Economics- money supply

1) As the interest rate falls, people hold ________ money in non-interest-bearing checking accounts instead of savings accounts because the opportunity cost of holding money has ________.

  1. A) more; fallen
  2. B) less; fallen
  3. C) less; risen
  4. D) more; risen

Answer:  A

 

2) If interest rates increase to a very high level, people will most likely hold

  1. A) more money in savings accounts and less cash.
  2. B) less money in savings accounts and less cash.
  3. C) less money in savings accounts and more cash.
  4. D) more money in savings accounts and more cash.

Answer:  A

 

3) Which of the following will most likely cause a decrease in the quantity of money demanded?

  1. A) an increase in the price level
  2. B) an increase in the interest rate
  3. C) an increase in nominal income
  4. D) a decrease in the interest rate

Answer:  B

 

Refer to the information provided in Figure 10.2 below to answer the questions that follow.

 

 

Figure 10.2

 

4) Refer to Figure 10.2. Suppose money demand is currently at Point A. An increase money demand could be caused by

  1. A) an increase in the interest rate.
  2. B) an increase in nominal income.
  3. C) a decrease in the interest rate.
  4. D) a decrease in nominal income.

Answer:  B

5) Refer to Figure 10.2. Suppose money demand is currently at Point A. A decrease in the interest rate to 5%, ceteris paribus, will likely

  1. A) decrease the quantity of money demanded from $200 million to $100 million.
  2. B) increase the quantity of money demanded from $100 million to $200 million.
  3. C) increase the quantity of money demanded from $100 million to $150 million.
  4. D) increase the quantity of money demanded from $150 million to $300 million.

Answer:  C

 

6) Refer to Figure 10.2. Suppose the money demand is currently at Point D.  A movement to point C could be caused by

  1. A) a decrease in the interest rate.
  2. B) a decrease in nominal income.
  3. C) an increase in the interest rate.
  4. D) an increase in the price level.

Answer:  B

 

7) Refer to Figure 10.2. Suppose that money demand is currently at Point B.  A movement to Point D could be caused by

  1. A) an increase in nominal income, ceteris paribus.
  2. B) an increase in the price level, ceteris paribus.
  3. C) a decrease in the price level, ceteris paribus.
  4. D) a decrease in the interest rate, ceteris paribus.

Answer:  D

 

8) Refer to Figure 10.2. An increase in nominal income could be represented by a movement from Point ________ to Point ________.

  1. A) A; C
  2. B) A; B
  3. C) B; A
  4. D) B; D

Answer:  B

 

9) Which of the following causes the quantity of money demanded to increase?

  1. A) an increase in nominal income
  2. B) a decrease in nominal income
  3. C) a decrease in the price level
  4. D) a decrease in the interest rate

Answer:  D

 

 

 

 

 

 

 

 

10 As the interest rate rises, people hold ________ money in non-interest-bearing checking accounts instead of savings accounts because the opportunity cost of holding money has ________.

  1. A) more; fallen
  2. B) less; fallen
  3. C) less; risen
  4. D) more; risen

Answer:  C

 

11) If interest rates decrease to a very low level, people will most likely hold

  1. A) more money in savings accounts and less cash.
  2. B) less money in savings accounts and less cash.
  3. C) less money in savings accounts and more cash.
  4. D) more money in savings accounts and more cash.

Answer:  C

 

12) Which of the following instruments is not used by the Federal Reserve to change the money supply?

  1. A) the discount rate
  2. B) the required reserve ratio
  3. C) the federal tax code
  4. D) open market operations

Answer:  C

 

13) The Fed uses open market operations to

  1. A) determine the required reserve ratio.
  2. B) determine the discount rate.
  3. C) buy or sell government securities.
  4. D) determine the federal funds rate.

Answer:  C

 

14) The discount rate is

  1. A) the interest rate commercial banks charge each other for borrowing funds.
  2. B) the interest rate commercial banks charge their new customers.
  3. C) the interest rate the Fed charges commercial banks for borrowing funds.
  4. D) the interest rate commercial banks charge their most creditworthy customers.

Answer:  C

 

15) A decrease in the required reserve ratio

  1. A) will increase the money supply.
  2. B) will decrease the money supply.
  3. C) will not change the money supply.
  4. D) will decrease the discount rate.

Answer:  A

 

 

16) The interest rate banks pay to borrow money from the Fed is the

  1. A) federal funds rate.
  2. B) discount rate.
  3. C) prime lending rate.
  4. D) reserve rate.

Answer:  B

 

17) Which of the following represents an action by the Federal Reserve that is designed to increase the money supply?

  1. A) buying government securities in the open market
  2. B) an increase in the required reserve ratio
  3. C) a decrease in federal spending
  4. D) an increase in the discount rate

Answer:  A

 

18) An open-market sale of securities by the Fed results in ________ in reserves and ________ in the supply of money.

  1. A) an increase; a decrease
  2. B) an increase; an increase
  3. C) a decrease; an increase
  4. D) a decrease; a decrease

Answer:  D

 

19) The money supply has increased from $1.4 trillion to $1.45 trillion. Which of the following could have caused this increase?

  1. A) The Fed sold government securities to the public.
  2. B) Consumers who were holding money outside the banking system deposit this money.
  3. C) The Fed increased the discount rate.
  4. D) Commercial banks began to hold excess reserves.

Answer:  B

 

20) When the Fed lowers the required reserve ratio, the banks’ excess reserves ________ and the money supply ________.

  1. A) remain constant; decreases
  2. B) decrease; decreases
  3. C) increase; remains constant
  4. D) increase; increases

Answer:  D

 

21) An intended goal of contractionary fiscal policy and a tightening of monetary policy is

  1. A) an increase in interest rates.
  2. B) an increase in the price level.
  3. C) a decrease in the unemployment rate.
  4. D) a decrease in the level of aggregate output.

Answer:  D

 

22) An intended goal of expansionary fiscal policy and an easing of monetary policy is

  1. A) an increase in interest rates.
  2. B) an increase in the price level.
  3. C) the equalization of the distribution of income.
  4. D) an increase in the level of aggregate output.

Answer:  D

 

23) Suppose the Federal Reserve sells Treasury bills. We can expect this transaction to _____ the money supply, _____ Treasury bill prices, and _____ interest rates.

  1. A) reduce; increase; lower
    B) increase; lower; lower
    C) reduce; reduce; raise
    D) increase; raise; lower
    Answer: C

 

24) If the Federal Reserve wants to lower the interest rate, it will:

  1. A) increase the money supply.
    B) keep the money supply unchanged.
    C) mandate a lower interest rate.
    D) decrease the money supply.
    Answer: A

 

25) Which of the following describes the difference between the Taylor rule and inflation targeting?

  1. A) Inflation targeting is used in conducting fiscal policy, while the Taylor rule is used in monetary policy.
    B) Inflation targeting responds to past inflation, and the Taylor rule is based on a forecast of inflation.
    C) The Taylor rule responds to past inflation, and inflation targeting is based on a forecast of inflation.
    D) The Federal Reserve uses inflation targeting, and the Bank of England uses the Taylor rule.
    Answer: C

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