money demand = cash + checking 1.

If the Fed wishes to reduce nominal interest rates, it must engage in an open market ____ of bonds that ____ the money supply. sale; increases NO sale; decreases sale; does not change YES purchase; increases purchase; decreases Feedback For more information, see p. 393 of your textbook. 2. When banks borrow funds via the Fed's discount window: interest rates rise. the reserve/deposit ratio falls. YES bank reserves are increased and ultimately bank deposits and the money supply increase. NO bank reserves are decreases and ultimately bank deposits and the money supply increase. bank reserves are increased and ultimately bank deposits and the money supply decrease. Feedback For more information, see p. 395 of your textbook. 3. A policy reaction function describes how the action a policymaker takes depends on: OK the state of the economy. public approval ratings. whether or not it is an election year. the reaction of special interest groups. the political affiliation of the policymaker. 4. Any value of the nominal interest rate chosen by the Federal Reserve implies a specific value for ______. potential output net exports government purchases the budget deficit OK the money supply 5. Jim has the following assets and liabilities: Which of the following actions would decrease Jim's money demand by $200? YES Jim writes a check for $200 to pay down his credit card balance. Jim sells a $200 government bond and puts the proceeds in his checking account. NO Jim writes a $200 check for cash and holds the cash. Jim sells $200 worth of stocks and puts the proceeds in his checking account. Jim gets a $200 cash advance on his credit card and puts the proceeds in his checking account. Feedback For more information, see p. 385 of your textbook. 6.

Joan has the following assets and liabilities: What is Joan's money demand? $200 $300 OK $500 $1,000 $11,000 7. If the nominal interest rate is below the equilibrium value, then money demand is ______ than money supply, bond prices will ____, and the nominal interest rate will ____. YES greater; fall; increase NO greater; fall; decrease greater; rise; increase less; fall; increase less; rise; decrease Feedback For more information, see p. 392 of your textbook. 8. When commercial banks borrow reserves from the Fed, the quantity of reserves in the banking system _____ and ultimately the money supply _____. YES increases; increases increases; decreases increases; does not change NO decreases; decreases decreases; increases Feedback For more information, see p. 395 of your textbook. 9. In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the required reserve/deposit ratio is 15 percent. If the Central Bank lowers the required reserve/deposit ratio making the new desired ratio equal to 10 percent, then the money supply in Macroland will _____ to _____ econs, assuming that the public does not wish to change the amount of currency it holds. NO increase; 4,000 YES increase; 5,000 decrease; 4,000 decrease; 5,000 decrease; 2,300 Feedback For more information, see p. 395 of your textbook. 10. to: OK When making discount window loans, the Federal Reserve lends bank reserves the U.S. Treasury. the nonbank public. commercial banks. foreign governments. discount retailers.

1. Jim has the following assets and liabilities:

Which of the following actions would decrease Jim's money demand by $200? OK Jim writes a check for $200 to pay down his credit card balance. Jim sells a $200 government bond and puts the proceeds in his checking account. Jim writes a $200 check for cash and holds the cash. Jim sells $200 worth of stocks and puts the proceeds in his checking account. Jim gets a $200 cash advance on his credit card and puts the proceeds in his checking account. 2. The equilibrium quantity of money in circulation is determined by: the interaction of money supply and money demand. the nominal interest rate, real income, and the price level. the nominal interest rate. individuals, households, and businesses. OK the Federal Reserve. 3. If inflation does not adjust rapidly in the short run, then when the Federal Reserve increases the nominal interest rate, the real interest rate in the short run will ____. OK increase decrease not change equal the nominal interest rate be determined by saving and investment decisions. 4. Higher nominal interest rates ____ the demand for money and higher real income ___ the demand for money. increase; increases increase; decreases increase; does not change NO decrease; decreases YES decrease; increases Feedback For more information, see p. 387 of your textbook. 5. The usefulness of money in carrying out transactions is its _____ and the nominal interest rate is its ____. supply; demand NO demand; supply real value; nominal value YES benefit; cost cost; benefit Feedback For more information, see p. 386 of your textbook. 6. Based on the diagram the nominal interest rate equals 6% and the money supply equals 600. If the Federal Reserve wants to set the nominal interest rate at 10%, it must conduct open market _____ to set the money supply at _____. NO purchases; 200 YES sales; 200 purchases; 800 sales; 800 purchases; 1,000 Feedback For more information, see p. 393 of your textbook. 7.

