Unit 4 Monetary Policy

1) A bank has $800 million in demand deposits and $100 million in reserves. If the reserve requirement is 10 percent, the bank’s excess reserves equal (Hint: Figure out how much more they have then they are required to)

• $10 million

• $20 million

• $80 million

• $100 million

• $200 million

If the legal reserve requirement is 10 percent, the value of the simple deposit multiplier is

• 2

• 4

• 5

• 10

• 1.0

Which of the following would be considered a contractionary monetary policy?

• The purchase of bonds/securities

• The sale of bonds/securities

• An increase in taxes

• A decrease in government spending

• A decrease in the discount rate

To increase demand and investment, the Federal Reserve should take what kind of action?

• expand the money supply in order to raise interest rates, which increases investment.

• expand the money supply in order to lower interest rates, which increases investment.

• contract the money supply in order to lower interest rates, which increases investment.

• contract the money supply in order to raise interest rates, which decreases investment.

• sell bonds and decrease the discount rate to encourage borrowing.

Which of the following combinations of monetary policy actions would definitely cause a decrease in aggregate demand?

• A

• B

• C

• D

• E

Suppose the Federal Reserve buys $400,000 worth of securities from the securities dealers on the open market. If the reserve requirement is 20 percent and the banks hold no excess reserves, what will likely happen to the total money supply?

• It will be unchanged

• It will contract by $2,000,000

• It will contract by $800,000

• It will expand by $2,000,000

• It will expand by $800,000

Which of the following fiscal policy actions would be most effective in combating (balancing) an economic boom?

• A

• B

• C

• D

• E

If a nation is operating at full employment, and the central bank engages in contractionary monetary policy, the nation can expect the interest rate, the purchases of new homes, and the unemployment rate to change in which of the following ways?

• A

• B

• C

• D

• E

If a commercial bank keeps no excess reserves and the reserve requirement is 10 percent, what is the value of new loans this single bank can issue by itself if a new customer deposits $10,000? (Hint: what does the bank keep and what can they loan out?)

• $100,000

• $90,000

• $10,000

• $9,000

• $1,000

When a central bank sells securities in the open market, which of the following set of events is most likely to follow?

• (A) An increase in the money supply, a decrease in interest rates, and an increase in aggregate demand

• (B) An increase in the money supply, an increase in interest rates, an increase in interest rates, and a decrease in aggregate demand

• (C) An increase in interest rates, an increase in the government budged deficit, and a movement toward trade surplus

• (D) A decrease in the money supply, an increase in interest rates, and a decrease in aggregate demand

• (E) A decrease in the money supply, a decrease in interest rates and a decrease in aggregate demand