ECON STUDY GUIDE
226. Suppose a commercial banking system has $240,000 of outstanding checkable deposits and actualreserves of $85,000. If the reserve ratio is 25 percent,the banking systemcan expand the supply of money by a maximum of
A. $75,000. B. $25,000. C. $5,000. D. $100,000.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
AssetsLiabilities + Net WorthReserves$100,000Checkable Deposits$300,000Loans140,000StockShares200,000Securities60,000Property200,000 227.
The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. This bank can safely expand its loans by a maximum of A. $20,000.
B. $40,000. C. $100,000. D. $200,000.
AACSB: KnowledgeApplication
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
AssetsLiabilities + Net WorthReserves$120,000Checkable Deposits$300,000Loans140,000StockShares200,000Securities40,000Property200,000 228.
The accompanying balance sheet is for the First FederalBank. Assume the required reserve ratio is 20 percent. The monetary multiplier is A. 3.00.
B. 4.00.
C. 5.00.
D. 6.67.
AACSB: KnowledgeApplication
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
AssetsLiabilities + Net WorthReserves$120,000Checkable Deposits$300,000Loans140,000StockShares200,000Securities40,000Property200,000 229.
The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. If the originalbank balance sheet was for the whole commercial banking system rather than a singlebank, loans and deposits could have beenexpanded by a maximum of
A. $40,000. B. $100,000. C. $200,000. D. $300,000.
AACSB: KnowledgeApplication
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
AssetsLiabilities + Net WorthReserves$120,000Checkable Deposits$300,000Loans140,000Stock Shares200,000Securities40,000Property200,000 230.
The accompanying table is the consolidated balancesheet for the commercial banking system. All figures are in billions. Assume that the requiredreserve ratio is 10 percent. The maximum amount by which this commercial banking system can expand the supplyof money by lending is
$120,000 billion.
$300,000 billion.
$600,000 billion.
D. $900,000 billion.
AACSB: KnowledgeApplication
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
AssetsLiabilities + Net WorthReserves$120,000Checkable Deposits$300,000Loans140,000StockShares200,000Securities40,000Property200,000 231.
The accompanying table is the consolidated balancesheet for the commercialbanking system. All figures are in billions.Assume that the requiredreserve ratio is 10 percent.If there is a deposit of $10billion of new currencyinto checking accounts in the bankingsystem, excess reserves will increaseby
$1 billion.
$2 billion.
C. $9 billion.
D. $10 billion.
AACSB: KnowledgeApplication
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
Assume that the reserve ratio is 20 percentand banks in the systemare loaning out all their excess reserve. If people collectively cash out $10 billion from their checking accounts, then the lending ability of the banking system will be
increased by $10 billion.
decreased by $10 billion.
C. decreased by $40 billion.
D. decreasedby $50 billion.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
Which of the following factors can contributeto a reductionin the money supply?
A. bank purchases of Treasurybonds from the Fed
bank sales of government bonds to meet liquidity demands
banks expanding the approval and granting of loans
a decreasein the requiredreserve ratio
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
"Leverage" in finance refers to the
increase in profits or losses from an investment.
use of one's own money in an investment.
C. use of borrowingmoney in order to magnify returns from an investment.
D. shifting of financial risk onto an insurer.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
What percentage of the money that a typicalmodern bank invests comes from borrowing?
about 50 percent
about 33 percent
about 75 percent
D. about 95 percent
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Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
Banks' borrowed funds come mostly from
buying bonds and loans.
buying stocks and sellingTreasury bonds.
issuing stocks and buying Treasury bonds.
D. issuing bonds and accepting deposits.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
The use of high leveraging by banks leads to the banking system's
A. competitiveness.
B. instability.
vital role in the economy.
monopoly power.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
One way to enhance the stability of the banking system is to
A. require higher bank capitalization, or net worth.
increase the federalfunds rate.
reduce the requiredreserve ratio.
require more leveraging by banks.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
Requiring banks to use less leveraging is equivalent to
expanding the loan portfolio of banks.
reducing the banks' reserve ratio.
C. requiring a higher level of bank net worth.
D. requiring banks to accept more deposits.
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
True / False Questions
When you depositmoney at a bank, the bank will normallyturn around and lend most of it to a borrower.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-01 Discuss why the U.S. banking system is called a " fractional reserve" system.
Test Bank: II Topic: The Fractional Reserve System
If all depositors of a bank were to try withdrawing all their deposits at the same time, a good solid bank should be able to meet all the withdrawals.
FALSE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-01 Discuss why the U.S. banking system is called a " fractional reserve" system.
Test Bank: II Topic: The Fractional Reserve System
When cash is deposited at a bank, the composition of the money supply is changed but the total supply of money is not.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-02 Explain the basics of a banks balance sheet and the distinction between a banks actual reserves and its required reserves.
Test Bank: II Topic: A Single Commercial Bank
When a bank's loan defaults, then the bank's reserveswill decrease.
FALSE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-02 Explain the basics of a banks balance sheet and the distinction between a banks actual reserves and its required reserves.
