C is correct. Required Deposits equals $160 times 10%. Required reserves equals $16 million. Since reserves are $20 million, the RCB has excess reserves of $4 million to loan out. 12. If banks charge 5% nominal interest on loans made and the expected rate of inflation is 2% then, the real interest rate is: A. B. C. D. E. 5% 7% 3% not part of the nominal interest rate less than expected rate of inflation
C is correct. The real interest rate, r, is equal to the nominal interest rate, nir, minus the expected rate of inflation, πe. Thus, r = 5 – 2. r = 3. 13. The Banking (Money) multiplier is calculated by the formula: A. B. C. D. 1/1-MPC 1/MPS 1/IR (IR = Interest Rate) 1/RR 1
E. 1/DR (DR = Discount rate) D is correct by definition. The Money Multiplier equals 1/RR. If the reserve ratio is 10%, then the multiplier equals 10. If the RR = 5%, then the multiplier equals 20. A is incorrect as that is the spending multiplier. B is incorrect as that is the spending multiplier. D and E are nonsense. 14. Which of the following would most likely have a negative effect on the velocity of money? An increase in
A. B. C. D. E.
the MPC the number of consumers the price level hoarding national income
I confess, I do not know the answer to this question. Let’s define the money supply as reserves plus currency in circulation. Let’s use the quantity of exchange, MV = PQ. Let’s set PQ equal to nominal GDP. Let’s assume that Y = GDP = Demand, where Y is income. A is incorrect as an increase in MPC increases Y. PQ = Y. If M is constant, the M will have to turn over more times to buy Y, so V increases. B is incorrect. An increase in the number of consumers shifts AD to the right and increases Y. C might be correct. An increase in the price level, decreases Y. D is incorrect. A decrease in M means money has to turnover more, an increase in V. E. is incorrect. I think the authors intended C to be correct. An increase in the price level would decrease the real balances, M/P, and result in a decline in the purchasing power of money. Thus, money would turnover less as consumers would be able to buy less.
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C is correct. An increase in saving shifts the supply curve to the right. The effect is a lower real cost of borrowing and an increase in the quantity demanded of loanable funds.
E is correct. In the Keynesian model, consumers demand money to hold for transactions.
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D is correct. The supply of LF equals S plus KI, where KI equals capital inflows. If KI decreases, then the supply of LF shifts to the left as illustrated. E is incorrect as a decrease in Investment demand would shift the demand curve to the left. What is illustrated is a change in the quantity demanded of loanable funds. A and B increase the quantity of savings and thus would shift the supply of loanable funds to the right. 18. if the FED increases the reserve requirement, what would be the most likely effect on the money supply and interest rates? A. B. C. D. E. MS increase; IR increase MS increase; IR decrease MS decrease; IR increase MS decease; IR decrease MS and IR would remain constant
C is correct. An increase in RR would decrease banking reserves and shift the MS curve to the left. Higher interest rates would result. The reserve requirement is a monetary policy tool used to affect interest rates and money supply.
A is correct. When a loan is made excess reserves are loaned out. In an intro economics class, the loans are redeposited and the money supply increases. Writing off bad loans would reverse this process. D is incorrect. It is true that net worth declines. Net Worth is equal to Assets minus Liabilities. If assets decrease, then net worth decreases.
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19. The country of Alpha is experiencing 7% inflation. If this rate of inflation continues for the next 20 years, we can expect the price level to double in approximately, A. B. C. D. E. 20 years 5 years 15 years 3 years 10 years
E is correct. Using the rule of 70, dividing 70 by 7 equals 10. I believe this was the intent.
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