Question 1

Refer to the given balance sheets. If the reserve ratio is 25 percent, the maximum money-creating potential of the commercial banking system is

Accepted Answer

A)  $36. 
B)  $17. 
C)  $48. 
D)  $24. 
A)  $36. 
B)  $17. 
C)  $48. 
D)  $24.

Question 2

Accepted Answer

A)  increase the interest rate from 6 percent to 8 percent. 
B)  decrease the interest rate from 6 percent to 4 percent. 
C)  decrease the interest rate from 6 percent to 2 percent. 
D)  maintain the interest rate at 6 percent. 
A)  increase the interest rate from 6 percent to 8 percent. 
B)  decrease the interest rate from 6 percent to 4 percent. 
C)  decrease the interest rate from 6 percent to 2 percent. 
D)  maintain the interest rate at 6 percent.

Question 3

Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately

Accepted Answer

A)  decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million. 
B)  decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $360 million. 
C)  increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $480 million. 
D)  increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $360 million. 
A)  decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $480 million. 
B)  decrease by $120 million with this transaction, and the decrease in money supply could eventually reach a maximum of $360 million. 
C)  increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $480 million. 
D)  increase by $120 million with this transaction, and the increase in money supply could eventually reach a maximum of $360 million.

Question 4

The liquidity trap refers to the situation where

Accepted Answer

A)  the Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand. 
B)  excessive consumer debt limits the growth in consumer spending necessary to bring the economy out of recession. 
C)  the public debt is so large that federal borrowing drives up interest rates and discourages private sector spending. 
D)  a ﬁnancial crisis causes a run on banks and the elimination of billions in excess reserves. 
A)  the Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand. 
B)  excessive consumer debt limits the growth in consumer spending necessary to bring the economy out of recession. 
C)  the public debt is so large that federal borrowing drives up interest rates and discourages private sector spending. 
D)  a ﬁnancial crisis causes a run on banks and the elimination of billions in excess reserves.

Question 5

The Federal Reserve gives much more weight to inﬂation than to unemployment when considering policy actions.

Accepted Answer

A) True 
 B)False

Question 6

Other things equal, an increase in taxes on businesses will

Accepted Answer

A)  increase aggregate supply, decrease aggregate demand, and cause the price level to fall. 
B)  increase aggregate supply, increase aggregate demand, and cause real GDP to rise. 
C)  decrease aggregate supply, decrease aggregate demand, and cause real GDP to fall. 
D)  decrease aggregate supply, increase aggregate demand, and cause the price level to rise. 
A)  increase aggregate supply, decrease aggregate demand, and cause the price level to fall. 
B)  increase aggregate supply, increase aggregate demand, and cause real GDP to rise. 
C)  decrease aggregate supply, decrease aggregate demand, and cause real GDP to fall. 
D)  decrease aggregate supply, increase aggregate demand, and cause the price level to rise.

Question 7

All else equal, when the Federal Reserve Banks engage in a restrictive monetary policy, the prices of government bonds usually

Accepted Answer

A)  fall. 
B)  rise. 
C)  remain constant. 
D)  move in the same direction as the bonds' interest rate yield. 
A)  fall. 
B)  rise. 
C)  remain constant. 
D)  move in the same direction as the bonds' interest rate yield.

Question 8

Which of the following actions by the Fed most likely increase commercial bank lending?

Accepted Answer

A)  raising the reserve ratio 
B)  increasing the federal funds rate target 
C)  reducing the interest paid on excess reserves held at the Fed 
D)  selling bonds to commercial banks and the public 
A)  raising the reserve ratio 
B)  increasing the federal funds rate target 
C)  reducing the interest paid on excess reserves held at the Fed 
D)  selling bonds to commercial banks and the public

Question 9

Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent. If the reserve requirement is now raised to 30 percent, the banking system then has

Accepted Answer

A)  excess reserves of $2 billion. 
B)  neither an excess nor a deﬁciency of reserves. 
C)  a deﬁciency of reserves of $.5 billion. 
D)  excess reserves of only $.5 billion. 
A)  excess reserves of $2 billion. 
B)  neither an excess nor a deﬁciency of reserves. 
C)  a deﬁciency of reserves of $.5 billion. 
D)  excess reserves of only $.5 billion.

Question 10

Which of the following statements is most accurate about the Fed's use of the federal funds rate target since the 2008 ﬁnancial crisis?

