumers who buy imported automobiles
d.
Foreigners who wish to travel to the United States
e.
U.S. consumers who buy only goods made entirely in the United States
 

146. 

Which of the following changes in the exchange rate represents an appreciation of the dollar?
a.
100 yen = $1 to 90 yen = $1
b.
1 yen = $.10 to 1 yen = $.08
c.
1 lira = $3 to 1 lira = $4
d.
$1 = 25 mark to $1 = 20 mark
e.
200 francs = $10 to 190 francs = $10
 

147. 

An increase in the real rate of interest that can be earned on U.S. investments above the rate that can be earned on German investments would:
a.
increase the price of the dollar in German marks.
b.
increase the supply of dollars by those holding U.S. dollars.
c.
decrease the equilibrium exchange rate of German marks per dollar.
d.
all of the above.
 

148. 

An increase in the equilibrium price of Japanese yen per dollar could be caused by a (an):
a.
increase in the general level of prices in Japan.
b.
increase in the U.S. demand for domestically-built automobiles.
c.
decrease in the U.S. income relative to the income in Japan.
d.
increase in the supply of dollars on the foreign market.
 

149. 

If the dollar appreciates (becomes stronger) this causes:
a.
the relative price of U.S. goods to increase for foreigners.
b.
the relative price of foreign goods to decrease for Americans.
c.
U.S. exports to fall and U.S. imports to rise.
d.
a balance of trade deficit for the U.S.
e.
all of the above.
 
 
Exhibit 18-7 Foreign exchange market for U.S. dollars and British pounds

internet_study_guid_files/i1650000.jpg
 

150. 

Exhibit 18-7 shows a situation in which:
a.
both the dollar and the pound have depreciated.
b.
both the dollar and the pound have appreciated.
c.
the dollar has depreciated and the pound has appreciated.
d.
the dollar has appreciated and the pound has depreciated.
 



 
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