Deck 4: Financial Markets

Question 1

The money demand curve will shift to the left when which of the following occurs?

A)a reduction in the interest rate
B)an increase in the interest rate
C)an open market sale of bonds by the central bank
D)an increase in income
E) none of the above

Answer 1

none of the above

Question 2

First,explain why the money demand curve is downward sloping.Second,explain what factor(s)will cause shifts in the money demand curve.

Answer 2

The money demand curve is downward sloping (with the interest rate on the vertical axis).It is assumed that money pays no interest.At the same time,individuals earn interest when they hold bonds.So,as the interest rate increases,individuals are more willing to incur the costs associated with converting bonds to money when they wish to buy goods.So,an increase in the interest rate causes a reduction in money demand.Money demand depends on the level of transactions and on the interest rate.As the level of transactions increases,individuals will increase money demand.Assuming that nominal income is correlated with nominal transactions,an increase in nominal income will cause an increase in money demand and shifts in the curve.

Question 3

Which of the following is a liability on a bank's balance sheet?

A)checkable deposits
B)reserves
C)loans
D)all of the above
E) none of the above

Answer 3

checkable deposits

Question 4

Which of the following is a component of money?

A)coins held by the nonbank public
B)bills held by banks
C)checkable deposits
D)all of the above

Question 5

Which of the following is a liability for the central bank?

A)currency
B)bonds
C)savings accounts
D)loans
E) checkable deposits

Question 6

In 2006,the average U.S.household held approximately how much currency (dollar bills and coins)?

A)$50
B)$100
C)$600
D)$1600
E) none of the above

Question 7

Suppose a one-year discount bond offers to pay $1000 in one year and currently has a 15% interest rate.Given this information,we know that the bond's price must be

A)$869.56.
B)$1150.
C)$850.
D)$950.
E) none of the above

Question 8

Which of the following is a characteristic of bonds?

A)pay zero nominal interest
B)can be used for transactions
C)are sold for a price that varies inversely with the interest rate
D)all of the above
E) none of the above

Question 9

Banks are different from other financial intermediaries because

A)banks receive funds and make loans.
B)some of a bank's deposits are money.
C)banks can conduct open market operations on their own.
D)banks do not need to hold reserves against their deposits.
E) banks are open longer hours.

Question 10

Which of the following will cause an increase in the amount of money that one wishes to hold?

A)an increase in the interest rate increase
B)a reduction in the interest rate increase
C)a reduction in income
D)none of the above

Question 11

Which of the following is a flow variable?

A)income
B)money
C)financial wealth
D)all of the above
E) none of the above

Question 12

The interest rate will increase as a result of which of the following events?

A)an increase in income
B)an open market purchase of bonds by the central bank
C)a reduction in income
D)all of the above
E) none of the above

Question 13

At the current interest rate,suppose the supply of money is less than the demand for money.Given this information,we know that

A)the price of bonds will tend increase.
B)the price of bonds will tend to fall.
C)production equals demand.
D)the goods market is also in equilibrium.
E) the supply of bonds also equals the demand for bonds.

Question 14

Which of the following affects demand for money?

A)prices
B)nominal income
C)interest rate
D)all of the above
E) none of the above

Question 15

Which of the following countries has adopted the U.S.dollar as its own currency?

A)Ecuador
B)Mexico
C)Canada
D)France
E) Australia

Question 16

Which of the following is a component of money?

A)bonds
B)saving
C)income
D)stocks
E) none of the above

Question 17

Which of the following is not included as a component of the M1 definition of money?

A)bonds
B)checkable deposits
C)coins and bills held by the nonbank public
D)all of the above
E) none of the above

Question 18

Suppose a one-year discount bond offers to pay $1000 in one year and currently sells for $950.Given this information,we know that the interest rate on the bond is

A)5)3%.
B)9)5%.
C)10%.
D)90%.
E) 110%.

Question 19

Which of the following is not an asset on a bank's balance sheet?

A)reserves
B)loans
C)checkable deposits
D)all of the above
E) none of the above

Question 20

The money demand curve will shift to the right when which of the following occurs?

A)an increase in income
B)a reduction in the interest rate
C)an increase in the money supply
D)all of the above
E) none of the above

Question 21

Which of the following is an asset for both a bank and a central bank?

A)currency
B)deposits
C)bonds
D)all of the above
E) none of the above

Question 22

Which of the following will occur when the central bank pursues expansionary monetary policy?

A)a leftward shift in the money demand curve and a leftward shift in the money supply curve
B)a rightward shift in the money demand curve and a leftward shift in the money supply curve.
C)a leftward shift in the money demand curve and a rightward shift in the money supply curve.
D)a rightward shift in the money demand curve and a rightward shift in the money supply curve.
E) none of the above

Question 23

Which of the following generally occurs when a central bank pursues expansionary monetary policy?

A)the central bank purchases bonds and the interest rate increases.
B)the central bank purchases bonds and the interest rate decreases.
C)the central bank sells bonds and the interest rate increases.
D)the central bank sells bonds and the interest rate decreases.