The following table shows Alex's estimated annual benefits of holding different amounts of money. How much money will Alex hold if the nominal interest rate is 6 percent? (Assume she wants her money holdings to be in multiples of $100.) 700 800 OK 900 1000 1100 8. If the Fed wishes to increase nominal interest rates, it must engage in an open market ____ of bonds that ____ the money supply. sale; increases OK sale; decreases sale; does not change purchase; increases purchase; decreases 9. When the Fed engages in an open market sale, the money supply ____ and the nominal interest rate ______. NO increases; increases increases; decreases increases; may either increase or decrease depending on money demand YES decreases; increases decreases; decreases Feedback For more information, see p. 393 of your textbook. 10. In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired reserve/deposit ratio is 15 percent. If commercial banks repay 100 econs in reserves from the Central Bank through discount window lending, then the money supply in Macroland will _____ to _____ econs, assuming that the public does not wish to change the amount of currency it holds. NO increase; 3,133 increase; 4,100 increase; 4,667 YES decrease; 3,133 decrease; 2,400 Feedback For more information, see p. 395 of your textbook. 1. The portfolio allocation decision is the decision about: how to spread one's consumption over the life-cycle. how much more to consume when disposable income increases by one dollar. OK the forms in which to hold one's wealth the choice of agents to send one's portfolio. how to allocate income between saving and consumption. 2. The Federal Reserve can: NO simultaneously set any money supply and any nominal interest rate target. set the target money supply and target nominal interest rate independently. YES only set a money supply target that is consistent with the target nominal interest rate. only target the nominal interest rate, not the money supply. only target the money supply, not the nominal interest rate.

Feedback For more information, see p. 394 of your textbook. 3. The interest rate that commercial banks charge each other for very shortterm loans is called the: prime rate. OK federal funds rate. Federal Reserve discount rate. commercial paper rate. bank loan rate. 4. When the Fed engages in an open market purchase, the money supply ____ and the nominal interest rate ______. increases; increases YES increases; decreases increases; may either increase or decrease depending on money demand NO decreases; increases decreases; decreases Feedback For more information, see p. 393 of your textbook. 5. If money demand in millions of dollars equals P(Y-50,000 i), where the price level (P) equals one, real income (Y) equals 10,000 and the nominal interest rate ( i ) is expressed as a decimal (for example, 5 percent is 0.05), and if the Federal Reserve wants to set the equilibrium nominal interest rate to equal 0.05, what must be money supply equal? NO 5,000 YES 7,500 10,000 12,500 15,000 Feedback For more information, see p. 393 of your textbook. 6. The Federal Reserve can decrease the money supply by: YES increasing reserve requirements. decreasing the discount rate. introducing deposit insurance. NO decreasing velocity. conducting open market purchases. Feedback For more information, see p. 396 of your textbook. 7. Higher nominal interest rates ____ the demand for money and a higher price level ___ the demand for money. increase; increases increase; decreases increase; does not change decrease; decreases OK decrease; increases 8. Lower nominal interest rates ____ the demand for money and lower real income ___ the demand for money. 1. During the Christmas shopping season the demand for money increases significantly. To offset the increase in money demand, the Fed must _____ the money supply in order to _____ nominal interest rates. OK increase; decrease increase; increase hold constant; increase

2.

decrease; increase decrease; decrease

The following table shows Alex's estimated annual benefits of holding different amounts of money. How much money will Alex hold if the nominal interest rate is 6 percent? (Assume she wants her money holdings to be in multiples of $100.) 700 800 OK 900 1000 1100 3. The amount of wealth an individual chooses to hold in the form of money is called: NO the money reaction function. YES the demand for money. the supply of money. expansionary monetary policy. contractionary monetary policy. Feedback For more information, see p. 385 of your textbook. 4. If money demand in millions of dollars equals P(Y-50,000 i), where the price level (P) equals one, real income (Y) equals 8,000 and the nominal interest rate ( i ) is expressed as a decimal (for example, 5 percent is 0.05), and if the Federal Reserve wants to set the equilibrium nominal interest rate to equal 0.03, what must the money supply equal? YES 6,500 NO 7,000 7,500 8,000 8,500 Feedback For more information, see p. 393 of your textbook. 5. Because an increase in the nominal interest rate raises the opportunity costs of holding money, the money demand curve: shifts to the right. NO shifts to the left. is vertical. YES slopes downward. slopes upward. Feedback For more information, see p. 389 of your textbook. 6. If inflation does not adjust rapidly in the short run, then when the Federal Reserve decreases the nominal interest rate, the real interest rate in the short run will ____. increase OK decrease not change equal the nominal interest rate be determined by saving and investment decisions. 7. _____ policy changes are made through the legislative process, while _____ policy changes are made by the Federal Open Market Committee. fiscal; international

OK

8.