Accepted Answer

A)  It stimulated quick recovery from the Great Recession, and the target is now at pre-crisis levels. 
B)  The target has become signiﬁcantly more important as a tool for signaling policy changes. 
C)  The Fed effectively lost the ability to use the target for monetary policy since there is a lack of reserves today. 
D)  The Fed effectively lost the ability to use the target for monetary policy since banks no longer have a problem meeting their reserve requirement. 
A)  It stimulated quick recovery from the Great Recession, and the target is now at pre-crisis levels. 
B)  The target has become signiﬁcantly more important as a tool for signaling policy changes. 
C)  The Fed effectively lost the ability to use the target for monetary policy since there is a lack of reserves today. 
D)  The Fed effectively lost the ability to use the target for monetary policy since banks no longer have a problem meeting their reserve requirement.

Question 11

Accepted Answer

A)  decrease the interest rate from 10 to 8 percent. 
B)  decrease the interest rate from 8 to 6 percent. 
C)  decrease the interest rate from 6 to 4 percent. 
D)  increase investment spending from $30 to $60 billion. 
A)  decrease the interest rate from 10 to 8 percent. 
B)  decrease the interest rate from 8 to 6 percent. 
C)  decrease the interest rate from 6 to 4 percent. 
D)  increase investment spending from $30 to $60 billion.

Question 12

The opportunity cost of holding money

Accepted Answer

A)  is zero because money is not an economic resource. 
B)  varies inversely with the interest rate. 
C)  varies directly with the interest rate. 
D)  varies inversely with the level of economic activity. 
A)  is zero because money is not an economic resource. 
B)  varies inversely with the interest rate. 
C)  varies directly with the interest rate. 
D)  varies inversely with the level of economic activity.

Question 13

If, in the market for money, the amount of money supplied exceeds the amount of money households and businesses want to hold, the interest rate will

Accepted Answer

A)  fall, causing households and businesses to hold less money. 
B)  rise, causing households and businesses to hold less money. 
C)  rise, causing households and businesses to hold more money. 
D)  fall, causing households and businesses to hold more money. 
A)  fall, causing households and businesses to hold less money. 
B)  rise, causing households and businesses to hold less money. 
C)  rise, causing households and businesses to hold more money. 
D)  fall, causing households and businesses to hold more money.

Question 14

Accepted Answer

A)  increase aggregate demand by increasing the interest rate. 
B)  decrease aggregate demand by increasing the interest rate. 
C)  increase aggregate demand by decreasing the interest rate. 
D)  make no change in the interest rate. 
A)  increase aggregate demand by increasing the interest rate. 
B)  decrease aggregate demand by increasing the interest rate. 
C)  increase aggregate demand by decreasing the interest rate. 
D)  make no change in the interest rate.

Question 15

If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be

Accepted Answer

A)  $1,800 billion. 
B)  $600 billion. 
C)  $200 billion. 
D)  $1,200 billion. 
A)  $1,800 billion. 
B)  $600 billion. 
C)  $200 billion. 
D)  $1,200 billion.

Question 16

Which of the following will increase commercial bank reserves?

Accepted Answer

A)  the purchase of government bonds in the open market by the Federal Reserve Banks 
B)  a decrease in the reserve ratio 
C)  an increase in the discount rate 
D)  the sale of government bonds in the open market by the Federal Reserve Banks 
A)  the purchase of government bonds in the open market by the Federal Reserve Banks 
B)  a decrease in the reserve ratio 
C)  an increase in the discount rate 
D)  the sale of government bonds in the open market by the Federal Reserve Banks

Question 17

$$\begin{array} { | c | c | c | c | } 
\hline \text { Money Supply } & \text { Money Demand } & \text { Interest Rate } & \begin{array} { c } 
\text { Investment (at Interest } \
\text { Rate Shown) }
\end{array} \
\hline \$ 400 & \$ 600 & 2 \% & \$ 700 \
\hline \$ 400 & 500 & 3 & 600 \
\hline \$ 400 & 400 & 4 & 500 \
\hline \$ 400 & 300 & 5 & 300 \
\hline \$ 400 & 200 & 6 & 200 \
\hline
\end{array}$$ Answer the question based on the information in the table. The equilibrium interest rate in this economy is

Accepted Answer

A)  3 percent. 
B)  4 percent. 
C)  5 percent. 
D)  6 percent. 
A)  3 percent. 
B)  4 percent. 
C)  5 percent. 
D)  6 percent.

Question 18

Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. This situation is a problem of

Accepted Answer

A)  "putting all your eggs in one basket." 
B)  "not in my backyard." 
C)  "There ain't no such thing as a free lunch." 
D)  "You can lead a horse to water, but you can't make it drink." 
A)  "putting all your eggs in one basket." 
B)  "not in my backyard." 
C)  "There ain't no such thing as a free lunch." 
D)  "You can lead a horse to water, but you can't make it drink."

