question
After several major bank failures, a large number of people decide to withdraw their cash from commercial banks and keep it in their cookie jars at home.
Suppose the goal of the Fed is to maintain a stable interest rate. In the aftermath of such cash withdrawal by people, the Fed should...
Suppose the goal of the Fed is to maintain a stable interest rate. In the aftermath of such cash withdrawal by people, the Fed should...
answer
increase money supply
question
According to the real wealth effect (or real balance effect), a decreasea decrease in the price level:
A.
does not affect the purchasing power of wealth in the long run.
B.
increasesincreases consumers' expenditures due to an increasean increase in the purchasing power of household wealth.
C.
does not affect the purchasing power of any type of wealth in the short run.
D.
decreasesdecreases consumers' expenditures due to a decreasea decrease in the purchasing power of household wealth.
A.
does not affect the purchasing power of wealth in the long run.
B.
increasesincreases consumers' expenditures due to an increasean increase in the purchasing power of household wealth.
C.
does not affect the purchasing power of any type of wealth in the short run.
D.
decreasesdecreases consumers' expenditures due to a decreasea decrease in the purchasing power of household wealth.
answer
B.
increases consumers' expenditures due to an increase in the purchasing power of household wealth.
increases consumers' expenditures due to an increase in the purchasing power of household wealth.
question
The crowding out effect refers to
A.
the reduction in private investment caused by increases in government spending.
B.
the reduction in private investment due to higher interest rate caused by a decrease in money supply.
C.
the reduction in government spending due to an increase in private investment.
D.
the reduction in private investment caused by an increase in consumption
A.
the reduction in private investment caused by increases in government spending.
B.
the reduction in private investment due to higher interest rate caused by a decrease in money supply.
C.
the reduction in government spending due to an increase in private investment.
D.
the reduction in private investment caused by an increase in consumption
answer
A. the reduction in private investment caused by increases in government spending.
question
When the interest rate is very lowlong dash—well below what would be considered normallong dash—households and firms will expect the rate to rise in the long run.
How does this affect the demand for holding money in the present?
A.The money demand curve will become very steep and downward sloping on the expectation that bond prices are going to fall.
B.
The money demand curve will be nearly flat but downward sloping on the expectation that bond prices are going to fall.
C.
The money demand curve will be nearly flat but downward sloping on the expectation that bond prices are going to rise.
D.
The money demand curve would be horizontal and the bond market will collapse.
How does this affect the demand for holding money in the present?
A.The money demand curve will become very steep and downward sloping on the expectation that bond prices are going to fall.
B.
The money demand curve will be nearly flat but downward sloping on the expectation that bond prices are going to fall.
C.
The money demand curve will be nearly flat but downward sloping on the expectation that bond prices are going to rise.
D.
The money demand curve would be horizontal and the bond market will collapse.
answer
The money demand curve will be nearly flat but downward sloping on the expectation that bond prices are going to fall.
question
When there is an excess supply of money,
A.
there is an excess demand for bonds, so those looking to borrow by selling bonds can do so at a lower interest rate.
B.
the price level in the economy will rise, thus increasing money demand until it equals the quantity supplied.
C.
the Fed will decrease the money supply.
D.
there is excess demand for bonds, so the Fed will issue new bonds.
A.
there is an excess demand for bonds, so those looking to borrow by selling bonds can do so at a lower interest rate.
B.
the price level in the economy will rise, thus increasing money demand until it equals the quantity supplied.
C.
the Fed will decrease the money supply.
D.
there is excess demand for bonds, so the Fed will issue new bonds.
answer
there is an excess demand for bonds, so those looking to borrow by selling bonds can do so at a lower interest rate.
question
The island nation of Macadamia has recently experienced an 800 percent jumpjump in tourism, increasingincreasing income throughout the island. Suppose the Macadamia money market was in equilibrium prior to the jumpjump in tourism.
Assuming no change in the supply of money, the increase in income will
A.
increase the equilibrium interest rate in Macadamia.
B.
decrease the demand for money in Macadamia.
C.
decrease the supply of money in Macadamia.
D.decrease the equilibrium rate in Macadamia.
