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5.
Which of the following actions would decrease Jim's money demand by $200?
YES Jim writes a check for $200 to pay down his credit card balance.
Jim sells a $200 government bond and puts the proceeds in his checking
account.
NO Jim writes a $200 check for cash and holds the cash.
Jim sells $200 worth of stocks and puts the proceeds in his checking
account.
Jim gets a $200 cash advance on his credit card and puts the proceeds
in his checking account.
Feedback
7. If the nominal interest rate is below the equilibrium value, then money
demand is ______ than money supply, bond prices will ____, and the nominal
interest rate will ____.
YES greater; fall; increase
NO greater; fall; decrease
greater; rise; increase
less; fall; increase
less; rise; decrease
Feedback
8. When commercial banks borrow reserves from the Fed, the quantity of reserves
in the banking system _____ and ultimately the money supply _____.
YES increases; increases
increases; decreases
increases; does not change
NO decreases; decreases
decreases; increases
Feedback
9. In Macroland, currency held by the public is 2,000 econs, bank reserves are
300 econs, and the required reserve/deposit ratio is 15 percent. If the Central
Bank lowers the required reserve/deposit ratio making the new desired ratio equal
to 10 percent, then the money supply in Macroland will _____ to _____ econs,
assuming that the public does not wish to change the amount of currency it holds.
NO increase; 4,000
YES increase; 5,000
decrease; 4,000
decrease; 5,000
decrease; 2,300
Feedback
10. When making discount window loans, the Federal Reserve lends bank reserves
to:
the U.S. Treasury.
the nonbank public.
OK commercial banks.
foreign governments.
discount retailers.
1.
Based on the diagram the nominal interest rate equals 6% and the money supply
equals 600. If the Federal Reserve wants to set the nominal interest rate at 10%,
it must conduct open market _____ to set the money supply at _____.
NO purchases; 200
YES sales; 200
purchases; 800
sales; 800
purchases; 1,000
Feedback
How much money will Alex hold if the nominal interest rate is 6 percent? (Assume
she wants her money holdings to be in multiples of $100.)
700
800
OK 900
1000
1100
8. If the Fed wishes to increase nominal interest rates, it must engage in an
open market ____ of bonds that ____ the money supply.
sale; increases
OK sale; decreases
sale; does not change
purchase; increases
purchase; decreases
9. When the Fed engages in an open market sale, the money supply ____ and the
nominal interest rate ______.
NO increases; increases
increases; decreases
increases; may either increase or decrease depending on money demand
YES decreases; increases
decreases; decreases
Feedback
1. During the Christmas shopping season the demand for money increases
significantly. To offset the increase in money demand, the Fed must _____ the
money supply in order to _____ nominal interest rates.
OK increase; decrease
increase; increase
hold constant; increase
decrease; increase
decrease; decrease
2.
The following table shows Alex's estimated annual benefits of holding different
amounts of money.
How much money will Alex hold if the nominal interest rate is 6 percent? (Assume
she wants her money holdings to be in multiples of $100.)
700
800
OK 900
1000
1100
3. The amount of wealth an individual chooses to hold in the form of money is
called:
NO the money reaction function.
YES the demand for money.
the supply of money.
expansionary monetary policy.
contractionary monetary policy.
Feedback
The following table shows Alex's estimated annual benefits of holding different
amounts of money.
How much money will Alex hold if the nominal interest rate is 4 percent? (Assume
she wants her money holdings to be in multiples of $100.)
700
800
NO 900
YES 1000
1100
Feedback
increase; increases
OK increase; decreases
increase; does not change
decrease; decreases
decrease; increases
9. In Macroland, currency held by the public is 2,000 econs, bank reserves are
300 econs, and the desired reserve/deposit ratio is 15 percent. If commercial
banks borrow 100 econs in reserves from the Central Bank through discount window
lending, then the money supply in Macroland will _____ to _____ econs, assuming
that the public does not wish to change the amount of currency it holds.
NO increase; 3,133
increase; 4,100
YES increase; 4,667
decrease; 3,133
decrease; 2,400
Feedback
1. Three macroeconomic factors that affect the demand for money are:
OK the nominal interest rate; real income, and the price level.
the nominal interest rate; capital, and labor.
globalization, skill-biased technological change, and labor mobility.
capital, labor, and technology.
average labor productivity, real income, and the nominal interest rate.
2. Because a decrease in the nominal interest rate reduces the opportunity cost
of holding money, the money demand curve:
NO shifts to the right.
shifts to the left.
is vertical.
