ECON UNIT 4

1. Which of the following is true for bonds but not for stocks?

(A) Bonds are the least liquid form of assets.

(B) Bonds represent partial ownership of a company.

(C) Bonds earn variable rates of return.

(D) Bonds are interest-bearing assets.

(E) Bonds have zero opportunity cost.

D

2. Which of the following measures the opportunity cost of holding

currency?

(A) The nominal wage rate

(B) The increase in the demand for money

(C) The forgone interest on alternative assets

(D) The ability to access currency to meet unexpected expenses

(E) The average income tax rates

C

3. 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?

(A) Bond

Prices

Increase

Price

level

Increase

(B) Bond

Prices

Increase

Price

level

Decrease

(C) Bond

Prices

Increase

Price

level

No

change

(D) Bond

Prices

Decrease

Price

level

Increase

(E) Bond

Prices

Decrease

Price

level

Decrease

D

4. Which of the following is considered the most liquid asset?

(A) Stocks

(B) Bonds

(C) Currency

(D) Real estate

(E) Commodities

C

5. Of the following, the most liquid asset is

(A) mutual funds

(B) currency

(C) time deposits

(D) demand deposits

(E) savings deposits

B

6. Which of the following will happen when interest rates increase in an

economy?

(A) The cost of borrowing will decrease.

(B) The spending multiplier will decrease.

(C) Investment spending will increase.

(D) The price of previously issued bonds will increase.

(E) The opportunity cost of holding money will increase.

E

7. Which of the following describes a major difference between stocks and

bonds?

(A) Stocks represent ownership in a corporation, and bonds represent

a loan to a corporation.

(B) Bonds represent ownership in a corporation, and stocks represent

a loan to a corporation.

(C) Stock are counted in Gross Domestic Product, and bonds are not

counted.

(D) Bonds are counted in gross domestic product, and stocks are not

counted.

(E) Bonds pay dividends, and stocks earn interest.

A

8. Which of the following is true of the opportunity cost of holding cash?

(A) It is zero.

(B) It is represented by the value of the dollar.

(C) It is equal to the price level.

(D) It decreases as the price level rises.

(E) It increases as the interest rate rises.

E

1. Assume the nominal interest rate on a 15-year fixed-rate mortgage loan is

5 percent. If the expected inflation rate is 2 percent, the expected real

interest rate is

(A) 2%

(B) 3%

(C) 5%

(D) 7%

(E) 10%

B

2. The annual inflation rate is expected to be 5 percent over the next 3 years.

Juan plans to take out a 3-year loan to purchase an automobile. If Juan

decides not to take out the loan if the real interest rate exceeds 3 percent,

the highest nominal interest rate he is willing to pay is

(A) 2 percent

(B) 3 percent

(C) 8 percent

(D) 15 percent

(E) 25 percent

C

3. Suppose that the real interest rate is equal to seven percent and the

expected inflation rate is currently three percent. If an oil crisis in the Middle

East increases the expected inflation rate to four percent, the new nominal

interest rate is equal to

(A) 3%

(B) 4%

(C) 7%

(D) 11%

(E) 14%

D

4. When purchasing her house, Ms. Jones took out a 15-year mortgage loan

from a local bank at a fixed interest rate of 7 percent. The rate of expected

inflation at the time was 3 percent. If the actual rate of inflation was 4.5

percent, which of the following is true?

(A) The bank gained because the real rate of interest increased by 1.5%.

(B) The bank gained because the real rate of interest became 3.5%.

(C) The bank lost because the real rate of interest decreased by 1.5%.

(D) Ms. Jones gained because the nominal rate of interest increased by 1.5%.

(E) Ms. Jones lost because the nominal rate of interest became 3.5%.

C

5. Assume that the inflation rate is 10 percent, and a bank account effectively

yields a real rate of interest of negative 5 percent per year. Would a person

be better off keeping money in the bank account or in cash?

(A) Cash, because it returns 5 more per year than the bank does.

(B) Cash, because it avoids losing 5 percent per year.

(C) The bank account because it returns 15 percent more per year than

holding cash does.

(D) The bank account because the loss is less than it is when holding cash.

(E) The bank account, because while the real interest rate is negative, the real

return is positive.

D

1. The table below shows monetary assets for a banking sector at the end of

a year.

Monetary Assets Value (in millions)

Monetary Base $4,000

Currency in Circulation $1,500

M1 $6,500

Based on the data provided, what is the value of total

reserves held by depository institutions? (A) million

(A) $500

(B) $1,500million

(C) $2,500 million

(D) $5,500 million

(E) $8,000 million

C

2. The narrowest definition of money, M1, includes which of the following

(A) savings accounts

(B) bank reserves

(C) government bonds

(D) certificates of deposit

(E) credit cards

A

3. On the island of Mabera, the local money is called "favoli." The price of

every good in Mabera is expressed as the number of favolis needed to buy

the good. The use of favolis to express the price of goods describes which

function of money?

