Name: 
 

STUDY GUIDE FOR EXAM 3 -MACRO Fall 2004 Chapters 15 and 16



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

1. 

A bank's "required reserves" are:
a.
held as deposits with the Federal Reserve System.
b.
equal to its checkable deposits.
c.
equal to its transactions deposits.
d.
none of the above.
 

2. 

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.
 

3. 

A bank faces a required reserve ratio of 5 percent. If the bank has $200 million of checkable deposits and $15 million of total reserves, then how large are the bank's excess reserves?
a.
$0.
b.
$5 million.
c.
$10 million.
d.
$15 million.
 

4. 

Which of the following would be classified as a liability for a bank?
a.
Required reserves.
b.
Excess reserves.
c.
Loans.
d.
Checkable deposits.
 

5. 

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.
 

6. 

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.
 

7. 

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.
 

8. 

A banking system that provides people immediate access to their deposits, but that allows banks to hold only a portion of those deposits on reserve, is known as:
a.
an excess reserve system.
b.
a fractional reserve system.
c.
the Fed.
d.
the FDIC.
e.
an asset-based system.
 

9. 

If loans are $300,000, checkable deposits are $600,000, and the required reserve ratio is 40 percent, then excess reserves are:
a.
$360,000.
b.
$240,000.
c.
$120,000.
d.
$60,000.
e.
$30,000.
 

10. 

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.
 

11. 

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 15-1 Balance sheet of First Iliad State Bank

Assets
Liabilities
Required reserves     $1,000,000
Demand deposits   $10,000,000
Excess reserves                0
 
Loans                 $_________
 
 

12. 

In Exhibit 15-1, if the required reserve ratio is raised to 18 percent, then First Iliad State will:
a.
have to convert loans worth $800,000 to required reserves.
b.
have to convert loans worth $200,000 to required reserves.
c.
be able to make additional loans worth $800,000.
d.
be able to make additional loans worth $200,000.
 
 
Exhibit 15-2 Balance Sheet of Springfield National Bank

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

13. 

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.
 

14. 

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.
 

15. 

If a bank has actual reserves of $40,000 and a 20 percent reserve requirement, then the maximum amount of checkable deposits the bank can have if excess reserves are zero is:
a.
$100,000.
b.
$80,000.
c.
$300,000.
d.
$20,000.
e.
$200,000.
 

16. 

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.
 

17. 

Assume we have a simplified banking system in balance-sheet equilibrium. Also assume that all banks are subject to a uniform 10 percent reserve requirement and checkable deposits are the only form of money. A commercial bank receiving a new checkable deposit of $100 would be able to extend new loans in the amount of:
a.
$10.
b.
$90.
c.
$100.
d.
$1,000.
 

18. 

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 loan balance can increase by a maximum of:
a.
$0.
b.
$90.
c.
$100.
d.
$900.
e.
$910.
 

19. 

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 Odyssey National can increase the money supply by:
a.
$900.
b.
$910.
c.
$1,000.
d.
$9,000.
e.
$10,000.
 

20. 

Best National Bank operates with a 20 percent required-reserve ratio. One day a depositor withdraws $500 from his or her checking account at this bank. As a result, the bank's excess reserves:
a.
fall by $500.
b.
fall by $400.
c.
rise by $100.
d.
rise by $500.
 

21. 

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.
 

22. 

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.
 

23. 

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.
 

24. 

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.
 

25. 

If the Fed wishes to increase the money supply then it should:
a.
increase the required reserve ratio.
b.
increase the discount rate.
c.
buy government securities on the open market.
d.
do any of the above.
 

26. 

Which of the following is an appropriate monetary policy if the Fed wants to increase the money supply?
a.
An increase in the required reserve ratio.
b.
An increase in the discount rate.
c.
Purchases of bonds in open market operations.
d.
Higher taxes on interest income.
 

27. 

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.
 

28. 

The cost to a member bank of borrowing from the Federal Reserve is measured by the:
a.
reserve requirement.
b.
price of securities in the open market.
c.
discount rate.
d.
yield on government bonds.
 

