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.