(A) Store of value

(B) Medium of exchange

(C) Means of payment

(D) Unit of account

(E) Store of wealth

D

4. Based on the table above, what is the value of M1, a measure of the

money supply?

(A) $100 million

(B) $102 million

(C) $112 million

(D) $1,000 million

(E) $1,120 million

E

1. Assume that the reserve requirement is 20 percent. If a bank initially

has no excess reserves and $10,000 cash is deposited in the bank, the

maximum amount by which this bank may increase its loans is

(A) $2,000

(B) $8,000

(C) $10,000

(D) $20,000

(E) $50,000

B

2. Assume that Atlantic National Bank has demand deposits of $100,000

and no excess reserves, and that the reserve requirement is 10 percent. A

customer withdraws $5,000 from the bank. To meet the reserve

requirement, the bank must increase its reserves by

(A) $500

(B) $1,000

(C) $2,000

(D) $4,000

(E) $4,500

E

3.

A commercial bank is facing the conditions given above. If the reserve

requirement is 12 percent and the bank does not sell any of its

securities, the maximum amount of additional lending this bank can

undertake is

(A) $15,000

(B) $12,000

(C) $3,000

(D) $1,800

(E) 0

C

4. Based on the balance sheets above for three different banks, which of the

following is true, if the reserve requirement is 10 percent?

(A) Bank A has no excess reserves.

(B) Bank B has no excess reserves.

(C) Bank B can increase its loans by $500.

(D) Bank B can increase its loans by $40.

(E) Bank C has excess reserves.

D

5. Banks create money when

(A) they make loans

(B) the loans they make are repaid

(C) they keep all excess reserves

(D) customers increase their cash withdrawals from their savings

accounts

(E) the money multiplier is less than one

A

6. Banks expand the money supply when

(A) issuing credit cards

(B) printing money

(C) cashing checks

(D) making loans

(E) accepting deposits

D

7. If the central bank raises the required reserve ratio in a banking system

with limited reserves, the money multiplier and the money supply will

change in which of the following ways?

(A) Money Multiplier

Increase

Money Supply

Increase

(B) Money Multiplier

Increase

Money

Supply

Decrease

(C) Money Multiplier

Increase

Money Supply

No change

(D) Money Multiplier

Decrease

Money Supply

No change

(E) Money Multiplier

Decrease

Money Supply

Decrease

E

8. Which of the following would lead to an increase in nominal interest

rates?

(A) An expansionary monetary policy accompanied by an increase in

the demand for money.

(B) An expansionary monetary policy accompanied by a decrease in the

demand for money.

(C)An expansionary monetary policy conducted without any change in

the demand for money.

(D)A contractionary monetary policy accompanied by an increase in the

demand for money.

(E) A contractionary monetary policy accompanied by a decrease in the

demand for money.

D

1. Which of the following changes will necessarily occur as a result of an

increase in the nominal interest rate?

(A) The money demand curve will shift to the left.

(B) The money demand curve will shift to the right.

(C) The money supply curve will shift to the left.

(D) The quantity of money supplied will decrease.

(E) The quantity of money demanded will decrease.

E

2. With a constant money supply, if the demand for money decreases, the

equilibrium interest rate and quantity of money will change in which of

the following ways?

(A) Interest Rate

Increase

Quantity of Money

Decrease

(B) Interest Rate

Increase

Quantity of Money

Not change

(C) Interest Rate

Decrease

Quantity of Money

Decrease

(D) Interest Rate

Decrease

Quantity of Money

Increase

(E) Interest Rate

Decrease

Quantity of Money

Not change

E

3. Expansionary fiscal policy will most likely result in (*hint: think about what

will happen to the Price Level in the macroeconomy FIRST!)

(A) a decrease in the money supply

(B) an increase in the marginal propensity to consume

(C) an increase in nominal interest rates

(D) a decrease in the level of output

(E) a decrease in the price level

C

4. An increase in the price level will most likely cause which of the following?

(A) A leftward shift of the aggregate demand curve

(B) An increase in the demand for money

(C) An increase in the real interest rate

(D) A decrease in the nominal interest rate

(E) An increase in the supply of money

B

5. The amount of money that the public wants to hold in the form of cash

will

(A) be unaffected by any change in interest rates or the price level

(B) increase if interest rates increase

(C) decrease if interest rates increase

(D) increase if the price level decreases

(E) decrease if the price level remains constant

C

6.