29. 

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

30. 

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.
 

31. 

What interest rate does a bank pay when it borrows reserves from the Fed?
a.
The discount rate.
b.
The prime rate.
c.
The federal funds rate.
d.
The required reserve rate.
 

32. 

Which of the following statements is true?
a.
The simple money multiplier equals the reciprocal of the required reserve ratio.
b.
Required reserves is the minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed.
c.
The Discount rate is the interest rate charged banks for loans from the Fed.
d.
Excess reserves equal total reserves minus required reserves.
e.
All of the above.
 

33. 

When the Fed raises the discount rate, 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.
 

34. 

The federal funds market is the market where:
a.
the federal government borrows money from banks to finance the national debt.
b.
the federal government lends money to commercial banks.
c.
banks borrow money from other banks for short periods of time.
d.
banks borrow money from the Fed for short periods of time.
e.
banks borrow money from the Treasury for long periods of time.
 

35. 

Which of the following actions by the Fed would increase the money supply?
a.
Reducing the required-reserve ratio.
b.
Selling government bonds in the open market.
c.
Increasing the discount rate.
d.
None of the above.
 

36. 

A decrease in the required reserve ratio will:
a.
reduce commercial bank loans and reduce the money supply.
b.
increase commercial bank loans and reduce the money supply.
c.
increase commercial bank loans and increase the money supply.
d.
decrease commercial bank loans and increase the money supply.
 

37. 

When the Fed lowers the required reserve ratio, 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.
 

38. 

An increase in required-reserve ratio by the Federal Reserve would:
a.
cause M1 to contract.
b.
cause M1 to expand.
c.
have no effect on M1 or M2.
d.
affect only M2, not M1.
 

39. 

When the Fed raises the required reserve ratio, then the:
a.
ability of banks to make loans is restricted.
b.
ability of banks to make loans is enhanced.
c.
ability of banks to make loans is unaffected.
d.
interest rate that banks pay to the Fed to borrow money is increased.
e.
interest rate that banks pay to other banks to borrow money is increased.
 

40. 

When the Fed decreases the required reserve ratio, then the:
a.
ability of banks to make loans is restricted.
b.
ability of banks to make loans is enhanced.
c.
ability of banks to make loans is unaffected.
d.
interest rate that banks pay to the Fed to borrow money is reduced.
e.
interest rate that banks pay other banks to borrow money is decreased.
 

41. 

Assume that the Paris First National Bank currently has deposits of $20 million. If the current required reserve ratio is raised from 20 percent to 40 percent, then:
a.
Paris First National Bank does not have to comply with the Federal Reserve mandate.
b.
required reserves will decrease from $16 million to $12 million.
c.
excess reserves will automatically increase by $20 million.
d.
Paris First National Bank must close out 4 million in loans.
e.
Paris First National Bank must increase its required reserves from $4 million to $8 million.
 

42. 

Assume that the Paris First National Bank's loan position contracted from $16 million to $12 million. If the required reserve ratio was increased from 20 percent to 40 percent, how much would the money supply shrink?
a.
$5 million.
b.
$10 million.
c.
$15 million.
d.
$20 million.
e.
$24 million.
 

43. 

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.
 

44. 

Which of the following would cause the money supply to expand?
a.
An open market purchase by the Fed.
b.
A reduction in the discount rate.
c.
A reduction in required ratios.
d.
All of the above.
 

45. 

When a recession hits, we would expect the government to run a budget deficit by raising the level of its spending or by cutting taxes, or perhaps both. 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.
 

46. 

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.
 

47. 

If there is no one who is interested in borrowing from a bank,
a.
the bank's excess reserves will be zero.
b.
there will be no process of money creation.
c.
the required reserve ratio must be equal to zero.
d.
the required reserve ratio must be equal to 100 percent.
 
 
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
 

48. 

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.
 

49. 