Assuming no change in the supply of money, the increase in income will
A.
increase the equilibrium interest rate in Macadamia.
B.
decrease the demand for money in Macadamia.
C.
decrease the supply of money in Macadamia.
D.decrease the equilibrium rate in Macadamia.
answer
increase the equilibrium interest rate in Macadamia.
question
True or False: When the real economy expandsexpands, the demand for money expandsexpands. As a result, households hold lessless cash and the supply of money expandsexpands.
answer
False. When the real economy expands, the demand for money expands, and interest will increase. This will motivate households to hold less cash than they would have if there interest did not change. This will not change the supply of money.
question
True or False: Inflation, a riserise in the price level, causes the demand for money to declinedecline. Because inflation causes money to be worth moremore, households want to hold lessless of it.
answer
False. Inflation, an increase in the price level, causes the demand for money to increase. Because inflation causes money to be worth less, households want to hold more of it.
question
True or False: If the Fed buys bonds in the open market and at the same time we experience an inflation, interest rates will no doubt rise.
answer
False. IF the Fed buys bonds in the open market, the money supply rises, putting downward pressure on interest rate. When we experience an inflation, the money demand rises putting upward pressure on interest rate. Thus, interest rates will change in an indeterminate way.
question
The opportunity cost of holding money
A.
increases as the holding return on bonds fall.
B.
decreases as one accumulates more of it.
C.
is the foregone interest from holding bonds.
D.
decreases with inflation.
A.
increases as the holding return on bonds fall.
B.
decreases as one accumulates more of it.
C.
is the foregone interest from holding bonds.
D.
decreases with inflation.
answer
is the foregone interest from holding bonds
question
During 2003, we began to stop worrying that inflation was a problem. Instead we began to worry about deflation, a decline in the price level. Assume that the Fed decided to hold the money supply constant. What impact would deflation have on interest rates?
A.
The money demand curve would shift up and to the right (increase in demand) and interest rates would rise.
B.
The money demand curve would shift down and to the left (decrease in demand) and interest rates would decline.
C.
A decline in the price level would have no effect on interest rates.
D.
There would be movement downward along the money demand curve and interest rates would decline.
A.
The money demand curve would shift up and to the right (increase in demand) and interest rates would rise.
B.
The money demand curve would shift down and to the left (decrease in demand) and interest rates would decline.
C.
A decline in the price level would have no effect on interest rates.
D.
There would be movement downward along the money demand curve and interest rates would decline.
answer
The money demand curve would shift down and to the left (decrease in demand) and interest rates would decline.
question
If there is excess demand in the money market,
A.
the Fed will increase the money supply to meet the excess demand.
B.
the interest rate will increase until the quantity of money demanded is equal to the quantity of money supplied.
C.
in the short run money demand will increase (shift right), raising the opportunity cost of holding money, and thereby reducing the quantity of money demanded in the long run.
D.
money demand will decrease (shift left) until the excess demand is eliminated.
A.
the Fed will increase the money supply to meet the excess demand.
B.
the interest rate will increase until the quantity of money demanded is equal to the quantity of money supplied.
C.
in the short run money demand will increase (shift right), raising the opportunity cost of holding money, and thereby reducing the quantity of money demanded in the long run.
D.
money demand will decrease (shift left) until the excess demand is eliminated.
answer
the interest rate will increase until the quantity of money demanded is equal to the quantity of money supplied.
question
The optimal average level of money holdings is the amount that
A.
maximizes money holdings.
B.
maximizes the profits from money management.
C.
maximizes interest earnings.
D.
minimizes switch costs.
A.
maximizes money holdings.
B.
maximizes the profits from money management.
C.
maximizes interest earnings.
D.
minimizes switch costs.
answer
maximizes the profits from money management.
question
As the interest rate rises, the
A.
the optimal amount of bond holdings decrease.
B.
the optimal amount of money to hold increases.
C.
the optimal number of switches to make decreases.
D.
the optimal number of switches to make increases
A.
the optimal amount of bond holdings decrease.
B.
the optimal amount of money to hold increases.
C.
the optimal number of switches to make decreases.
D.
the optimal number of switches to make increases
answer
the optimal number of switches to make increases
question
Banks borrow not only from the Fed but also from each other. What is the interest rate in this market called?
