homework 3

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homework 3
1. In a 100-percent reserve banking system, if a customer withdraws $500 from his checking account,
the bank's deposits will _______________ while its reserves will _________________.
A. decrease $500; stay the same
B. decrease $500; decrease $500
C. decrease $500; increase $500
D. increase $500; increase $500
Answer: B
2. In a fractional reserve banking system, if a customer deposits $100 into his checking account, the
bank's reserve holdings will ___________________ because __________.
A. increase by $100; the banks may choose to lend out excess reserves
B. increase by less than $100; the banks may choose to lend out excess reserves
C. increase by $100; the banks have to keep all the reserves in the bank vaults
D. stay the same; the banks will lend all $100 out as loans
Answer: B
3. According to the book, which of the following equations represents the money multiplier?
A. (cr + 1)/(cr + rr)
B. (cr + 1) × (cr + rr)
C. (cr + 1) + (cr + rr)
D. (cr + 1) - (cr + rr)
Answer: A
4. The quantity of money in the United States is essentially controlled by the:
A. President of the United States.
B. Department of the Treasury.
C. Federal Reserve.
D. system of commercial banks.
Answer: C
5.
Bank Balance Sheet
Assets
Reserves
Loans
Securities
Liabilities & Net Worth
$ 10,000
100,000
40,000
Deposits
$100,000
Debt
20,000
Equity
30,000
Reference: Ref 4-1
(Table: Bank Balance Sheet) Based on the table, what is the reserve ratio at the bank?
A. 3 percent
B. 5 percent
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C. 10 percent
D. 15 percent
Answer: C
6. If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and
bank deposits equal $500 billion, then the monetary base equals:
A. $50 billion.
B. $100 billion.
C. $150 billion.
D. $600 billion.
Answer: C
7. If the ratio of currency to deposits (cr) increases, while the ratio of reserves to deposits (rr) is
constant and the monetary base (B) is constant, then:
A. it cannot be determined whether the money supply increases or decreases.
B. the money supply increases.
C. the money supply decreases.
D. the money supply does not change.
Answer: C
8. If the currency–deposit ratio equals 0.5 and the reserve–deposit ratio equals 0.1, then the money
multiplier equals:
A. 0.6.
B. 1.67.
C. 2.0.
D. 2.5.
Answer: D
9. A general increase in the price level is called:
A. hyperinflation.
B. deflation.
C. inflation.
D. devaluation.
Answer: C
10. In the quantity equation MV = PT, V is the:
A. income velocity of money.
B. transactions velocity of money.
C. inflation rate.
D. value of the money supply.
Answer: B
11.
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According to the quantity equation, if M increases by 3 percent and V increases by 2 percent,
then:
A. real income increases by approximately 5 percent.
B. the price level increases by approximately 5 percent.
C. the nominal interest rate increases by approximately 5 percent.
D. nominal income increases by approximately 5 percent.
Answer: D
12. The quantity theory of money states that if the money supply doubles and output is constant,
prices will:
A. fall by half.
B. remain the same.
C. double.
D. fall only if velocity rises.
Answer: C
13. The revenue raised by printing money is called:
A. interest rates.
B. velocity.
C. seigniorage.
D. nominal income.
Answer: C
14. The difference between the nominal interest rate and the real interest rate is:
A. the inflation rate.
B. taxes.
C. seigniorage.
D. hyperinflation.
Answer: A
15. The ex ante real interest rate differs from the ex post real interest rate only when:
A. the money supply grows at a constant rate.
B. the money supply remains the same.
C. the money supply falls at a constant rate.
D. actual inflation differs from expected inflation.
Answer: D
16. Which of the following statements is FALSE?
A. If inflation is higher than the real interest rate, then the nominal interest rate must be
negative.
B. If inflation is higher than the nominal interest rate, then the real interest rate must be
negative.
C.
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If the nominal interest rate is higher than the real interest rate, then inflation must be
positive.
D. If the nominal interest rate is higher than inflation, then the real interest rate must be
positive.