Question 24

Explain what types of policies a central bank can implement to reduce the interest rate.

Question 25

The federal funds rate is determined in which of the following markets?

A)the market for U.S. treasury securities
B)the money market
C)the bond market
D)the market for central bank money
E) none of the above

Question 26

For this question,assume that individuals do not hold currency (i.e.,c = 0).If the ratio of reserves to deposits is .10,the money multiplier is

A) .1.
B) 0.9.
C) 4.
D) 5.
E) 10.

Question 27

Which of the following is an asset of a central bank?

A)currency
B)bonds
C)reserves
D)none of the above

Question 28

For this question,assume that individuals do not hold currency (i.e.,c = 0).The money multiplier is equal to

A)1 / (1-c).
B)1 / [c + θ(1 - c)].
C)[c + θ(1 - c)].
D)1 / θ.
E) none of the above

Question 29

Use the market for central bank money to answer this question.Graphically illustrate and explain what effect a Federal Reserve purchase of bonds will have on this market and on the equilibrium interest rate.

Question 30

The money supply will tend to fall when which of the following occurs?

A)a central bank sale of bonds
B)a decrease in the ratio of reserves to deposits
C)a shift in public preferences away from currency to checkable deposits
D)all of the above
E) none of the above

Question 31

Which of the following generally occurs when a central bank pursues contractionary monetary policy?

A)the central bank purchases bonds and the interest rate increases.
B)the central bank purchases bonds and the interest rate decreases.
C)the central bank sells bonds and the interest rate increases.
D)the central bank sells bonds and the interest rate decreases.

Question 32

Which of the following events will cause the interest rate to increase?

A)an open market sale of bonds
B)an increase in the reserve deposit ratio (i.e., θ)
C)an increase in income
D)all of the above

Question 33

For this question,assume that individuals do not hold currency (i.e.,c = 0).The money multiplier is equal to

A)1)
B)1 / (1 - c).
C)θ)
D)1 / (1- θ).
E) none of the above

Question 34

For this question,assume that individuals hold both currency and checkable deposits.The money multiplier is equal to

A)1 / c.
B)1 / [c + θ(1 - c)].
C)[c + θ(1 - c)].
D)1 / θ.
E) 1 / (1-c)

Question 35

Graphically illustrate and explain what effect an increase in real income will have on the money market.

Question 36

Graphically illustrate and explain what effect a purchase of bonds by the Federal Reserve will have on the money market.

Question 37

Which of the following is a component of high powered money?

A)bonds held by banks, loans, and bank reserves
B)currency in circulation plus bank reserves
C)currency in circulation plus checkable deposits
D)bonds held by banks plus checkable deposits
E) the sum of currency in circulation, bank reserves, and checkable deposits

Question 38

Suppose a one-year discount bond offers to pay $100 in one year and currently sells for $99.Given this information,we know that the interest rate on the bond is

A)11.1%.
B)10%.
C)5)3%.
D)9)9%.

Question 39

Which of the following will cause the money multiplier to become smaller?

A)an increase in high powered money
B)a decrease in the ratio of reserves to checkable deposits
C)an increase in the public's preference for checking deposits as opposed to holding currency
D)a reduction in high powered money
E) none of the above

Question 40

We would expect which of the following to occur when the central bank pursues expansionary monetary policy?

A)an increase in bond prices and an increase in the interest rate (i)
B)a reduction in bond prices and an increase in i
C)an increase in bond prices and a reduction in i
D)a reduction in bond prices and a reduction in i
E) none of the above

Question 41

An increase in income will tend to cause which of the following?

A)an increase in the monetary base (H)
B)a reduction in H
C)an increase in the interest rate
D)a reduction in the money multiplier
E) none of the above

Question 42

Explain what effect changes in each of the following variables has on the demand for central bank money: (1)the interest rate,i; and (b)real income,Y.

Question 43

If individuals do not hold currency,we know that

A)M = D.
B)H = R.
C)the money multiplier is 1 / θ.
D)all of the above

Question 44

We would expect which of the following to occur when the central bank conducts an open market purchase of bonds?

A)a reduction in the monetary base (H)
B)a reduction in the money multiplier
C)an increase in the money multiplier
D)an increase in the money supply

Question 45

If individuals do not hold checkable deposits,we know that

A)M = CU.
B)H = CU.
C)the money multiplier is 1.
D)all of the above

Question 46

An open market sale of securities will tend to cause

A)a reduction in the supply of central bank money.
B)a reduction in the demand for currency.
C)a reduction in the demand for reserves.
D)none of the above

Question 47

The FDIC currently insures each bank account up to what level?

A)$10,000
B)$50,000
C)$250,000
D)$150,000

Question 48

An increase in income will cause

A)a reduction in the supply of central bank money.
B)a reduction in the demand for currency.
C)an increase in the demand for reserves.
D)none of the above

Question 49

Discuss the tools of the Federal Reserve and explain how each can be used to change the money supply and equilibrium interest rate.