fiscal; monetary international; fiscal monetary; fiscal monetary; international

The following table shows Alex's estimated annual benefits of holding different amounts of money. How much money will Alex hold if the nominal interest rate is 4 percent? (Assume she wants her money holdings to be in multiples of $100.) 700 800 NO 900 YES 1000 1100 Feedback For more information, see p. 386 of your textbook. 9. Lower real income ____ the demand for money and a lower price level ___ the demand for money. increases; increases increases; decreases increases; does not change OK decreases; decreases decreases; increases 10. Because a decrease in the nominal interest rate reduces the opportunity cost of holding money, the money demand curve: shifts to the right. shifts to the left. is vertical. OK slopes downward. slopes upward. increase; increases increase; decreases increase; does not change decrease; decreases decrease; increases 9. In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired reserve/deposit ratio is 15 percent. If commercial banks borrow 100 econs in reserves from the Central Bank through discount window lending, then the money supply in Macroland will _____ to _____ econs, assuming that the public does not wish to change the amount of currency it holds. NO increase; 3,133 increase; 4,100 YES increase; 4,667 decrease; 3,133 decrease; 2,400 Feedback OK For more information, see p. 395 of your textbook. 10. Lower nominal interest rates ____ the demand for money and a lower price level ___ the demand for money. NO increase; increases YES increase; decreases increase; does not change decrease; decreases

decrease; increases Feedback For more information, see p. 387 of your textbook. 1. OK Three macroeconomic factors that affect the demand for money are: the nominal interest rate; real income, and the price level. the nominal interest rate; capital, and labor. globalization, skill-biased technological change, and labor mobility. capital, labor, and technology. average labor productivity, real income, and the nominal interest rate. 2. Because a decrease in the nominal interest rate reduces the opportunity cost of holding money, the money demand curve: NO shifts to the right. shifts to the left. is vertical. YES slopes downward. slopes upward. Feedback For more information, see p. 389 of your textbook. 3. The money demand curve will shift to the left if: NO the nominal interest rate increases. the nominal interest rate decreases. price level increases. YES real income decreases. real income increases. Feedback For more information, see p. 389 of your textbook. 4. The decision about the forms in which to hold one's wealth is called the ________ decision. Taylor OK portfolio allocation Fisher effect life-cycle reaction function 5. Suppose that money demand in millions of dollars equals P(Y-50,000 i), where the price level (P) equals one, real income (Y) equals 10,000 and the nominal interest rate ( i ) is expressed as a decimal (for example, 5 percent is 0.05). Suppose also that the Federal Reserve has set the money supply to 7,500 so that the equilibrium nominal interest rate equals 0.05. If real income increases to 12,000 and the Fed takes no action, the equilibrium interest rate will: NO decrease to 0.03. remain at 0.05. increase to 0.07. YES increase to 0.09. increase to 0.10. Feedback For more information, see p. 393 of your textbook. 6. A policy reaction function describes how the action a policymaker takes depends on: YES the state of the economy. public approval ratings. whether or not it is an election year. NO the reaction of special interest groups. the political affiliation of the policymaker.

Feedback For more information, see p. 389 of your textbook. 7. The money demand curve relates ________ to the ________. NO aggregate demand; price level aggregate demand; nominal interest rate the aggregate quantity of money demanded; price level YES the aggregate quantity of money demanded; nominal interest rate the aggregate quantity of money demanded; aggregate demand Feedback For more information, see p. 388 of your textbook. 8. When Argentines increase their savings in U.S. dollars, the U.S. money: supply curve shifts left. supply curve shifts right. NO supply and demand curves shift left. demand curve shifts left. YES demand curve shifts right. Feedback For more information, see p. 390 of your textbook. 9. The following table shows Jay's estimated annual benefits of holding different amounts of money. How much money will Jay hold if the nominal interest rate is 8 percent? (Assume he wants his money holdings to be in multiples of $100.) 100 YES 200 NO 300 400 500 Feedback For more information, see p. 386 of your textbook. 10. Which of the following would be expected to decrease the U.S. demand for money? OK Grocery stores begin to accept credit cards in payment. The economy enters a boom period. Political instability increases dramatically in developing nations. Households fear increasing computer glitches will severely limit their ability to use ATMs. Financial investors become concerned about the increasing riskiness of stocks. 1. Higher nominal interest rates ____ the demand for money and a higher price level ___ the demand for money. increase; increases increase; decreases increase; does not change decrease; decreases OK decrease; increases 2. Based on the diagram the nominal interest rate equals 5% and the money supply equals 500. If the Federal Reserve wants to set the nominal interest rate at 9%, it must conduct open market _____ to set the money supply at _____.