YES slopes downward.
slopes upward.
Feedback
The following table shows Jay's estimated annual benefits of holding different
amounts of money.
How much money will Jay hold if the nominal interest rate is 8 percent? (Assume he
wants his money holdings to be in multiples of $100.)
100
YES 200
NO 300
400
500
Feedback
1. Higher nominal interest rates ____ the demand for money and a higher price
level ___ the demand for money.
increase; increases
increase; decreases
increase; does not change
decrease; decreases
OK decrease; increases
2.
Based on the diagram the nominal interest rate equals 5% and the money supply
equals 500. If the Federal Reserve wants to set the nominal interest rate at 9%,
it must conduct open market _____ to set the money supply at _____.
purchases; 100
OK sales; 100
purchases; 900
sales; 900
purchases; 700
3.
Based on the diagram the nominal interest rate equals 3% and the money supply
equals 300. If the Federal Reserve wants to set the nominal interest rate at 2%,
it must conduct open market _____ to set the money supply at _____.
purchases; 200
sales; 200
OK purchases; 400
sales; 400
purchases; 500
4. If the nominal interest rate is below the equilibrium value, then money
demand is ______ than money supply, bond prices will ____, and the nominal
interest rate will ____.
OK greater; fall; increase
greater; fall; decrease
greater; rise; increase
less; fall; increase
less; rise; decrease
5. For the past 40 years the Federal Reserve has expressed policy in terms of a
target value for:
bank reserves.
the Federal Reserve discount rate.
YES the federal funds rate.
NO open market operations.
commercial bank lending.
Feedback
Which of the following actions would decrease Jim's money demand by $200?
OK Jim writes a check for $200 to pay down his credit card balance.
Jim sells a $200 government bond and puts the proceeds in his checking
account.
Jim writes a $200 check for cash and holds the cash.
Jim sells $200 worth of stocks and puts the proceeds in his checking
account.
Jim gets a $200 cash advance on his credit card and puts the proceeds
in his checking account.
8. Reserve requirements set by the Federal Reserve are the:
OK minimum value of reserves to deposits that commercial banks are allowed
to maintain.
maximum value of reserves to deposits that commercial banks are allowed
to maintain.
minimum amount of currency banks must hold in their vaults.
maximum amount of currency banks are allowed to hold in their vaults.
minimum amount of bonds commercial banks must purchase from the Federal
Reserve.
9.
The following table shows Jay's estimated annual benefits of holding different
amounts of money.
How much money will Jay hold if the nominal interest rate is 6 percent? (Assume he
wants his money holdings to be in multiples of $100.)
100
200
YES 300
NO 400
500
Feedback
Based on the diagram the nominal interest rate equals 5% and the money supply
equals 500. If the Federal Reserve wants to raise the interest rate to 7%, it must
_____ the money supply to _____.
increase; 300
OK decrease; 300
increase; 900
increase; 700
decrease; 700
Multiple Choice
1. The Federal Reserve can decrease the money supply by:
OK increasing reserve requirements.
decreasing the discount rate.
introducing deposit insurance.
decreasing velocity.
conducting open market purchases.
2. For the past 40 years the Federal Reserve has expressed policy in terms of a
target value for:
bank reserves.
the Federal Reserve discount rate.
OK the federal funds rate.
open market operations.
commercial bank lending.
3. The interest rate that commercial banks charge each other for very short-
term loans is called the:
prime rate.
OK federal funds rate.
Federal Reserve discount rate.
commercial paper rate.
bank loan rate.
4. If the money supply is less than money demand, people will ____ bonds which
will cause bond prices to ____ and the nominal interest rate to _____ until money
demand equals money supply.
YES sell; fall; rise
sell; fall; fall
sell; rise; fall
buy; fall; rise
NO buy; rise; fall
Feedback
Based on the diagram the nominal interest rate equals 6% and the money supply
equals 600. If the Federal Reserve wants to set the nominal interest rate at 4%,
it must conduct open market _____ to set the money supply at _____.
purchases; 200
sales; 200
OK purchases; 800
sales; 800
purchases; 1,000
6. When making discount window loans, the Federal Reserve lends bank reserves
to:
the U.S. Treasury.
the nonbank public.
OK commercial banks.
foreign governments.
discount retailers.
7. Because the Fed determines the money supply, the:
money demand curve is downward sloping.
money demand curve is upward sloping.
YES money supply curve is vertical.
NO money supply curve is downward sloping.
money supply curve is upward sloping.
Feedback