Assume all banks in the system started with balance sheets as shown in Exhibit 15-3 and the Fed made a $100,000 open-market purchase. The result would be a (an):
a.
$500,000 expansion of the money supply.
b.
$100,000 expansion of the money supply.
c.
$20,000 contraction of the money supply.
d.
infinite contraction of the money supply.
e.
infinite expansion of the money supply.
 
 
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
 

50. 

The required-reserve ratio in Exhibit 15-4 is:
a.
5 percent.
b.
10 percent.
c.
15 percent.
d.
20 percent.
 

51. 

Suppose Connie Rich deposits $500 in the bank in Exhibit 15-4. The result would be that the bank must increase its required reserves to:
a.
$4,100.
b.
$4,500.
c.
$5,100.
d.
$5,500.
 
 
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
 

52. 

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.
 

53. 

Suppose Brad Jones deposits $20,000 into his checking account in the bank shown in Exhibit 15-5. The result would be that the bank must increase its required reserves to:
a.
$ 5,000.
b.
$20,000.
c.
$25,000.
d.
$30,000.
 

54. 

Economists estimate that the total lag for monetary policy is about.
a.
1-2 days.
b.
2 weeks to 1 month.
c.
3-12 months.
d.
2-4 years.
 
 
Exhibit 15-6c Balance sheet of Tucker National Bank

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

55. 

Suppose Connie Rich deposits $100,000 into her checking account in the bank shown in Exhibit 15-6c. The result would be a:
a.
zero change in required reserves.
b.
$10,000 increase in required reserves.
c.
$100,000 increase in required reserves.
d.
$20,000 increase in excess reserves.
 
 
Exhibit 15-7 Lower Walloon National Bank

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

56. 

In Exhibit 15-7, if the required reserve ratio is 20 percent, the Lower Walloon National bank has excess reserves of:
a.
$2,000.
b.
$8,000.
c.
$0.
d.
$10,000.
e.
$40,000.
 

57. 

In Exhibit 15-7, if Lower Walloon National bank loans out all of its excess reserves to James Brown so that Mr. Brown can upgrade his restaurant, and the money is put into Mr. Brown's account at the Lower Walloon National bank, then the bank will have reserves of:
a.
$10,000, loans of $8,000, and checkable deposits of $18,000.
b.
$2,000, loans of $4,000, and checkable deposits of $14,000.
c.
$6,000, loans of $4,000, and checkable deposits of $10,000.
d.
$10,000, loans of $8,000, and checkable deposits of $10,000.
e.
$0, loans of $8,000, and checkable deposits of $18,000.
 

58. 

In Exhibit 15-7, if Mr. Brown pays out all of the proceeds of the loan to Mr. John White who is going to make the renovations of the restaurant, the Lower Walloon National bank will now have:
a.
$6,000 in reserves, $4,000 in loans, and $10,000 in checkable deposits.
b.
$2,000 in reserves, $4,000 in loans, and $10,000 in checkable deposits.
c.
$2,000 in reserves, $8,000 in loans, and $10,000 in checkable deposits.
d.
$0 in reserves, $8,000 in loans, and $10,000 in checkable deposits.
e.
$10,000 in reserves, $8,000 in loans, and $2,000 in checkable deposits.
 

59. 

People learn to hold a specific quantity of money for the groceries, theater tickets, gasoline, clothes, film, and other items they habitually purchase. This behavior is representative of the:
a.
precautionary demand.
b.
speculative demand.
c.
transactions demand.
d.
volatility demand.
e.
liquidity demand.
 

60. 

One reason that people hold money is to pay for unexpected car repairs and other unpredictable expenses. This motive for holding money is called:
a.
transactions demand.
b.
precautionary demand.
c.
speculative demand.
d.
noncyclical demand.
 

61. 

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.
 

62. 

Keynes called the money people hold in order to buy bonds, stocks, or other nonmoney financial assets the:
a.
transactions demand for holding money.
b.
precautionary demand for holding money.
c.
speculative demand for holding money.
d.
unit of account demand for holding money.
 

63. 

