Economics 【Reading 19】Sample between, 2012, policy

kim226

A distinction between fiscal policy and monetary policy is that fiscal policy:

A) is aimed at promoting economic growth, while monetary policy is aimed at promoting price stability.

B) is typically expansionary, while monetary policy is typically contractionary.

C) concerns taxes and government spending, while monetary policy concerns the money supply.

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The distinction between fiscal and monetary policy is that a country’s government determines fiscal policy through taxes and spending, but its central bank determines monetary policy by controlling the money supply. Both fiscal and monetary policy can be used to promote economic growth and price stability. Either fiscal policy or monetary policy can be expansionary or contractionary.

kim226

On January 5, the U.S. Federal Reserve (the Fed) bought $10,000,000 of U.S. Treasury securities in the open market. At the time, the reserve requirement was 25%, and all banks had zero excess reserves. What is the potential impact of the Fed's purchase on the U.S. money supply?

A) $40,000,000 increase.

B) $10,000,000 increase.

C) $25,000,000 decrease.

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Buying securities by the Fed increases the money supply because they are injecting money into the banking system. The money supply can potentially increase by 1 / 0.25 × $10,000,000 = $40,000,000.

kim226

When comparing a barter economy with an economy that uses money as a medium of exchange we would expect increased efficiencies due to a reduction in which of the following?

A) The need to specialize.

B) Nominal interest rates.

C) Transaction costs.

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Money functions as a medium of exchange because it is accepted as payment for goods and services. Compare this to a barter economy, where if I have goat and want an ox, I have to find someone willing to trade. Finding someone takes time and time is costly. With money, I can sell the goat and buy the ox. Thus, transaction costs are reduced. Having money as a medium of exchange would not reduce the inflation rate, interest rates, or the need to specialize in the production of those goods in which we have a comparative advantage (low opportunity cost producer).

kim226

On January 3, Logan Industries deposited $1,000,000 in cash at Federal Savings Bank. No excess reserves were present at the time Logan made the deposit and the required reserve ratio is 10%. What is the maximum amount by which Federal Savings Bank can increase its lending?

A) $100,000.

B) $900,000.

C) $10,000,000.

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Since there are no excess reserves present at the time that Logan deposited the money, the bank would be required to maintain $100,000 ($1,000,000 × 0.10) on reserve and would be able to loan out or increase the money supply by $900,000.

kim226

When additional or excess reserves are injected into the U.S. banking system, the money supply can potentially increase by an amount equal to the additional excess reserves multiplied by which of the following?

A) Reciprocal of the required reserve ratio.

B) Reciprocal of one minus the required reserve ratio.

C) Required reserve ratio.

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The potential deposit expansion multiplier = 1 / (required reserve ratio)
The potential increase in the money supply = potential deposit expansion multiplier × increase in excess reserves

kim226

Banks choose to hold a higher percentage of depths as reserves because they believe general business conditions in the economy are subject to greater uncertainty. If all else is held constant, what is the most likely impact of this action?

A) The money supply will decrease.

B) The money supply will increase during a period of inflation, but will decrease if the economy goes into a recession.

C) There will be no effect on the money supply.

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If banks choose to hold excess reserves, they will decrease their lending. Less bank lending will cause the money supply to decrease.

kim226

The amount of money a commercial bank has available to lend is known as:

A) required reserves.

B) excess reserves.

C) fractional reserves.

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Excess reserves are the amount of money a commercial bank has available with which to make new loans, after depositing its required reserves with the central bank.

kim226

Which of the following is the most accurate definition of the velocity of money? The velocity of money is the:

A) GDP of a country divided by its price level.

B) GDP of a country divided by its money supply.

C) money supply of a country divided by its price level.

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Velocity is the average number of times per year each dollar is used to buy goods and services (velocity = nominal GDP / money). Therefore, the money supply multiplied by velocity must equal nominal GDP. The equation of exchange must hold with velocity defined in this way. Letting money supply = M, velocity = V, price = P, and real output = Y, the equation of exchange may be symbolically expressed as: MV = PY.

kim226

Which of the following relationships in regard to the quantity theory of money is least accurate?

A) Money × Velocity = Money Supply × Velocity.

B) Nominal GDP = Price × Money Supply.

C) Nominal GDP = Money Supply × Velocity = Price × Real Output.

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The quantity theory of money holds that: Money Supply × Velocity = Nominal GDP = Price × Real Output.

kim226

Which of the following statements about the demand for and supply of money is least accurate?

A) As gross domestic product rises, the demand for money balances also rises.

B) As inflation rises, the demand for money by households and businesses also rises.

C) As the interest rate rises, the supply of money also rises.

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The supply of money is determined by the monetary authorities and is not affected by changes in interest rates. Thus, the supply of money curve is vertical.