Economics 102

Answer Key for Practice Questions 5
Spring 2001

I. Concepts

Refer to your textbook.

II.True/False Questions:

1. FALSE:  On its own, Diana's action has no effect on the money supply. The "currency held outside banks" category decreases by $10; the "demand deposits" category increases by $10.
2. TRUE
3.  FALSE : The required reserve ratio is the simplest monetary policy tool; open market operations are used more frequently.
4. FALSE : In a barter system a double coincidence of wants is necessary. This requirement is a disadvantage because finding such a double coincidence may be difficult and time-consuming.
5. FALSE : Demand deposits must be repaid on demand by the banks-they are liabilities (things that are owed).
6. FALSE : When the timing of two things is mismatched, the two things are not synchronized.
7. TRUE
8. TRUE : Since the price level is a relevant variable not listed on either axis, the demand curve will shift. The curve will shift to the right since higher prices require more units of money to buy the same set of goods and services.
9. FALSE : The demand for money does not refer to how much income people wish to have.
10. TRUE

III. Multiple Choice Questions

1. retain its purchasing power over time
2. Money market accounts.
3. Loan by First National Bank to Mr. Smith.
4. 160
5. First National Bank will have to reduce the volume of its new loans.
6. $900; $900
7. $300 million. Banking system reserves can support $1200 million when
    the reserve ratio is 25%. Reserves must be $300 million. When the money
    multiplier increases to 5, the money supply can increase to $1500 million.
8. An open market purchase of government securities and a decrease in the required reserve ratio.
9. The Fed reduces the discount rate.
10. Open market operations, because buying and selling of government securities can be done quickly and with precision.
11. 6.4%
12. lower; higher
13. fall; larger
14. lower; lower
15. how much of their financial assets people wish to hold in the form of money.
16. a shift in; a movement along
17. negative; vertical
18. there is an excess supply of money, bond prices rise, and the interest rate falls.
19.  the Federal Reserve reduces the money supply.
20. shift the supply of money curve to the right.
21. Money reduces the need to specialize
22. the price level.
23. savings deposits.
24. plus savings deposits, small-denomination time deposits, and money market
      mutual funds.
25. All of the above.
26. required reserves.
27. all of the above.
28. $1,000,000.
29. 1/required reserve ratio.
30. $12 billion.
31. People decide to take part of their loans in the form of currency rather than
      checking deposit.
32. the Board of Governors.
33. A decrease in the discount rate.
34. All of the above.
35. monetarists.
36. increase their holdings of money balances
37. i1
38. Omit

39. Omit

40. increased prices, lower interest rates, and increased output and employment.
41. all of the above.
42. 4
43. cause a higher inflation rate.
44. weakened by the effect of lower nominal interest rates on the velocity of money.
45. have usually been preceded by a decline in the growth rate of the money supply.

IV. Short Answer Question:

a.  k= .15
b. The new price will be 2.1
c. In the Classical Quantity Theory of Money when the money supply is increased this results in an equal percentage increase in price level and no change in the real level of output. The ratio of desired money holdings to income is assumed to stay constant in this problem.
d.  There will be no change in real output because the increase in government spending financed through borrowing will simply crowd out private sector spending, which includes investment expenditure by private businesses and consumption by households, and replace it with the equivalent amount of government expenditure. This results in no change in the real level of output.