Econ CH 14

money demand = cash + checking
1. If the Fed wishes to reduce nominal interest rates, it must engage in an

open market ____ of bonds that ____ the money supply.
sale; increases
NO sale; decreases
sale; does not change
YES purchase; increases
purchase; decreases
Feedback
For more information, see p. 393 of your textbook.
2. When banks borrow funds via the Fed's discount window:

interest rates rise.
the reserve/deposit ratio falls.
YES bank reserves are increased and ultimately bank deposits and the money
supply increase.
NO bank reserves are decreases and ultimately bank deposits and the money
supply increase.
bank reserves are increased and ultimately bank deposits and the money
supply decrease.
Feedback
3. A policy reaction function describes how the action a policymaker takes

depends on:
OK the state of the economy.
public approval ratings.
whether or not it is an election year.
the reaction of special interest groups.
the political affiliation of the policymaker.
4. Any value of the nominal interest rate chosen by the Federal Reserve implies
a specific value for ______.
potential output
net exports
government purchases
the budget deficit
OK the money supply
5.
Jim has the following assets and liabilities:
Which of the following actions would decrease Jim's money demand by $200?
YES Jim writes a check for $200 to pay down his credit card balance.
Jim sells a $200 government bond and puts the proceeds in his checking
account.
NO Jim writes a $200 check for cash and holds the cash.
Jim sells $200 worth of stocks and puts the proceeds in his checking
account.
Jim gets a $200 cash advance on his credit card and puts the proceeds
in his checking account.
Feedback

6.
Joan has the following assets and liabilities:
What is Joan's money demand?

$200
$300
OK $500
$1,000
$11,000
7. If the nominal interest rate is below the equilibrium value, then money
demand is ______ than money supply, bond prices will ____, and the nominal
interest rate will ____.
YES greater; fall; increase
NO greater; fall; decrease
greater; rise; increase
less; fall; increase
less; rise; decrease
Feedback
8. When commercial banks borrow reserves from the Fed, the quantity of reserves
in the banking system _____ and ultimately the money supply _____.
YES increases; increases
increases; decreases
increases; does not change
NO decreases; decreases
decreases; increases
Feedback
9. In Macroland, currency held by the public is 2,000 econs, bank reserves are
300 econs, and the required reserve/deposit ratio is 15 percent. If the Central
Bank lowers the required reserve/deposit ratio making the new desired ratio equal
to 10 percent, then the money supply in Macroland will _____ to _____ econs,
assuming that the public does not wish to change the amount of currency it holds.
NO increase; 4,000
YES increase; 5,000
decrease; 4,000
decrease; 5,000
decrease; 2,300
Feedback
10. When making discount window loans, the Federal Reserve lends bank reserves
to:
the U.S. Treasury.
the nonbank public.
OK commercial banks.
foreign governments.
discount retailers.
1.

OK Jim writes a check for $200 to pay down his credit card balance.
account.
Jim writes a $200 check for cash and holds the cash.
account.
2. The equilibrium quantity of money in circulation is determined by:
the interaction of money supply and money demand.
the nominal interest rate, real income, and the price level.
the nominal interest rate.
individuals, households, and businesses.
OK the Federal Reserve.
3. If inflation does not adjust rapidly in the short run, then when the Federal
Reserve increases the nominal interest rate, the real interest rate in the short
run will ____.
OK increase
decrease
not change
equal the nominal interest rate
be determined by saving and investment decisions.
4. Higher nominal interest rates ____ the demand for money and higher real
income ___ the demand for money.
increase; increases
increase; decreases
increase; does not change
NO decrease; decreases
YES decrease; increases
Feedback

5. The usefulness of money in carrying out transactions is its _____ and the
nominal interest rate is its ____.
supply; demand
NO demand; supply
real value; nominal value
YES benefit; cost
cost; benefit
Feedback

6.
Based on the diagram the nominal interest rate equals 6% and the money supply
equals 600. If the Federal Reserve wants to set the nominal interest rate at 10%,
it must conduct open market _____ to set the money supply at _____.
NO purchases; 200
YES sales; 200
purchases; 800
sales; 800
purchases; 1,000
Feedback

