Question 1

A bank receives a new deposit of $1,000. If the required reserve ratio is 10%, what is the maximum total increase in deposits that the banking system can create from this initial deposit, assuming no currency drain and all loans are redeposited? Use the deposit multiplier formula.

Accepted Answer

$10,000

Question 2

According to the Quantity Theory of Money, if the money supply grows at 8% per year, real GDP grows at 3% per year, and velocity is constant, what is the predicted inflation rate?

Accepted Answer

$$5\%$$

Question 3

Which of the following is NOT a function of money?

Accepted Answer

A means of production

Question 4

If the Federal Reserve conducts an open market purchase of government bonds, what is the most likely immediate effect on the federal funds rate and the money supply?

Accepted Answer

Federal funds rate decreases; money supply increases

Question 5

Suppose the nominal interest rate is 6%, the expected inflation rate is 2%, and the risk premium is 1%. According to the formula $$r = i - 	ext{risk premium} - 	ext{inflation}$$, what is the real rate of return?

Accepted Answer

$$3\%$$

Question 6

Which of the following contributed to the Great Depression?

Accepted Answer

All of these things

Question 7

If the price of bonds in the secondary market rises, what happens to the yield on those bonds and to interest rates in general?

Accepted Answer

Yield decreases; interest rates decrease

Question 8

A bank has assets of $$1,100 (reserves 100$$, loans $$1,000) and liabilities of 1$$,000 (deposits). If $100 in loans default, what is the new value of owners' equity?

Accepted Answer

$$0$$

Question 9

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

Accepted Answer

Money market accounts

Question 10

If the Federal Reserve increases the interest rate paid on reserves (IOR), what is the likely effect on the demand for reserves by banks?

Accepted Answer

Demand for reserves increases

Question 11

Which of the following is a primary benefit of fractional reserve banking to the economy?

Accepted Answer

Maturity transformation: converting short-term deposits into long-term loans

Question 12

Suppose the central bank wants to reduce inflation. According to the Quantity Theory of Money, which policy would be most effective?

Accepted Answer

Reduce the growth rate of the money supply

Question 13

Which of the following is NOT included in bank reserves for private banks?

Accepted Answer

Loans to commercial firms

Question 14

During a period of deflation, which of the following is most likely to occur?

Accepted Answer

Delayed expenditures and rising unemployment

Question 15

If the Federal Reserve targets a lower federal funds rate but banks expect higher inflation in the long run, what is the likely effect on the nominal interest rate charged by banks?

Accepted Answer

Banks will charge a higher nominal interest rate to cover expected inflation

Question 16

Which of the following is a plausible risk of rapid M2 growth that exceeds real GDP growth?

Accepted Answer

Unexpected inflation that hurts lenders and workers without COLAs

Question 17

Which of the following is a key difference between investment banks and commercial banks?

Accepted Answer

Investment banks are less liquid and offer higher returns; commercial banks must maintain liquidity for depositors

Question 18

Suppose the Bank of Japan engages in quantitative easing by buying assets from commercial banks. What is the most likely effect on the overnight call rate (similar to the US federal funds rate)?

Accepted Answer

The supply of reserves shifts right, and the overnight call rate decreases

Question 19

Which of the following variables is likely to be negatively correlated with real GDP?

Accepted Answer

The average number of initial applications for unemployment insurance

Question 20

Following the energy shocks of 1973 and 1979, the Fed chose to prioritize ______ in its dual mandate and so it set a dramatically ____ target federal funds rate.

Accepted Answer

Inflation; higher

Money, Banking, and Macroeconomic Policy: Study Notes

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