Test Bank: II Topic: A Single Commercial Bank
The amount of requiredreserves that a bank must hold is computedas a certain fractionof the bank's assets.
FALSE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-02 Explain the basics of a banks balance sheet and the distinction between a banks actual reserves and its required reserves.
Test Bank: II Topic: A Single Commercial Bank
When a bank accepts additional deposits, its required reserves and excess reserves will both increase.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-02 Explain the basics of a banks balance sheet and the distinction between a banks actual reserves and its required reserves.
Test Bank: II Topic: A Single Commercial Bank
When a bank grants a loan, the money supply M1 will increase, even if the funds from the loan are not spent.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-03 Describe how a bank can create money.
Test Bank: II Topic: Money-CreatingTransactions of a Commercial Bank
The primary purpose of the reserve requirements for banks is not really to ensure liquidity to meet withdrawals, but rather to allow the Fed some control over the money supply.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-03 Describe how a bank can create money.
Test Bank: II Topic: Money-CreatingTransactions of a Commercial Bank
The granting of a $10,000 loan and the purchase of a $10,000 government bond from a securities dealer by a commercial bank would have the same effect on the money supply.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-03 Describe how a bank can create money.
Test Bank: II Topic: Money-CreatingTransactions of a Commercial Bank
A bank can grant loans up to the amount of its actual reserves.
FALSE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-03 Describe how a bank can create money.
Test Bank: II Topic: Money-CreatingTransactions of a Commercial Bank
A bank has reserves of $30,000 and depositsof $120,000. If the reserve ratio is 10 percent, then this bank can lend out a maximum of $12,000in new loans.
FALSE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-03 Describe how a bank can create money.
Test Bank: II Topic: Money-CreatingTransactions of a Commercial Bank
When a bank buys government securities from the Fed, then the bank's ability to "create money" will be reduced.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-03 Describe how a bank can create money.
Test Bank: II Topic: Money-CreatingTransactions of a Commercial Bank
A check for $10,000 drawn on Bank A and depositedat Bank B will increasethe excess reservesin Bank B by $10,000.
FALSE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-03 Describe how a bank can create money.
Test Bank: II Topic: Money-CreatingTransactions of a Commercial Bank
The federalfunds rate is the interestrate that the Fed charges banks for its loans to them.
FALSE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-03 Describe how a bank can create money.
Test Bank: II Topic: Money-CreatingTransactions of a Commercial Bank
One bank can borrow reservesfrom another bank, and the interest on the loan is called the federalfunds rate.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-03 Describe how a bank can create money.
Test Bank: II Topic: Money-CreatingTransactions of a Commercial Bank
When Bank A borrows reservesin the federalfunds market, it causes the total reservesin the banking system to increase.
FALSE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-03 Describe how a bank can create money.
Test Bank: II Topic: Money-CreatingTransactions of a Commercial Bank
When a commercialbank buys government (Treasury) bonds from the general public, money is created.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-03 Describe how a bank can create money.
Test Bank: II Topic: Money-CreatingTransactions of a Commercial Bank
If a bank has excess reserves of $100,000, then it can lend out only up to $100,000; but if the bankingsystem has excess reservesof $100,000, then the systemcan make additional loans totaling more than $100,000.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-04 Describe the multiple expansion of loans and money by the entire banking system.
Test Bank: II Topic: The Banking System: Multiple-Deposit Expansion
If banks borrow from the Fed, the banking system'sreserves will increase, but if banks borrow from one another, the banking system'sreserves will not change.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-04 Describe the multiple expansion of loans and money by the entire banking system.
Test Bank: II Topic: The Banking System: Multiple-Deposit Expansion
When bank loans are repaid and the banks hold on to the funds as additional reserves, then the bankingsystem's abilityto "create" money decreases.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 15-04 Describe the multiple expansion of loans and money by the entire banking system.
Test Bank: II Topic: The Banking System: Multiple-Deposit Expansion
The monetary multiplier can also be called the spendingmultiplier.
FALSE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
The maximum deposit creationthat can be made in the bankingsystem is equal to the excess reserves divided by the required reserve ratio.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
If the banking system has $20 billion in excess reserves and the reserve ratio is 10 percent, the system can increaseits loans by a maximumof $22 billion.
FALSE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
If a commercialbanking system has $200,000 in checkable deposits,actual reserves of $70,000, and a reserve ratio of 20 percent, then the banking system can expand the supply of money by a maximum of $180,000.
FALSE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
During a recession, when banks tend to increase their excess reserves,the money supply M1 decreases.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
While the withdrawal of cash from banks does not affectmoney supply immediately, it will affect the banking system's lending capacity,which will eventually lead to a contraction in money supply.
TRUE
AACSB: KnowledgeApplication Accessibility: Keyboard Navigation
Blooms: RememberDifficulty: 01 Easy
Learning Objective: 15-05 Define the monetary multiplier, explain how tocalculate it, and demonstrate its relevance.