Question 50

Based on our understanding of the determinants of the interest rate and bond prices,we know that a reduction in income will cause

A)an increase in bond prices and an increase in the interest rate (i).
B)a reduction in bond prices and an increase in i.
C)an increase in bond prices and a reduction in i.
D)a reduction in bond prices and a reduction in i.
E) none of the above

Question 51

Use the market for central bank money to answer this question.Graphically illustrate and explain what effect an increase in the reserve deposit ratio (θ)will have on this market and on the equilibrium interest rate.

Question 52

We would expect which of the following to occur when the central bank pursues contractionary monetary policy?

A)an increase in bond prices and an increase in the interest rate (i)
B)a reduction in bond prices and an increase in i
C)an increase in bond prices and a reduction in i
D)a reduction in bond prices and a reduction in i
E) none of the above

Question 53

We would expect which of the following to occur when the central bank conducts an open market sale of bonds?

A)a reduction in the monetary base (H)
B)a reduction in the money multiplier
C)an increase in H
D)an increase in the money multiplier
E) both C and D

Question 54

An increase in the parameter c,the proportion of money individuals wish to hold as currency,will tend to cause which of the following?

A)an increase in the monetary base (H)
B)a reduction in H
C)an increase in the money multiplier
D)a reduction in the money multiplier

Question 55

An increase in income will cause

A)a reduction in the supply of central bank money.
B)a reduction in the demand for currency.
C)a reduction in the demand for reserves.
D)none of the above
E) both B and C

Question 56

A reduction in the parameter c,the proportion of money individuals wish to hold as currency,will tend to cause which of the following?

A)an increase in the monetary base (H)
B)a reduction in H
C)an increase in the money multiplier
D)a reduction in the money multiplier

Question 57

A reduction in the reserve ratio,θ,will cause

A)an increase in the monetary base (H).
B)a reduction in H and a reduction in the money multiplier.
C)an increase in the money multiplier.
D)a reduction in the money multiplier.

Question 58

An increase in the interest rate will cause

A)a reduction in the supply of central bank money.
B)a reduction in the demand for currency.
C)a reduction in the demand for reserves.
D)all of the above
E) both B and C

Question 59

An increase in the reserve ratio,θ,will cause

A)an increase in the monetary base (H).
B)a reduction in H.
C)an increase in the money multiplier.
D)a reduction in the money multiplier.
E) none of the above

Question 60

What is the money multiplier and what factors determine its size?

Question 61

What is the difference between saving and savings?

Question 62

Graphically illustrate and explain what effect a sale of bonds by the Federal Reserve will have on the money market.

Question 63

Suppose a liquidity trap situation exists.Which of the following is most likely to occur if taxes are cut?

A)no change in output and no change in the interest rate
B)an increase in output and an increase in the interest rate
C)an increase in output and little change in the interest rate
D)an increase in output and a reduction in the interest rate
E) none of the above

Question 64

An open market purchase of bonds by the central bank will cause which of the following when a liquidity trap situation exists?

A)The interest rate will decrease.
B)The interest rate will not change.
C)Output will increase.
D)The money supply, M, will not change.
E) none of the above

Question 65

When a liquidity trap situation exists,we know that

A)an open market operation will have no effect on the supply of money.
B)an open market operation will have no effect on the monetary base.
C)fiscal policy will have no effect on the demand for goods.
D)expansionary monetary policy will be deflationary.
E) none of the above

Question 66

Which of the following conditions will most likely coincide with the existence of a liquidity trap?

A)inflation is rising
B)inflation is constant
C)inflation is zero
D)individuals prefer to hold only money and not bonds
E) the real interest rate is negative

Question 67

Use the money market to answer this question.Suppose there is a reduction in income.First,briefly explain what effect this will have on the interest rate.Second,explain all types of policies the central bank could implement to prevent this reduction in income from affecting the interest rate.

Question 68

The demand for money is given by Md = $Y (0.3 - i),where $Y = 120 and the supply of money is $30.
a.What is the equilibrium interest rate?
b.If the central bank wants to decrease i by 2%,at what level should it set the supply of money?

Question 69

An open market sale of bonds by the central bank will cause which of the following when a liquidity trap situation exists?

A)The interest rate will increase.
B)The interest rate will not change.
C)Output will decrease.
D)The money supply, M, will not change.
E) none of the above

Question 70

When a liquidity trap situation exists,the most appropriate policy to increase output would be

A)a central bank sale of bonds.
B)an increase in government spending.
C)a central bank purchase of bonds.
D)none of the above

Question 71

The demand for money is given by Md = $Y (0.3 - i),where $Y = 100 and the supply of money is $20.
a.What is the equilibrium interest rate?
b.What is the impact on the interest rate if central bank money is increased to $25?

Question 72

Which of the following will occur when an economy is faced with a liquidity trap situation?

A)A reduction in the price level will cause a rightward shift in the aggregate demand curve.
B)A reduction in the price level will cause a leftward shift in the aggregate demand curve.
C)The aggregate demand curve is now vertical.
D)The aggregate demand curve is now upward sloping.

Question 73

Explain what types of policies a central bank can implement to raise the interest rate.