Question 19

If nominal GDP is $4,000 billion and the amount of money demanded for transactions purposes is $800 billion, it can generally be concluded that

Accepted Answer

A)  the asset demand for money is $3,200 billion. 
B)  the total demand for money is $4,800 billion. 
C)  on average, each dollar will be spent ﬁve times a year. 
D)  the supply of money needs to be increased to meet the demand. 
A)  the asset demand for money is $3,200 billion. 
B)  the total demand for money is $4,800 billion. 
C)  on average, each dollar will be spent ﬁve times a year. 
D)  the supply of money needs to be increased to meet the demand.

Question 20

Other things equal, an increase in consumer wealth will

Accepted Answer

A)  increase aggregate supply. 
B)  increase aggregate demand. 
C)  reduce the price level. 
D)  reduce the money supply. 
A)  increase aggregate supply. 
B)  increase aggregate demand. 
C)  reduce the price level. 
D)  reduce the money supply.

Refer to the given balance sheets. If the reserve ratio is 25 percent, the maximum money-creating potential of the commercial banking system is

Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately

The liquidity trap refers to the situation where

The Federal Reserve gives much more weight to inﬂation than to unemployment when considering policy actions.

Other things equal, an increase in taxes on businesses will

All else equal, when the Federal Reserve Banks engage in a restrictive monetary policy, the prices of government bonds usually

Which of the following actions by the Fed most likely increase commercial bank lending?

Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent. If the reserve requirement is now raised to 30 percent, the banking system then has

Which of the following statements is most accurate about the Fed's use of the federal funds rate target since the 2008 ﬁnancial crisis?

The opportunity cost of holding money

If, in the market for money, the amount of money supplied exceeds the amount of money households and businesses want to hold, the interest rate will

If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be

Which of the following will increase commercial bank reserves?

Money Supply Money Demand Interest Rate Investment (at Interest Rate Shown) \ 400 \ 600 2\% \ 700 \ 400 500 3 600 \ 400 400 4 500 \ 400 300 5 300 \ 400 200 6 200 Answer the question based on the information in the table. The equilibrium interest rate in this economy is

Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. This situation is a problem of

If nominal GDP is $4,000 billion and the amount of money demanded for transactions purposes is $800 billion, it can generally be concluded that

Other things equal, an increase in consumer wealth will

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures Caused by Externalities Asymmetric Information

Public Goods, Public Choice, and Government Failure

An Introduction to Macroeconomics

Measuring Domestic Output and National Income

Economic Growth

Business Cycles, Unemployment, and Inflation

Basic Macroeconomic Relationships

The Aggregate Expenditures Model

Aggregate Demand and Aggregate Supply

Fiscal Policy, Deficits, and Debt

Money, Banking, and Financial Institutions

Money Creation

Financial Economics

Extending the Analysis of Aggregate Supply

Current Issues in Macro Theory and Policy

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

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Exam 16: Interest Rates and Monetary Policy

Refer to the given balance sheets. If the reserve ratio is 25 percent, the maximum money-creating potential of the commercial banking system is

Assume that the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government securities to the general public, the money supply will immediately

The liquidity trap refers to the situation where

The Federal Reserve gives much more weight to inﬂation than to unemployment when considering policy actions.

Other things equal, an increase in taxes on businesses will

All else equal, when the Federal Reserve Banks engage in a restrictive monetary policy, the prices of government bonds usually

Which of the following actions by the Fed most likely increase commercial bank lending?

Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent. If the reserve requirement is now raised to 30 percent, the banking system then has

Which of the following statements is most accurate about the Fed's use of the federal funds rate target since the 2008 ﬁnancial crisis?

The opportunity cost of holding money

If, in the market for money, the amount of money supplied exceeds the amount of money households and businesses want to hold, the interest rate will

If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be

Which of the following will increase commercial bank reserves?

Money Supply Money Demand Interest Rate Investment (at Interest Rate Shown) \ 400 \ 600 2\% \ 700 \ 400 500 3 600 \ 400 400 4 500 \ 400 300 5 300 \ 400 200 6 200 Answer the question based on the information in the table. The equilibrium interest rate in this economy is

Assume the Fed creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. This situation is a problem of

If nominal GDP is $4,000 billion and the amount of money demanded for transactions purposes is $800 billion, it can generally be concluded that

Other things equal, an increase in consumer wealth will

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures Caused by Externalities Asymmetric Information

Public Goods, Public Choice, and Government Failure

An Introduction to Macroeconomics

Measuring Domestic Output and National Income

Economic Growth

Business Cycles, Unemployment, and Inflation

Basic Macroeconomic Relationships

The Aggregate Expenditures Model

Aggregate Demand and Aggregate Supply

Fiscal Policy, Deficits, and Debt

Money, Banking, and Financial Institutions

Money Creation

Financial Economics

Extending the Analysis of Aggregate Supply

Current Issues in Macro Theory and Policy

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

Filters