The graph above shows two aggregate demand curves, AD1 and AD2,

and an aggregate supply curve, AS. The shift in the aggregate demand

curve from AD1 to AD2 could be caused by

(A) a decrease in taxes

(B) a decrease in the money supply

(C) an increase in government spending

(D) an increase in consumption spending

(E) an increase in the price level

B

7. Which of the following accurately describes the federal funds rate?

(A) The interest rate that banks charge state governments

(B) The interest rate that banks charge other banks for overnight

loans

(C) The interest rate that banks pay on long-term savings

(D) The interest rate on personal loans

(E) The interest rate on government bonds

B

1. If the money stock decreases but Nominal Gross Domestic

Product remains constant, which of the following has occurred?

(A) Income velocity of money has increased.

(B) Income velocity of money has decreased.

(C) Price Level has increased.

(D) Price level has decreased.

(E) Real Output has decreased.

A

2. If the velocity of money is stable, the quantity theory of money

predicts that an increase in the money supply will lead to a

proportional

(A) Increase in the nominal output

(B) Decrease in the price level

(C) Decrease in the nominal interest rate

(D) Decrease in the real interest rate

(E) Decrease in the unemployment rate

A

3. According to the quantity theory of money, if a 3% increase in the

money supply leads to a 3% increase in nominal GDP, which of the

following is true?

(A) Real output increases by 3%.

(B) The price level decreases by 3%.

(C) The velocity of money does not change.

(D) The nominal interest rate does not change.

(E) The government budget deficit increases by 3%.

C

4. If the economy is operating at full employment and there is a

substantial increase in the money supply, the quantity theory of

money predicts an increase in

(A) The velocity of money

(B) Real output

(C) Interest rates

(D) Unemployment

(E) The price level

E

1. 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

(A) sell bonds to decrease the interest rate and to increase aggregate

demand

(B) sell bonds to increase the interest rate and to decrease aggregate

demand

(C) sell bonds to increase the interest rate and to increase investment

(D) buy bonds to decrease the interest rate and to decrease aggregate

demand

(E) buy bonds to decrease the interest rate and to increase aggregate

demand

E

2. Assume a country's banking system has limited reserves. If the central

bank buys government bonds from individuals on the open market and

banks do not loan out any excess reserves created by the open market

purchase, which of the following will happen?

(A) The money supply will increase.

(B) The money supply will remain unchanged.

(C) Loans to the private sector will increase.

(D) Demand deposits will decrease.

(E) The level of actual reserves will decrease.

A

3. Assume that the reserve requirement for demand deposits is 20 percent,

that banks hold no excess reserves, and that the public holds no currency. If

the banking system has limited reserves and the central bank sells $10,000

worth of government securities to commercial banks, the total money supply

will

(A) increase by $10,000

(B) increase by $50,000

(C) decrease by $10,000

(D) decrease by $50,000

(E) not change

D

4. In a country whose banking system has limited reserves, which of

the following actions by the central bank increases the money

supply?

(A) Buying government bonds on the open market

(B) Selling government bonds on the open market

(C) Increasing the reserve requirement

(D) Increasing the discount rate

(E) Increasing the federal funds rate

A

5.Assuming a banking system with limited reserves, which of the following

actions by the central bank reduces the ability of the banking system to

create money?

(A) Decreasing the policy rate

(B) Decreasing the discount rate

(C) Increasing the money supply

(D) Increasing the reserve requirement

(E) Buying government bonds on the open market

D

6. If the Federal Reserve institutes a policy to reduce inflation, which of the

following is most likely to increase?

(A) Tax rates

(B) Investment

(C) Government spending

(D) Interest rates

(E) Gross domestic product

D

7. Assuming a banking system with limited reserves, which of the following

set of events is most likely to follow when a central bank sells securities in

the open market?

(A) An increase in the money supply, a decrease in interest rates, and an

increase in aggregate demand

(B) An increase in the money supply, an increase in interest rates, and a

decrease in aggregate demand

(C)An increase in interest rates, an increase in the government budget deficit,

and a movement toward trade surplus

(D) A decrease in the money supply, an increase in interest rates, and a

decrease in aggregate demand

(E) A decrease in the money supply, a decrease in interest rates, and a

decrease in aggregate demand

D

8. The diagram shows the effect of a monetary policy action on aggregate

demand.

Which of the following will shift the aggregate demand curve in the direction

shown in the diagram above?

(A) A decrease in the money supply

(B) A decrease in the monetary base

(C) A decrease in the policy rate

(D) An increase in the required reserve ratio

(E) The sale of bonds to the private sector by the central bank

C

9. When an economy is operating below the full-employment level of output,

an appropriate monetary policy would be to decrease which of the

following?

(A) Income tax rates

(B) Transfer payments

(C) Government bond purchases

(D) Administered interest rates

(E) Government expenditures on goods and services

D

10. If businesses become optimistic about the profitability of investments

in an economy, which of the following will happen in the loanable funds

market in the short run?

(A) The supply and demand for loanable funds will increase.

(B) The supply and demand for loanable funds will decrease.

