Question 1

The banking system has just experienced an increase in deposits of $50,000. The currency drain ratio is 20 percent and the desired reserve ratio is 10 percent. What does the money multiplier equal?

Accepted Answer

The money multiplier is calculated as 1 divided by the sum of the currency drain ratio and the desired reserve ratio. Here, it is 1 / (0.20 + 0.10) = 1 / 0.30 = 3.33. However, the correct calculation should consider the formula for the money multiplier in the presence of a currency drain, which is 1 / (desired reserve ratio + currency drain ratio * (1 - desired reserve ratio)). This results in 1 / (0.10 + 0.20 * 0.90) = 1 / 0.28 = 3.57, which rounds to approximately 4.00.

Question 2

International data supports the quantity theory of money conclusion that high money growth rates are associated with inflation.

Accepted Answer

International data shows a consistent relationship between high money growth rates and inflation, which supports the quantity theory of money.

Question 3

The commercial banks in Lendland have Reserves $400 million
Loans $3,600 million
Deposits $4,000 million
Total assets $4,600 million The banks hold no excess reserves.
a) Calculate the banks' reserve ratio.
b) An immigrant arrives in Lendland with $5 million, which he deposits in a bank. How much does the immigr bank lend initially?

Accepted Answer

The answer of The commercial banks in Lendland have Reserves...

Question 4

_ in the desired reserve ratio will the money multiplier.

Accepted Answer

An increase in the desired reserve ratio decreases the money multiplier because banks hold more reserves and lend out less, reducing the overall money supply expansion.

Question 5

In comparing growth rates of money growth and inflation across countries, the long- run proposition of the quantity theory of money is supported.

Accepted Answer

According to the quantity theory of money, there is a direct relationship between money growth and inflation. Therefore, if we compare the growth rates of money and inflation across countries in the long run, we should observe a strong positive correlation, which supports the theory.

Question 6

In the economy of Brightland, the commercial banks have deposits of $600 billion. Their reserves are $60 billion. reserves are in deposits with the Central Bank and the commercial banks hold no excess reserves. There is $120 b Central Bank notes outside the banks, and there are no coins.
a) What is the economy's monetary base?
b) What is the quantity of money in the economy?
c) Calculate the money multiplier.
d) Suppose the Central Bank of Brightland undertakes an open market purchase of securities of so that the mon base increases by $5 billion. By how much will the quantity of money change?

Accepted Answer

The answer of In the economy of Brightland, the commercial...

Question 7

If the desired reserve ratio rises, the money multiplier

Accepted Answer

When the desired reserve ratio (DRR) rises, banks are required to hold a higher percentage of their deposits as reserves, which reduces the amount of money they can lend out. This decrease in the amount of money available for lending reduces the money multiplier, resulting in a decrease in the amount of money that can be created by the banking system. Therefore, the correct answer is C - the money multiplier decreases.

Question 8

In the economy of Briskland, the commercial banks have deposits of $500 billion. Their reserves are $50 billion, 8 percent of which is in deposits with the Central Bank. There is $20 billion in Central Bank notes outside the bank there are no coins.
a) What is the monetary base?
b) If all the deposits are money, what is the total quantity of money?
c) What is the banks' reserve ratio?
d) What is the currency drain as a percentage of the quantity of deposits?

Accepted Answer

The answer of In the economy of Briskland, the commercial...

Question 9

In Zealand, banks' desired reserve ratio is 20 percent and the currency drain also equals 20 percent.
The money multiplier equals .

Accepted Answer

The money multiplier is calculated using the formula 1/required reserve ratio. In this scenario, the required reserve ratio (RRR) is 20%, so the money multiplier is 1/0.20, which equals 5. Therefore, one dollar deposited in the bank can generate up to five dollars in the economy. However, the currency drain also equals 20%, which means that for every dollar deposited in the bank, 20 cents will be withdrawn as currency and not used for further lending. The effective reserve ratio is therefore 20% + (20% x 20%), which equals 24%. The adjusted money multiplier is then 1/0.24, which equals 4.17. Therefore, one dollar deposited in the bank can generate up to 4.17 dollars in the economy. However, the question asks for the money multiplier, not the adjusted money multiplier. To get the money multiplier, we need to take the adjusted money multiplier and multiply it by the currency drain, which is 0.80 (100% - 20%). Therefore, the money multiplier is 4.17 x 0.80, which equals 3.34. Rounded to the nearest tenth, the answer is 3.0.

Question 10

The commercial banks in Fundland have Reserves $500 million
Loans $3,500 million
Deposits $4,000 million
Total assets $5,000 million The banks hold no excess reserves.
a) Calculate the banks' desired reserve ratio.
b) An immigrant arrives in Fundland with $10 million, which she deposits in a bank. How much does the imm bank lend initially?

Accepted Answer

The answer of The commercial banks in Fundland have Reserves...

Question 11

In Zealand, banks' desired reserve ratio is 20 percent and there is no currency drain. The money multiplier equals .

Accepted Answer

The money multiplier can be calculated using the formula:
Money multiplier = 1 / Reserve requirement ratio
In this case, the reserve requirement ratio is 20%, so the money multiplier is:
Money multiplier = 1 / 0.20 = 5.0

Question 12

Fisheria is a country in which the quantity theory of money operates. The country has a constant population, cap stock, and technology. In 2008, real GDP was $300 million, the quantity of money was $60, and the velocity of cir of money was 10. In 2009, the price level rose by 20 percent.
a) What was the price level in 2008? (The price level is measured by the GDP deflator, which is 100 in 2000. So level from the equation of exchange needs to be multiplied by 100 to convert it to the GDP deflator.)
b) What was real GDP in 2009?
c) What was the velocity of circulation in 2009?
d) What was the quantity of money in 2009?

Accepted Answer

The answer of Fisheria is a country in which the...

Question 13

According to the quantity theory of money, inflation causes an increase in the money supply.

Accepted Answer

The quantity theory of money states that inflation is directly proportional to the money supply, but it does not suggest that inflation causes an increase in the money supply. In fact, an increase in the money supply can cause inflation, but inflation cannot cause an increase in the money supply.

Question 14

in the currency drain the money multiplier.

Accepted Answer

An increase in the currency drain decreases the money multiplier because more money is held as cash rather than being deposited in banks, reducing the base for further money creation through lending.

Question 15

The smaller the currency drain, the

Accepted Answer

A smaller currency drain means more money stays within the banking system, allowing banks to lend more, which increases the money supply when reserves increase.

Question 16

Friedmania is a country in which the quantity theory of money operates. The country has a constant population, capital stock, and technology so real GDP does not change. In 2008, real GDP was $500 million, the price level, measured by the GDP deflator, was 150 and the velocity of circulation of money was 10. (Because the price level is measured by the GDP deflator, it must be divided by 100 before it is used in the equation of exchange.) In 2009 the quantity of money increased by 20 percent.
a) What was the quantity of money in 2008?
b) What was the velocity of circulation in 2009?
c) What was the price level in 2009?

Accepted Answer

The answer of Friedmania is a country in which the...

Quiz 8: Money, the Price Level, and Inflation