Question 1

Suppose the central bank increases the required reserve ratio from 10% to 20%. What is the effect on the simple money multiplier, and what is the new value of the multiplier?

Accepted Answer

The money multiplier decreases; new multiplier is $\frac{1}{0.2} = 5$

Question 2

Which of the following best describes the wealth effect as it relates to the aggregate demand curve?

Accepted Answer

As the price level falls, the real value of household wealth rises, leading to an increase in consumption and aggregate demand.

Question 3

If the Federal Reserve wants to implement an expansionary monetary policy, which of the following actions is it most likely to take?

Accepted Answer

Lower the federal funds rate by buying government securities.

Question 4

A bank has $\$100,000$ in deposits and the required reserve ratio is $10\%$. What is the maximum amount the bank can lend out?

Accepted Answer

$\$90,000$

Question 5

Which of the following would cause a rightward shift in the short-run aggregate supply (SRAS) curve?

Accepted Answer

A decrease in input prices, such as oil.

Question 6

If the economy is currently producing below its long-run equilibrium output, which policy action would help return the economy to full employment?

Accepted Answer

The central bank decreases the discount rate.

Question 7

Which of the following is included in M2 but not in M1?

Accepted Answer

Savings deposits

Question 8

Suppose the price level increases in the U.S. relative to other countries. According to the international trade effect, what happens to U.S. net exports and aggregate demand?

Accepted Answer

Net exports decrease, causing aggregate demand to decrease.

Question 9

Which of the following best describes the double coincidence of wants problem in a barter economy?

Accepted Answer

Both parties must have what the other wants in order to trade.

Question 10

If the Federal Reserve increases the interest rate paid on reserves (IORB rate), what is the likely effect on the money supply?

Accepted Answer

Banks will hold more reserves, decreasing the money supply.

Question 11

Which of the following is an example of commodity-backed money?

Accepted Answer

A $\$20$ bill that can be exchanged for a fixed amount of gold.

Question 12

According to the quantity theory of money, if the money supply grows by 5% and real GDP grows by 2%, what is the predicted inflation rate, assuming velocity is constant?

Accepted Answer

$5\% - 2\% = 3\%$

Question 13

Which of the following is NOT a function of money?

Accepted Answer

A method for producing goods

Question 14

If banks hold excess reserves instead of lending them out, what is the effect on the money multiplier and the money supply?

Accepted Answer

Both the money multiplier and the money supply decrease.

Question 15

Which of the following would be considered a liability on a bank's balance sheet?

Accepted Answer

Customer deposits

Question 16

Suppose the economy is experiencing stagflation. Which combination of events is most likely occurring?

Accepted Answer

High inflation and high unemployment

Question 17

If the Federal Reserve wants to decrease the money supply using open market operations, what should it do?

Accepted Answer

Sell government securities to banks and the public.

Question 18

Which of the following best explains why sticky prices can lead to short-run fluctuations in output?

Accepted Answer

Prices do not adjust immediately to changes in demand, causing firms to change output instead.

Question 19

A negative supply shock, such as a sudden increase in oil prices, will most likely cause which of the following in the AD/AS model?

Accepted Answer

A leftward shift of the SRAS curve, leading to higher prices and lower output.

Question 20

Which of the following is a new tool of the Federal Reserve introduced after the 2008 financial crisis?

Accepted Answer

Paying interest on reserves (IORB rate)

Macroeconomics Study Notes: AD/AS Model, Money & Banking, and Monetary Policy

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