(C) The demand for loanable funds by the private sector will decrease.

(D) The real interest rate will increase.

(E) The real interest rate will decrease.

D

11. If investors feel that business conditions will deteriorate in the future,

the demand for loans and real interest rate in the loanable funds market

will change in which of the following ways in the short run?

(A) Demand for Loans

Increase

Real Interest Rate

Increase

(B) Demand for Loans

Increase

Real Interest Rate

Decrease

(C) Demand for Loans

Decrease

Real Interest Rate

Increase

(D) Demand for Loans

Decrease

Real Interest Rate

Decrease

(E) Demand for Loans

Decrease

Real Interest Rate

Not change

D

12. All of the following changes will shift the investment demand curve

to the right EXCEPT

(A) a decrease in the corporate income tax rate

(B) an increase in the productivity of new capital goods

(C) an increase in the real interest rate

(D) an increase in corporate profits

(E) an increase in real gross domestic product

C

13. An increase in government spending with no change in taxes leads to a

A) lower income level

(B) lower price level

(C) smaller money supply

(D) higher interest rate

(E) higher bond price

D

14. In the short run, government deficit spending will most likely

(A) raise the unemployment rate

(B) lower the inflation rate

(C) raise nominal interest rates

(D) lower private savings

(E) raise net exports

C

15. Which of the following changes would most likely cause

an increase in interest rates in the short run? (A) A

decrease in reserve requirements

(B) An increase in trade deficits

(C) An open market purchase of government bonds

(D) An increase in government spending financed by borrowing

(E) An increase in the price of bonds

D

16. Which of the following is most likely to increase the real interest rate

in Country Z?

(A) Country Z's central bank purchases government securities from

banks and citizens.

(B) Country Z reduces government expenditures.

(C) Country Z is viewed as having increased political and economic

risk.

(D) Country Z's citizens increase their savings in anticipation of

needed retirement income.

(E) Country Z introduces a tax on

consumption goods.

C

17. Assume that the government finances its spending by borrowing from

the public. If the government increases deficit spending, the price of

previously issued bonds and the real interest rate will change in which of

the following ways?

(A) Price of

Bonds

Decrease

Real Interest

Rate

Decrease

(B) Price of

Bonds

Decrease

Real Interest

Rate

Increase

(C) Price of

Bonds

Increase

Real Interest

Rate

Decrease

(D) Price of

Bonds

Increase

Real Interest

Rate

No change

(E) Price of

Bonds

Increase

Real Interest

Rate

Increase

B

18. When there is excess demand in the loanable

funds market, which of the following will occur?

(A) National savings will exceed investment spending.

(B) The economy will remain at full employment.

(C) Real interest rates will increase.

(D) An inflationary gap will exist.

(E) The money supply will increase.

C

1. Which of the following is true for bonds but not for stocks?

(A) Bonds are the least liquid form of assets.

(B) Bonds represent partial ownership of a company.

(C) Bonds earn variable rates of return.

(D) Bonds are interest-bearing assets.

(E) Bonds have zero opportunity cost.

2. Which of the following measures the opportunity cost of holding

currency?

(A) The nominal wage rate

(B) The increase in the demand for money

(C) The forgone interest on alternative assets

(D) The ability to access currency to meet unexpected expenses

(E) The average income tax rates

3. 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?

(A) Bond Prices

Increase

Price level

Increase

(B) Bond Prices

Increase

Price level

Decrease

(C) Bond Prices

Increase

Price level

No change

(D) Bond Prices

Decrease

Price level

Increase

(E) Bond Prices

Decrease

Price level

Decrease

4. Which of the following is considered the most liquid asset?

(A) Stocks

(B) Bonds

(C) Currency

(D) Real estate

(E) Commodities

5. Of the following, the most liquid asset is

(A) mutual funds

(B) currency

(C) time deposits

(D) demand deposits

(E) savings deposits

6. Which of the following will happen when interest rates increase in an

economy?

(A) The cost of borrowing will decrease.

(B) The spending multiplier will decrease.

(C) Investment spending will increase.

(D) The price of previously issued bonds will increase.

(E) The opportunity cost of holding money will increase.

7. Which of the following describes a major difference between stocks and

bonds?

(A) Stocks represent ownership in a corporation, and bonds represent

a loan to a corporation.

(B) Bonds represent ownership in a corporation, and stocks represent

a loan to a corporation.

(C) Stock are counted in Gross Domestic Product, and bonds are not

counted.

(D) Bonds are counted in gross domestic product, and stocks are not

counted.

(E) Bonds pay dividends, and stocks earn interest.

8. Which of the following is true of the opportunity cost of holding cash?

(A) It is zero.

(B) It is represented by the value of the dollar.

(C) It is equal to the price level.

(D) It decreases as the price level rises.

(E) It increases as the interest rate rises.