The speculative demand for money is the stock of money that people hold to:
a.
pay their predictable, everyday expenses.
b.
pay for any unexpected expenses that may occur.
c.
buy stocks, bonds, and other financial assets.
d.
buy the foreign currencies needed to purchase imports.
 

64. 

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.
 

65. 

The speculative demand for money shows the relationship between money demand and :
a.
income levels.
b.
interest rates.
c.
prices
d.
investment.
e.
consumption.
 

66. 

In a two-asset economy with money and T-bills, the quantity of money that people will want to hold, other things being equal, can be expected to:
a.
decrease as real GDP increases.
b.
increase as the interest rate decreases.
c.
increase as the interest rate increases.
d.
all of the above.
 

67. 

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.
 

68. 

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.
 

69. 

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.
 

70. 

Assume a fixed demand for money curve and the Fed increases the money supply. The result is a temporary:
a.
excess quantity of money demanded.
b.
excess quantity of money supplied.
c.
new equilibrium interest rate.
d.
decrease in the demand for loans.
 

71. 

If the Fed wants to raise interest rates, then it can use its open market operations to:
a.
increase the money supply.
b.
decrease the money supply.
c.
increase money demand.
d.
decrease money demand.
 

72. 

Which of the following policies could the Fed use to lower the interest rate?
a.
A tax cut.
b.
Selling government securities.
c.
Raising the discount rate.
d.
Reducing the required reserve ratio.
 

73. 

An increase in the money supply is represented by a (an):
a.
rightward shift of the downward-sloping money supply curve.
b.
upward shift of the money supply curve.
c.
rightward shift of the money supply curve.
d.
increase in the rate of interest.
 

74. 

When the Fed expands the money supply, interest rates:
a.
rise.
b.
fall.
c.
are unaffected.
d.
rise and then fall.
e.
fall and then rise.
 

75. 

Assume the demand for money curve is stationary and the Fed increases the money supply. The result is that people:
a.
increase the supply of bonds, thus driving up the interest rate.
b.
increase the supply of bonds, thus driving down the interest rate.
c.
increase the demand for bonds, thus driving up the interest rate.
d.
increase the demand for bonds, thus driving down the interest rate.
 

76. 

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.
 

77. 

The Keynesian mechanism through which monetary policy affects the price level, real GDP, and employment depends on the impact of the:
a.
interest rate on savings.
b.
inflation on investment.
c.
interest rate on investment.
d.
interest rate on bond prices.
 

78. 

If the economy is inflationary, 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 lowering the discount rate.
d.
decrease bank reserves by selling government securities.
e.
decrease bank reserves by lowering the legal reserve requirement.
 

79. 

Keynesian economists argue that monetary policy works through its effects on:
a.
interest rates and investment.
b.
price- and wage-flexibility.
c.
budget deficits and trade deficits.
d.
the spending and money multipliers.
 

80. 

According to Keynesians, an increase in the money supply will:
a.
decrease the interest rate, and increase investment, aggregate demand, prices, real GDP, and employment.
b.
decrease the interest rate, and decrease investment, aggregate demand, prices, real GDP, and employment.
c.
increase the interest rate, and decrease investment, aggregate demand, prices, real GDP, and employment.
d.
only increases prices.
 
 
Exhibit 16-4 Aggregate demand and supply model

study_guide_for_exa_files/i0890000.jpg
 

81. 

In Exhibit 16-4, which one of the following actions could the Fed use to shift the AD curve from AD1 to AD2?
a.
Raise the legal reserve requirement.
b.
Raise the discount rate.
c.
Lower the federal funds rate.
d.
Buy government securities.
e.
Print currency.
 

82. 

In Exhibit 16-4, which one of the following actions could the Fed use to shift the AD curve from AD3 to AD2?
a.
Lower the discount rate.
b.
Lower the federal funds rate
c.
Raise the federal funds rate.
d.
Raise the legal reserve requirement
e.
Buy government securities.
 
 
Exhibit 16-6 Money, investment and product markets

study_guide_for_exa_files/i0920000.jpg
 

83. 