Test Bank: II Topic: The Monetary Multiplier
Chapter 16 Interest Rates and MonetaryPolicy Answer Key
Multiple Choice Questions
The transactions demand for money is most closely relatedto money functioning as a
A. unit of account.
B. medium of exchange.
store of value.
measure of value.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
The asset demand for money is most closely relatedto money functioning as a
unit of account.
medium of exchange.
C. store of value.
D. measure of value.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
The desire to hold money for transactions purposes arises because
A. receipts of income and expenditures are not perfectlysynchronized.
people fearthat prices will rise.
households want money on hand in case a good financialinvestment opportunity arises.
low interest rates reduce the opportunity cost of holding money.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
The asset demand for money
A. is unrelated to both the interest rate and the level of GDP.
B. varies inversely with the rate of interest.
varies inversely with the level ofreal GDP.
varies directly with the level of nominalGDP.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
On a diagramwhere the interest rate and the quantity of money demandedare shown on the vertical and horizontal axes, respectively, the transactions demand for money can be represented by
A. a line paralleltothe horizontal axis.
B. a vertical line.
a downsloping line or curve from left to right.
an upsloping line orcurve from left to right.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
On a diagramwhere the interest rate and the quantity of money demandedare shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by
a line paralleltothe horizontal axis.
a vertical line.
C. a downsloping line or curve from left to right.
D. an upslopingline or curve from left to right.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
On a diagramwhere the interest rate and the quantity of money demandedare shown on the vertical and horizontal axes respectively, the total demand for money can be found by
A. horizontallyadding the transactions and the asset demand for money.
vertically subtracting the transactions demand from the asset demand for money.
horizontally subtracting the asset demand from the transactions demand for money.
vertically adding the transactions and the asset demand for money.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
The total demand for money curve will shift to the right as a resultof
A. an increase in nominal GDP.
an increase in the interest rate.
a decline in the interest rate.
a decline in nominal GDP.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
Which of the following statements is correct?Other things equal,
a decline in real output will shift both the transactions demand curve for money and the total money demandcurve to the right.
a decline in the interestrate will shift the asset demand curve formoney to the right but leave the total money demandcurve unchanged.
C. deflation will shift both the transactions demand curve for money and the total money demand curve to the left.
D. inflation will shift the transactions demand curve for money to the right but leave the total money demandcurve unchanged.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
If nominal GDP is $600 billionand, on the average, each dollar is spent three times per year, then the amountof money demanded for transactions purposes will be
$1,800 billion.
$600 billion.
C. $200 billion.
D. $1,200 billion.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
In which of the following situations is it certain that the quantityof money demandedby the publicwill decrease?
nominal GDP decreases and the interest rate decreases
nominal GDP increases and the interest rate decreases
C. nominal GDP decreases and the interest rate increases
D. nominal GDP increases and the interest rate increases
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
It is costly to hold money because
A. deflation may reduce its purchasing power.
B. in doing so, one sacrifices interest income.
bond prices are highly variable.
the rate at which money is spent may decline.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
An increase in nominal GDP increasesthe demand for money because
A. interest rates will rise.
B. more money is needed to finance a larger volume of transactions.
bond prices will fall.
the opportunity cost of holding money will decline.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
Which of the followingis correct?
A. The asset demand for money is downsloping because the opportunity cost of holding money declines as the interestrate rises.
B. The asset demand for money is downsloping because the opportunity cost of holding money increases as the interestrate rises.
The transactions demand for money is downsloping because the opportunity cost of holding money variesinversely with the interest rate.
The asset demand for money is downsloping because bond prices and the interest rate are directlyrelated.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
The opportunity cost of holdingmoney
is zero because money is not an economic resource.
varies inversely with the interest rate.
C. varies directly with the interest rate.
D. varies inversely with the levelof economic activity.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
The total demand for money will shift to the left as a result of
A. a decline in nominal GDP.
an increase in the price level.
a change in theinterest rate.
an increase in nominal GDP.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
The asset demand for money is downsloping because
A. the opportunity cost of holding money increases as the interestrate rises.
it is more attractive to hold money at high interestrates than at low interest rates.
bond prices rise as interestrates rise.
the opportunity cost of holding money declines as the interestrate rises.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
(Advanced analysis) Assume the equation for the total demand for money is L = 0.4Y + 80 - 4i, where Lis the amount of money demanded, Y is gross domestic product, and i is the interest rate. If gross domestic productis $200 and the interest rate is 10 (percent), what amount of money will
society want to hold?
A. $200 B. $120 C. $320 D. $160
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
If the quantity of money demanded exceeds the quantitysupplied,
the supply-of-money curve will shift to the left.
the demand-for-money curve will shift to the right.
C. the interest rate will rise.
D. the interest rate will fall.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates
The equilibrium rate of interest in the market for money is determined by the intersection of the
supply-of-money curve and the asset-demand-for-money curve.
supply-of-money curve and the transactions-demand-for-money curve.
C. supply-of-money curve and the total-demand-for-money curve.
D. investment-demand curve and the total-demand-for-money curve.
AACSB: Knowledge Application Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 16-01 Discuss how the equilibrium interest rate is determined in the market for money.
Test Bank: I Topic: Interest Rates