Answer & Explanation:NEW ENGLAND COLLEGE
INTRODUCTION TO MACROECONOMICS
FIFTH HOMEWORK ASSIGNMENT
1.
The speculative demand
for money is:
A)
directly related to the
interest rate.
B)
independent the
interest rate.
C)
inversely related to
the interest rate.
D)
none of the above.
E) (A)
and (C) above.
2.
An example of a double
coincidence of wants is:
A)
a car mechanic who
wants a TV set finds an owner of an electronics store who wants a car
repaired.
B)
a car dealer who wants
a TV set finds an electronics store owner who wants money.
C)
an electronics store
owner who wants car repairs finds a car mechanic who wants money.
D)
all of the above are
examples.
E)
none of the above.
3.
“Tuition at State
University this year is $12,000.” Which
function of money does this statement best illustrate?
A)
store of value
B)
medium of exchange
C)
unit of account
D)
credit score.
E)
any of the above.
4.
Expansionary monetary
policy:
A)
increases the money
supply, interest rates, consumption, and investment.
B)
decreases the money
supply, interest rates, consumption, and investment.
C)
increases the money
supply, decreases interest rates, and increases investment.
D)
decreases the money
supply, increases interest rates, and decreases investment.
E)
((B) and (D) above.
5.
To increase the money
supply, the Federal Reserve could:
A)
lower the discount
rate.
B)
buy government bonds.
C)
lower reserve
requirements.
D)
do all of the above.
E)
none of the above.
6.
Suppose that the
required reserve ratio is 10% and banks have no excess reserves. The total demand deposit in the system is
$100,000. Now the monetary authorities lower the required reserve ratio to
5%. Which of the following will likely follow?
A)
The amount of excess
reserves in the banking system will be $5,000.
B)
The amount of excess
reserves in the banking system will be $10,000.
C)
Banking system can
create more money.
D)
All of the above.
E) (A)
and (C) above.
7.
If a bank gets a new
deposit of $100 cash and it has a 20% required reserve ratio, then the money
supply can eventually increase by:
A)
$20.
B)
$100.
C)
$500.
D)
$1,000.
E)
none of the above.
8.
If the Federal Reserve increases
the discount rate:
A)
the money supply will
decrease.
B)
the money supply will
increase.
C)
the money supply will
not change.
D)
the federal funds rate
must decrease.
E)
any of the above.
9.
Which of the following
is NOT considered one of the functions of money?
A)
serving as a medium of
exchange.
B)
serving as a store of
value.
C)
serving as a unit of
account.
D)
being durable.
E) (A),
(B) and (C) above.
10.
Commodity money is:
A)
whatever the government
has decreed is money.
B)
Something that is used
as money and also has intrinsic value.
C)
money used for buying commodities.
D)
whatever people accept
as money.
E)
none of the above.
11.
Bank reserves are:
A)
the fraction of
deposits kept in gold with the Federal Reserve.
B)
the deposits lent to
finance illiquid investments.
C)
the fraction of
deposits kept in cash form.
D)
gold kept in the bank’s
vault.
E) none of the above.
12.
Federal funds rate is:
A)
the rate banks pay to
the Federal Reserve System.
B)
the rate banks charge
their best customers.
C)
the rate government
pays when it borrows from the public.
D)
the rate banks pay to
other banks when they borrow from each other.
E)
none of the above.
13.
The discount rate is
the interest rate the Federal Reserve charges on loans to:
A)
consumers.
B)
the federal government.
C)
state governments.
D)
banks.
E)
none of the above.
14.
The three primary monetary
policy tools are:
A)
interest rates, taxes, and
government purchases,
B)
currency, near-moneys,
and reserve ratio.
C)
deposit insurance,
discount rate, and money multiplier.
D)
reserve requirements,
the discount rate, and open-market operation.
E)
none of the above.
15.
If the Fed conducts a
$10 million open-market purchase of government bonds and the reserve
requirement is 10%, the maximum amount of eventual change in the money supply
is:
A)
an increase of $100
million.
B)
A decrease of $100
million.
C)
A decrease of $10
million.
D)
an increase of $10 million.
E)
none of the above.
16.
The Federal Open Market
Committee is in charge of:
A)
setting the discount
rate.
B)
setting the required reserve
ratio.
C)
setting the prime rate.
D)
setting the federal
funds rate
E)
none of the above.
17.
People demand money to:
A)
for speculative
purposes.
B)
for transaction
purposes.
C)
for precautionary
purposes.
D)
all of the above.
E)
none of the above.
18.
To expand the money
supply, the Federal Reserve would have to do which of the following?
A)
purchase government
bonds.
B)
sell government bonds.
C)
raise discount rate.
D)
raise required reserve
ratio.
E)
none of the above.
19.
To increase the money
supply and decrease the interest rate, the Federal Reserve can:
A)
buy bonds.
B)
sell bonds.
C)
tell the banks to make
more loans.
D)
tell the banks to make
fewer loans.
E)
none of the above.
20.
If the economy is
experiencing an inflationary gap, the Federal Reserve should ______ the money
supply in order to ______ the GDP.
A)
increase; decrease
B)
decrease; increase
C)
increase; increase.
D)
decrease; decrease
E) none
of the above.
21.
Legal Reserve Ratio:
A)
determines the maximum
amount of reserves a bank must hold.
B)
determines the minimum
amount of reserves a bank must hold.
C)
is established by
Congress.
D)
is set by the American
Bankers Association.
E)
none of the above.
22.
Banks in a fractional
banking system can create money when they:
A)
make loans.
B)
accept deposits.
C)
hold excess reserves.
D)
pay withdrawals to
depositors.
E) all
of the above.
23.
If the required reserve
ratio is 5%, a deposit of $1,000 will eventually increase the money supply
by:
A)
$1,000.
B)
$20,000.
C)
$10,000.
D)
$50,000.
E) none of the above.
24.
If the Fed sells $10
million government bonds and the reserve requirement is 20%, the money supply
can eventually:
A)
increase by $10
million.
B)
increase by $8 million.
C)
decrease by $10
million.
D)
decrease by $50
million.
E)
increase by $50 million.
25.
Open-market operations
occur when the Federal Reserve:
A)
buys government bonds
from the federal government.
B)
buys or sells
government bonds.
C)
buys or sells existing
U.S. Treasury bills.
D)
does all of the above.
E)
none of the above.
ESSAY:
In the United States, the Federal Reserve frequently engages in buying
and selling of the government securities as well as other policies. In recent years, the Fed has reduced the
Discount Rate several times. The Fed has
also purchased substantial amount of government securities. Explain the logic of these actions by the
Fed. Why are they doing this and what
they hope to accomplish? Take a stand in
support or against these actions and state your reasoning. If you were to advise the President, what course of action
would you recommend?
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