Econ exam

Last year both a borrower and a lender expected an inflation rate of 3 percent when they signed a long-term loan agreement with a fixed nominal rate of 5 percent. If the actual infation rate were lower than expected, then which of the following would be true?

The lender would benefit

If the interest rate on loans before adjusting for inflation is 9%, and the expected inflation rate is 4%, then which of the following must be true?

The nominal interest rate is 9%

Country M has an open economy with a flexible exchange rate. The banking system of country M has ample reserves. If the central bank of Country M decreases the interest rate on reserves, what will be the short-run effect on real output, the price level, and the value of the country’s currency?

Real output - Increase, Price level - increase, Value of currency - Depreciate

Which of the following is true for bonds and not for stocks?

Bonds are interest-bearing assets

A bank has $200 million in demand deposits and $150 million in reserves. The reserve ratio is 20 percent. What is the maximum amount of loans the bank can make from its reserves?

$110 Million

Which of the following would be true if the actual rate of inflation were less than the expected rate of inflation?

People who borrow funds at the nominal interest rate during this time period would lose.

Assume the banking system has limited reserves and the economy is currently in long-rum equilibrium. An increase in the money supply will affect unemployment in the short run and in the long run in which of the following ways?

Unemployment will decrease below the natural rate of unemployment in the short run and increase back to the natural rate of unemployment in the long run

Which of the following measures the opportunity cost of holding currency?

The forgone interest on alternative assets

For a country whose banking system has limited reserves, an open-market operation by the country’s central bank to reduce the unemployment rate would be to

buy bonds to decrease the interest rate and to increase aggregate demand

The aggregate demand curve is downward sloping because an increase in the general price level will cause the demand for money, interest rates, and investment to change in which of the following ways?

demand for money - increase , interest rates - increase , and investment - decrease

Pat deposits a portion of her wages into a personal savings account every week. The saved monetary can be considered to be primarily a

Store of Value

Assume that in a banking system in which banks hold no excess reserves, the public holds part of its money in cash and the rest in checking accounts. If the required reserve ratio is 10 percent, actual reserves are $10 million, and currency in circulation is equal to $20 million, M1 will be equal to

$120 million

Which of the following is true about inflation and interest rates?

if there is no actual or expected inflation, the nominal and real interest rates are equal

An increase in the equilibrium nominal interest rate could be causes by which of the following changes?

An increase in real income

If the required reserve ratio is 10 percent, what is the maximum change in the money supply from johns deposit of $50k cash into his checking account?

$450,000

An economy has a marginal propensity to consume of .60. If the government decreases income taxes by $100 billion what will be the maximum possible change in real gross domestic product?

$150 billion

What is th opportunity cost of keeping cash at home?

The lost income from not investing the money in an interest-bearing financial asset

Which of the following is true for both stocks and bonds?

They are financial asset

The economy is currently operating at long-run equilibrium. The central bank engages in expansionary monetary policy. How will the central bank’s action affect the economy’s real output and the price level in the short run?

Real output will increase, and the price level will increase

Which of the following will happen when interest rates increase in an economy?

The opportunity cost of holding money will increase

Which of the following will lower the prices of a country’s outstanding government bonds?

An outflow of financial capital to other countries

Use the graph, which of the following is true at the nominal interest rate i3?

There is a shortage in the money market because the quantity demanded is greater than the quantity supplied

Which of the following will occur in the money market when the aggregate price level increases?

The demand for money will increase and nominal interest rates will increase

a decrease in a nations capital and financial account balance will lead to which of the following for that nation?

an increase in real interest rates

The table below gives the value of various monetary measures, what is the value of the monetary base?

$110 million

Which of the following shifts the money demand curve to the right?

An increase in the price level

Investment in physical capital is most likely to occur as a result of an increase in

Business confidence

Most liquid asset?

currency

economy has a banking system with limited reserves and in the required Reserve ratio is 10% of the Central Bank purchases 50 million of bonds on an open market what will be the maximum possible change in the monetary base and the money supply after all adjustments are made in the banking system?

Monetary base increase 50 million - Money supply increase by 500 million

Assume that a country’s government increases borrowing. what will most likely happen to the prices of previously issued bonds and the price level in the short run?

Bond prices - Decrease , Price level - increase

an expansionary fiscal policy financed by government borrowing most likely lead to which of the following changes in the real interest rate and the value of the country’s currency?

The real interest rate will increase and the currency will appreciate

Which is included in monetary base?

Currency held by the public and commercial bank reserves held with the central bank

statement true about inflation is true

the expected inflation rate is the difference between nominal and real interest rates

Example of money being used as a medium of exchange

Greta uses $5 bill to purchase an ice-cream cone

Best descibes the nominal interest rate on a mortgage loan that a bank offers to a customer?

it is the interest rate changed by the bank

sam pays monthly installments on a five-year fixed interest rate auto loan. if the expected inflation rate increases, which will happen?

Sam will pay a lower real interest rate