Q: Suppose the required reserve ratio is 10%. If a customer deposits $2,000 in cash into a bank, what is the maximum possible increase in the money supply according to the simple deposit multiplier?

$$2,000 \times \frac{1}{0.10} = 20$$,000$

Q: According to the quantity theory of money, if the money supply grows at 6% per year, velocity is constant, and real GDP grows at 2% per year, what is the predicted inflation rate?

$$6\% + 0\% = 2\% + \text{Inflation Rate} \implies \text{Inflation Rate} = 4\%$$

Question 1

Suppose the required reserve ratio is 10%. If a customer deposits $2,000 in cash into a bank, what is the maximum possible increase in the money supply according to the simple deposit multiplier?

Accepted Answer

$$2,000 	imes \frac{1}{0.10} = 20$$,000$

Question 2

Which of the following best explains why the real-world deposit multiplier is typically less than the simple deposit multiplier?

Accepted Answer

Consumers keep some currency out of the banking system and banks may hold excess reserves.

Question 3

If the required reserve ratio is 20%, what is the value of the simple deposit multiplier?

Accepted Answer

$$\frac{1}{0.20} = 5$$

Question 4

During the hyperinflation in Germany in the 1920s, what was the primary cause of the rapid increase in prices?

Accepted Answer

A rapid increase in the money supply due to the government financing spending by selling bonds to the central bank.

Question 5

According to the quantity theory of money, if the money supply grows at 6% per year, velocity is constant, and real GDP grows at 2% per year, what is the predicted inflation rate?

Accepted Answer

$$6\% + 0\% = 2\% + 	ext{Inflation Rate} \implies 	ext{Inflation Rate} = 4\%$$

Question 6

Which of the following is NOT one of the four main goals of monetary policy set by the Federal Reserve?

Accepted Answer

Maximizing government tax revenue

Question 7

If the money supply increases by 5%, velocity is unchanged, and real GDP increases by 3%, what happens to the price level according to the quantity theory of money?

Accepted Answer

The price level increases by 2%.

Question 8

Which of the following best describes the role of the Federal Open Market Committee (FOMC)?

Accepted Answer

It conducts America's monetary policy by managing open market operations.

Question 9

A country experiences a 10% increase in the money supply, a 2% increase in real GDP, and velocity is constant. According to the quantity theory of money, what is the expected inflation rate?

Accepted Answer

$$10\% - 2\% = 8\%$$

Question 10

Which of the following statements about the Federal Reserve System is TRUE?

Accepted Answer

The Federal Reserve is subject to oversight from Congress but not controlled by the executive branch.

Question 11

If banks decide to hold more excess reserves and consumers hold more currency, what will happen to the real-world money multiplier?

Accepted Answer

It will decrease.

Question 12

Which of the following is an example of hyperinflation?

Accepted Answer

Prices increase by more than 100% per year, such as in Zimbabwe in the 2000s.

Question 13

Which equation represents the quantity theory of money?

Accepted Answer

$$M 	imes V = P 	imes Y$$

Question 14

Which of the following would most likely cause a bank panic?

Accepted Answer

Many banks experience simultaneous bank runs.

Question 15

If the required reserve ratio is 5% and a bank receives a new deposit of $5,000, what is the maximum amount of new loans the bank can make?

Accepted Answer

$$5,000 	imes (1 - 0.05) = 4$$,750$

Question 16

Which of the following best describes monetarism as advocated by Milton Friedman?

Accepted Answer

The money supply should grow at a steady, predictable rate to promote economic stability.

Question 17

If the velocity of money increases while the money supply and real GDP remain constant, what happens to the price level according to the quantity theory of money?

Accepted Answer

The price level increases.

Question 18

Which of the following is a direct result of the Federal Reserve acting as a lender of last resort?

Accepted Answer

It prevents individual banks from failing due to temporary liquidity problems.

Question 19

If the money supply grows at the same rate as real GDP and velocity is constant, what will happen to the price level?

Accepted Answer

The price level will remain stable.

Question 20

Which of the following is a likely consequence of a government forcing its central bank to purchase government bonds to finance a budget deficit?

Accepted Answer

An increase in the money supply and potential hyperinflation.

Money, Banking, and Monetary Policy: Study Notes for Macroeconomics

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