Answer: A
17. According to the Fisher Effect, the expected rate of inflation does not influence the:
A. demand for real money balances.
B. ex post real interest rate.
C. nominal interest rate.
D. current price level.
Answer: B
18. An increase in the expected rate of inflation will:
A. lower the demand for real balances because the real interest rate will rise.
B. lower demand for real balances because the nominal interest rate will rise.
C. increase the demand for real balances because the real interest rate will fall.
D. increase the demand for real balances because the nominal interest rate will rise.
Answer: B
19. Hyperinflation usually starts when:
A. people start spending too much money.
B. firms demand higher and higher prices for their goods.
C. governments are forced to print money to finance their spending.
D. fiscal deficits are small.
Answer: C
20. According to the classical dichotomy, which of these magnitudes is affected by monetary policy?
A. the price level
B. the real wage
C. the real interest rate
D. the rate of growth of real GDP
Answer: A
21. The next several questions refer to the case of an economy with the following equations:
Y = 40K0.5L0.5, with K=100 and L= 100
G = 1000, T = 1000
I = 1000 - 1000r
C = 300 + .6(Y-T)
d
real money demand: (M/P) = 0.2Y - 1000r
nominal money supply: M=1400
(Assume a closed economy: Y = C + I + G)
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Compute the real wage (W/P):
A. 10
B. 20
C. 30
D. 40
E. none of the above
Answer: B
22. For the economy above, compute the aggregate price level (P).
A. 1
B. 2
C. 3
D. 4
E. none of the above
Answer: B
23. For the economy above, compute the nominal wage (W):
A. 10
B. 20
C. 30
D. 40
E. none of the above
Answer: D
24. For the economy above, suppose the government raises the money supply by 50% from 1400 to
2100. Compute the nominal wage (W):
A. 20
B. 40
C. 60
D. 80
E. none of the above
Answer: C
25. Compute the real wage after the rise in money supply to 2100.
A. 20
B. 40
C. 60
D. 80
E. none of the above
Answer: A
26. Does the Classical Dichotomy hold for this economy?
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A. yes
B. no
Answer: A
27. The model of aggregate supply and aggregate demand in the short run differs from our long-run
model of the economy because, in the short run:
A. the interest rate is fixed.
B. output is fixed.
C. prices are fixed.
D. employment is fixed.
Answer: C
28. The quantity equation MV = PY implies that the AD curve is:
A. vertical.
B. upward sloping.
C. horizontal.
D. downward sloping.
Answer: D
29. If the Fed reduces the supply of money, the:
A. AS curve shifts outward.
B. AS curve shifts inward.
C. AD curve shifts outward.
D. AD curve shifts inward.
Answer: D
30. The LRAS curve of the classical model is:
A. vertical.
B. upward sloping.
C. horizontal.
D. downward sloping.
Answer: A
31. In the short run, if prices are fixed, the aggregate supply curve is:
A. vertical.
B. upward sloping.
C. horizontal.
D. downward sloping.
Answer: C
32. The AS/AD model with sticky prices predicts that, in the long run, a reduction of the money supply
results in:
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A. lower prices and lower output.
B. lower prices and no change in output.
C. no change in prices and lower output.
D. no change in prices or output.
Answer: B
33. Short-run fluctuations in output and employment are called:
A. sectoral shifts.
B. the classical dichotomy.
C. business cycles.
D. productivity slowdowns.
Answer: C
34. Stabilization policy refers to policy actions aimed at:
A. reducing the severity of short-run economic fluctuations.
B. equalizing incomes of households in the economy.
C. maintaining constant shares of output going to labor and capital.
D. preventing increases in the poverty rate.
Answer: A
35. Exhibit: Shift in Aggregate Demand
Reference: Ref 10-1
(Exhibit: Shift in Aggregate Demand) In this graph, initially the economy is at point E, with price
P0 and output Y. Aggregate demand is given by curve AD0, and SRAS and LRAS represent,
respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand
curve shifts so that it is represented by AD1. The economy moves first to point ______ and then,
in the long run, to point ______.
A. A; D
B. D; A
C. C; B
D. B; C
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Answer: C
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