In Exhibit 16-6, if the Fed believes the economy is at AD3, how might it engineer a decline in the price level?
a.
B decreasing the money supply, the interest rate falls, investment rises, and aggregate demand falls, causing the price level to fall.
b.
By decreasing the money supply, the interest rate rises, investment rises, and aggregate demand rises, causing the price level to fall.
c.
By decreasing the money supply, the interest rate rises, investment falls, and aggregate demand falls, causing the price level to fall.
d.
By increasing the money supply, the interest rate rises, investment rises, and aggregate demand falls, causing the price level to fall.
e.
By increasing the money supply, the interest rate rises, investment falls, and aggregate demand rises, causing the price level to fall.
 

84. 

Monetarists 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 increase in nominal GDP
e.
an increase in real GDP.
 

85. 

The Monetarist transmission mechanism through which monetary policy affects the price level, real GDP, and employment depends on the:
a.
indirect impact of changes on the interest rate.
b.
indirect impact of changes on profit expectations.
c.
direct impact of changes in fiscal policy on aggregate demand.
d.
direct impact of changes in the money supply on aggregate demand.
 

86. 

The equation of exchange states:
a.
MV = PQ.
b.
MP = VQ.
c.
MP = V/Q.
d.
V = M/PQ.
 

87. 

The V in the equation of exchange represents the:
a.
variation in the GDP.
b.
variation in the CPI.
c.
variation in real GDP.
d.
average number of times per year a dollar is spent on final goods and services.
 

88. 

If the money supply is $250 billion and nominal GDP is $1 trillion, the velocity of money is:
a.
0.25.
b.
0.40.
c.
2.50.
d.
4.00.
 

89. 

According to the quantity theory of money, a 10 percent increase in the money supply leads to a 10 percent increase in:
a.
velocity.
b.
unemployment.
c.
the price level.
d.
real GDP.
 

90. 

According to classical economists,
a.
prices are rigid.
b.
both V and Q are variable for an economy in short-run equilibrium.
c.
changes in M cause changes in V.
d.
the velocity of money is constant.
 

91. 

Since classical economists believe that both V and Q are constants for an economy in short-run equilibrium, the equation of exchange becomes a theory in which:
a.
the quantity of money explains prices.
b.
the quantity of money explains velocity.
c.
the quantity of money explains real GDP.
d.
changes in M cause changes in V.
e.
prices are never flexible
 

92. 

Since classical economists and monetarists believe that the economy operates at full employment, real GDP, that is, along the vertical segment of aggregate supply,
a.
any increase in the money supply can only end up raising the price level.
b.
any increase in the money supply can only end up lowering the price level.
c.
any decrease in the money supply can only end up raising the price level.
d.
changes in the money supply will not affect the price level.
e.
any increase in the money supply will cause both nominal and real GDP to increase.
 

93. 

The quantity theory of money assumes that the velocity of money:
a.
is constant.
b.
will rise if the money supply rises and fall if the money supply falls.
c.
will rise if the money supply rises, but it will not change if the money supply falls.
d.
will fall if the money supply rises, and it will rise if the money supply falls.
e.
will fall if the money supply rises, but it will not change if the money supply falls.
 

94. 

Monetarists believe that:
a.
velocity is constant.
b.
velocity is highly predictable.
c.
there are three motives for demanding money.
d.
changes in the money supply cause changes in velocity.
e.
a change in the money supply can affect real GDP.
 

95. 

The assumption that the velocity of money and the quantity being produced is constant is held by the:
a.
Keynesian school.
b.
supply-side school.
c.
neo-Keynesian school.
d.
rational expectations school.
e.
classical school.
 

96. 

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
 

97. 

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

98. 

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.
 

99. 

Which of the following is an important issue in the Keynesian-Monetarist debate?
a.
The relative importance of monetary and fiscal policy.
b.
The nature of the transmission mechanism through which a change in the money supply affects the economy.
c.
The shape of the investment-demand curve.
d.
All of the above.
 

100. 

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.
 



 
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