A.
discount rate
B.
prime rate
C.
bank reserve rate
D.
federal funds rate
A.
discount rate
B.
prime rate
C.
bank reserve rate
D.
federal funds rate
answer
federal funds rate
question
The speculation motive for holding moneyspeculation motive for holding money
A.
is based on wealth.
B.
is based on interest ratesis based on interest rates.
C.
is based on income.
D.
refers to people holding money for the primary purpose of using the money to make purchases
A.
is based on wealth.
B.
is based on interest ratesis based on interest rates.
C.
is based on income.
D.
refers to people holding money for the primary purpose of using the money to make purchases
answer
is based on interest ratesis based on interest rates.
question
If there is an excess supplyexcess supply of money in the economy, people will want to
increase/decrease their holding of bonds and decrease/increase their holding of money. This will drive up/down interest rates to restore equilibrium.
increase/decrease their holding of bonds and decrease/increase their holding of money. This will drive up/down interest rates to restore equilibrium.
answer
increase their holding of bonds and decrease their holding of money. This will drive down interest rates to restore equilibrium.
question
loans are an asset/liability because it is something the banks own/owes
answer
loans are an asset because it is something the banks own
question
deposits at the Fed are an asset/liability because it is something the banks owns/owes
answer
deposits at the Fed are an asset because it is something the banks own
question
Cash in the vault is an asset/liability because it is something the banks owns/owes
answer
Cash in the vault is an asset because it is something the banks owns
question
In order to contractcontract the supply of money in Japan in 2009, the head of the Central Bank of Japan should
A.
increase the expected reserve ratioincrease the expected reserve ratio.
B.
lower the discount ratelower the discount rate.
C.
buy corporate securities in the open marketbuy corporate securities in the open market.
D.
increase the required reserve ratio
A.
increase the expected reserve ratioincrease the expected reserve ratio.
B.
lower the discount ratelower the discount rate.
C.
buy corporate securities in the open marketbuy corporate securities in the open market.
D.
increase the required reserve ratio
answer
increase the required reserve ratio. This action
reduces credit availability and lowers the money supply.
reduces credit availability and lowers the money supply.
question
Suppose the treasury of the United States issues bonds and sells them to the public to finance the deficit.
What happens to the money supply and why?
A.
The money supply remains unchanged because every dollar taken in by the Treasury goes right back into circulation through government spending.
B.
The money supply decreases because government borrowing reduces free reserves in the banking system.
C.
The money supply increase because government borrowing increases reserves in the banking system.
D.
The money supply remains unchanged because there is no effect on the spending multiplier.
What happens to the money supply and why?
A.
The money supply remains unchanged because every dollar taken in by the Treasury goes right back into circulation through government spending.
B.
The money supply decreases because government borrowing reduces free reserves in the banking system.
C.
The money supply increase because government borrowing increases reserves in the banking system.
D.
The money supply remains unchanged because there is no effect on the spending multiplier.
answer
The money supply remains unchanged because every dollar taken in by the Treasury goes right back into circulation through government spending.
question
The economy is beginning to slip into a recession. Further, data indicate that inflation is low. The Fed will most likely respond to this state of the economy by
A.
selling government securities to raise the interest rate.
B.
purchasing government securities to lower the interest rate.
C.
purchasing government securities to raise the interest rate.
D.
selling government securities to lower the interest rate.
A.
selling government securities to raise the interest rate.
B.
purchasing government securities to lower the interest rate.
C.
purchasing government securities to raise the interest rate.
D.
selling government securities to lower the interest rate.
answer
purchasing government securities to lower the interest rate.
question
Expansionary fiscal policy is used by the government to
A.
control inflation.
B.
create new jobs in the economy.
C.
reduce the national debt.
D.
reduce the budget deficit.
A.
control inflation.
B.
create new jobs in the economy.
C.
reduce the national debt.
D.
reduce the budget deficit.
answer
create jobs
question
fiscal drag
answer
when average income tax rates increase as a result of economic expansion
question
the structural deficit...
answer
remains the same at full employment
question
If planned investment increases by $200200, the change in equilibrium output will be greater/less than
answer
greater than
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