Chapter 12-14

• Assume a country's banking system has limited reserves. In the short run, which of the following would occur to the price of the previously issued bonds and interest rates if a central bank bought bonds through open-market operations?

  Bond Prices: increase

  Interest Rates: decrease
• What would M1 be if the required reserve ratio is 10 percent, actual reserves are $10 million, and currency in circulation is equal to $20 million; assume banks hold no excess reserves, the public holds part of its money in cash and the rest in checking accounts?

  $120 million
• Which of the following most undermines the ability of a nation's currency to store value domestically?

  A: a decrease in the purchasing power of the currency

  B: the use of credit and debit cards as mediums of exchange

  C: an increase in the prices of federal bonds

  D: appreciation of the currency in the international money market

  E: an increase in the supply of foreign currencies in the international money market

  A
• Assume that Atlantic National Bank has demand deposits of $100,000 and no excess reserves, and that the reserve requirement is 10%. A customer withdraws $5,000 from the bank. To meet the reserve requirement, the bank must increase its reserves by $4,500.
• assets liabilities

  total reserves: $15,000 demand deposits: $100,000

  securities: $70,000

  loan: $15,000

  A commercial bank is facing the conditions given above. If the reserve requirement is 12% and the bank does not sell any of its securities, the maximum amount of additional lending this bank can undertake is $3,000.
• 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
• 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%. If Maggie deposits the $100 bill she received as a graduation gift from her grandmother into her checking account, the maximum increase in the total money supply will be $900.
• The required reserve ratio is 0.2 and the central bank sells $1 million in securities. Assuming the banking system has limited reserves, there are no leakages, and banks do not hold excess reserves, then what is the change in money supply?

  a decrease of $5 million
• Which of the following would lead to an increase in nominal interest rates?

  A: an expansionary monetary policy accompanied by an increase in the demand for money

  B: an expansionary monetary policy accompanied by a decrease in the demand for money

  C: an expansionary monetary policy conducted without any change in the demand for money

  D: a contractionary monetary policy accompanied by an increase in the demand for money

  E: a contractionary monetary policy accompanied by a decrease in the demand for money

  D
• 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 which of the following will cause an increase in the demand for money?

  A: the interest rate

  B: the supply of money

  C: the price level

  D: the velocity of money

  E: the trade deficit

  C
• 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
• 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
• 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
• For a country whose banking system has limited reserves, an open-market operation buy the country's central bank to reduce the unemployment rate would be to buy bonds to decrease the interest rate and to increase aggregate demand.
• 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 economy is currently operating at long-run equilibrium. The central bank engages in expansionary monetary policy. How will the central bank's action affect the economy's real output and the price level in the short run?

  Real output will increase, and the price level will increase.
• Assuming ample reserves, the Federal Reserve decreases the federal funds rate by

  A: buying government bonds on the open market

  B: increasing interest on reserves

  C: increasing the discount rate

  D: decreasing the reserve requirement

  E: decreasing its administered interest rates

  E
• A country's economy is in equilibrium at point H (above employment). Which of the following policies would be most effective to reduce the price level in the short run?

  A: increasing the minimum wage

  B: increasing government expenditures

  C: increasing interest on reserves

  D: decreasing the required reserve ratio

  E: decreasing income tax rates

  C
• Assume that the government finances its spending by borrowing from the public. If the government increases deficit spending, the price of previously issued bonds and the real interest rate will change in which of the following ways?

  Price of Bonds: decreases

  Real Interest Rate: increases