1) Assuming initially that rr = 15%, c = 40%, and e = 5%, an increase in e to 10%
causes the M1 money multiplier to ________, everything else held constant
A) increase from 215 to 233
B) decrease from 233 to 215
C) increase from 154 to 167
D) decrease from 167 to 154
2) If reserves in the banking system increase by $100, then checkable deposits will
increase by $500 in the simple model of deposit creation when the required reserve
ratio is
A) 001
B) 010
C) 005
D) 020
3) The opportunity cost of holding excess reserves is the federal funds rate
A) minus the discount rate
B) plus the discount rate
C) plus the interest rate paid on excess reserves
D) minus the interest rate paid on excess reserves
4) If initially the money supply is $2 trillion, velocity is 5, the price level is 2, and real
GDP is $5 trillion, a fall in the money supply to $1 trillion
A) reduces real GDP to $25 trillion
B) causes velocity to rise to 10
C) decreases the price level to 1
D) decreases the price level to 1 and decreases velocity to 25
5) In order to ensure that borrowers have an ability to repay residential mortgages, the
new consumer protection legislation requires lenders to do all of the following except
A) verify the income of the borrower
B) verify the borrower’s job status
C) check the credit history of the borrower
D) verify that the borrower can read and understand a loan contract
6) A decrease in the quantity of money supplied shifts the money supply curve to the
________, and the LM curve to the ________, everything else held constant
A) right; left
B) right; right
C) left; left
D) left; right
7) When good weather speeds the check-clearing process, float tends to ________
causing the Fed to initiate defensive open market ________
A) decrease; sales
B) decrease; purchases
C) increase; sales
D) increase; purchases
8) When the price level falls, the ________ curve for nominal money ________, and
interest rates ________, everything else held constant
A) demand; decreases; fall
B) demand; increases; rise
C) supply; increases; rise
D) supply; decreases; fall
9) Purchases and sales of government securities by the Federal Reserve are called
A) discount loans
B) federal fund transfers
C) open market operations
D) swap transactions
10) In the liquidity trap, the money demand curve
A) is horizontal
B) is vertical
C) is negatively sloped
D) is positively sloped
11) Policy makers cannot achieve both price stability and economic activity stability
when facing
A) temporary supply shocks
B) permanent supply shocks
C) demand shocks
D) all of the above
12) ________ are the time and resources spent trying to exchange goods and services
A) Bargaining costs
B) Transaction costs
C) Contracting costs
D) Barter costs
13) Currency circulated by banks that could be redeemed for gold was called
A) junk bonds
B) banknotes
C) gold bills
D) state money
14) Due to asymmetric information in credit markets, monetary policy may affect
economic activity through the balance sheet channel, where an increase in the money
supply
A) raises stock prices, lowering the cost of new capital relative to firms’ market value,
thus increasing investment spending
B) raises firms’ net worth, decreasing adverse selection and moral hazard problems,
thus increasing banks’ willingness to lend to finance investment spending
C) raises the level of bank reserves, deposits, and bank loans, thereby raising spending
by those individuals who do not have access to credit markets
D) lowers the value of the dollar, increasing net exports and aggregate demand
15) A decline in autonomous planned investment spending causes the equilibrium level
of aggregate output to ________ and shifts the ________ curve to the ________,
everything else held constant
A) rise; LM; right
B) rise; IS; right
C) fall; IS; left
D) fall; LM; left
16) If people expect real estate prices to increase significantly, the ________ curve for
bonds will shift to the ________, everything else held constant
A) demand; right
B) demand; left
C) supply; left
D) supply; right
17) The Taylor Principle states that central banks raise nominal rates by ________ than
any rise in expected inflation so that real interest rates ________ when there is a rise in
inflation
A) less; rise
B) more; fall
C) less; fall
D) more; rise
18) During the 1960s, 1970s, and early 1980s, traditional bank profitability declined
because of
A) financial innovation that increased competition from new financial institutions
B) a decrease in interest rates to fight the inflation problem
C) a decrease in deposit insurance
D) increased regulation that prohibited banks from making risky real estate loans