OK

purchases; 100 sales; 100 purchases; 900 sales; 900 purchases; 700

3. Based on the diagram the nominal interest rate equals 3% and the money supply equals 300. If the Federal Reserve wants to set the nominal interest rate at 2%, it must conduct open market _____ to set the money supply at _____. purchases; 200 sales; 200 OK purchases; 400 sales; 400 purchases; 500 4. If the nominal interest rate is below the equilibrium value, then money demand is ______ than money supply, bond prices will ____, and the nominal interest rate will ____. OK greater; fall; increase greater; fall; decrease greater; rise; increase less; fall; increase less; rise; decrease 5. For the past 40 years the Federal Reserve has expressed policy in terms of a target value for: bank reserves. the Federal Reserve discount rate. YES the federal funds rate. NO open market operations. commercial bank lending. Feedback For more information, see p. 394 of your textbook. 6. When commercial banks borrow reserves from the Fed, the quantity of reserves in the banking system _____ and ultimately the money supply _____. OK increases; increases increases; decreases increases; does not change decreases; decreases decreases; increases 7. Jim has the following assets and liabilities: Which of the following actions would decrease Jim's money demand by $200? OK Jim writes a check for $200 to pay down his credit card balance. Jim sells a $200 government bond and puts the proceeds in his checking account. Jim writes a $200 check for cash and holds the cash. Jim sells $200 worth of stocks and puts the proceeds in his checking account. Jim gets a $200 cash advance on his credit card and puts the proceeds in his checking account. 8. Reserve requirements set by the Federal Reserve are the: OK minimum value of reserves to deposits that commercial banks are allowed to maintain. maximum value of reserves to deposits that commercial banks are allowed to maintain.

minimum amount of currency banks must hold in their vaults. maximum amount of currency banks are allowed to hold in their vaults. minimum amount of bonds commercial banks must purchase from the Federal Reserve. 9. The following table shows Jay's estimated annual benefits of holding different amounts of money. How much money will Jay hold if the nominal interest rate is 6 percent? (Assume he wants his money holdings to be in multiples of $100.) 100 200 YES 300 NO 400 500 Feedback For more information, see p. 386 of your textbook. 10. Based on the diagram the nominal interest rate equals 5% and the money supply equals 500. If the Federal Reserve wants to raise the interest rate to 7%, it must _____ the money supply to _____. increase; 300 OK decrease; 300 increase; 900 increase; 700 decrease; 700 Multiple Choice 1. The Federal Reserve can decrease the money supply by: OK increasing reserve requirements. decreasing the discount rate. introducing deposit insurance. decreasing velocity. conducting open market purchases. 2. For the past 40 years the Federal Reserve has expressed policy in terms of a target value for: bank reserves. the Federal Reserve discount rate. OK the federal funds rate. open market operations. commercial bank lending. 3. The interest rate that commercial banks charge each other for very shortterm loans is called the: prime rate. OK federal funds rate. Federal Reserve discount rate. commercial paper rate. bank loan rate. 4. If the money supply is less than money demand, people will ____ bonds which will cause bond prices to ____ and the nominal interest rate to _____ until money demand equals money supply. YES sell; fall; rise sell; fall; fall sell; rise; fall buy; fall; rise

NO Feedback

buy; rise; fall

For more information, see p. 392 of your textbook. 5. Based on the diagram the nominal interest rate equals 6% and the money supply equals 600. If the Federal Reserve wants to set the nominal interest rate at 4%, it must conduct open market _____ to set the money supply at _____. purchases; 200 sales; 200 OK purchases; 800 sales; 800 purchases; 1,000 6. When making discount window loans, the Federal Reserve lends bank reserves to: the U.S. Treasury. the nonbank public. OK commercial banks. foreign governments. discount retailers. 7. Because the Fed determines the money supply, the: money demand curve is downward sloping. money demand curve is upward sloping. YES money supply curve is vertical. NO money supply curve is downward sloping. money supply curve is upward sloping. Feedback For more information, see p. 392 of your textbook. 8. Which of the following would be expected to decrease the U.S. demand for money? OK Grocery stores begin to accept credit cards in payment. The economy enters a boom period. Political instability increases dramatically in developing nations. Households fear increasing computer glitches will severely limit their ability to use ATMs. Financial investors become concerned about the increasing riskiness of stocks. 9. If the money supply exceeds money demand, people will ____ bonds which will cause bond prices to ____ and the nominal interest rate to _____ until money demand equals money supply. NO sell; fall; rise sell; fall; fall sell; rise; fall buy; fall; rise YES buy; rise; fall Feedback For more information, see p. 392 of your textbook. 10. When Argentines increase their savings in U.S. dollars, the U.S. money: supply curve shifts left. supply curve shifts right. supply and demand curves shift left. demand curve shifts left. OK demand curve shifts right.

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