7.
The following table shows Alex's estimated annual benefits of holding different
amounts of money.
How much money will Alex hold if the nominal interest rate is 6 percent? (Assume
she wants her money holdings to be in multiples of $100.)
700
800
OK 900
1000
1100
8. If the Fed wishes to increase nominal interest rates, it must engage in an
open market ____ of bonds that ____ the money supply.
sale; increases
OK sale; decreases
sale; does not change
purchase; increases
purchase; decreases
9. When the Fed engages in an open market sale, the money supply ____ and the
nominal interest rate ______.
NO increases; increases
increases; may either increase or decrease depending on money demand
YES decreases; increases
decreases; decreases
Feedback

300 econs, and the desired reserve/deposit ratio is 15 percent. If commercial
banks repay 100 econs in reserves from the Central Bank through discount window
lending, then the money supply in Macroland will _____ to _____ econs, assuming
that the public does not wish to change the amount of currency it holds.
NO increase; 3,133
increase; 4,100
increase; 4,667
YES decrease; 3,133
decrease; 2,400
Feedback
1. The portfolio allocation decision is the decision about:

how to spread one's consumption over the life-cycle.
how much more to consume when disposable income increases by one
dollar.
OK the forms in which to hold one's wealth
the choice of agents to send one's portfolio.
how to allocate income between saving and consumption.
2. The Federal Reserve can:
NO simultaneously set any money supply and any nominal interest rate
target.
set the target money supply and target nominal interest rate
independently.
YES only set a money supply target that is consistent with the target
nominal interest rate.
only target the nominal interest rate, not the money supply.
only target the money supply, not the nominal interest rate.
Feedback

3. The interest rate that commercial banks charge each other for very short-
term loans is called the:
prime rate.
OK federal funds rate.
Federal Reserve discount rate.
commercial paper rate.
bank loan rate.
4. When the Fed engages in an open market purchase, the money supply ____ and
the nominal interest rate ______.
increases; increases
YES increases; decreases
increases; may either increase or decrease depending on money demand
NO decreases; increases
Feedback

5. If money demand in millions of dollars equals P(Y-50,000 i), where the price
level (P) equals one, real income (Y) equals 10,000 and the nominal interest rate
( i ) is expressed as a decimal (for example, 5 percent is 0.05), and if the
Federal Reserve wants to set the equilibrium nominal interest rate to equal 0.05,
what must be money supply equal?
NO 5,000
YES 7,500
10,000
12,500
15,000
Feedback

6. The Federal Reserve can decrease the money supply by:
YES increasing reserve requirements.
decreasing the discount rate.
introducing deposit insurance.
NO decreasing velocity.
conducting open market purchases.
Feedback

7. Higher nominal interest rates ____ the demand for money and a higher price
level ___ the demand for money.
increase; increases
increase; decreases
decrease; decreases
OK decrease; increases
8. Lower nominal interest rates ____ the demand for money and lower real income
___ the demand for money.
1. During the Christmas shopping season the demand for money increases
significantly. To offset the increase in money demand, the Fed must _____ the
money supply in order to _____ nominal interest rates.
OK increase; decrease
increase; increase
hold constant; increase
decrease; increase
decrease; decrease
2.
amounts of money.
700
800
OK 900
1000
1100
3. The amount of wealth an individual chooses to hold in the form of money is
called:
NO the money reaction function.
YES the demand for money.
the supply of money.
expansionary monetary policy.
contractionary monetary policy.
Feedback

4. If money demand in millions of dollars equals P(Y-50,000 i), where the price
level (P) equals one, real income (Y) equals 8,000 and the nominal interest rate (
i ) is expressed as a decimal (for example, 5 percent is 0.05), and if the Federal
Reserve wants to set the equilibrium nominal interest rate to equal 0.03, what
must the money supply equal?
YES 6,500
NO 7,000
7,500
8,000
8,500
Feedback

5. Because an increase in the nominal interest rate raises the opportunity
costs of holding money, the money demand curve:
shifts to the right.
NO shifts to the left.
is vertical.
YES slopes downward.
slopes upward.
Feedback

6. If inflation does not adjust rapidly in the short run, then when the Federal
Reserve decreases the nominal interest rate, the real interest rate in the short
run will ____.
increase
OK decrease
not change
equal the nominal interest rate
be determined by saving and investment decisions.
7. _____ policy changes are made through the legislative process, while _____
policy changes are made by the Federal Open Market Committee.
fiscal; international
OK fiscal; monetary
international; fiscal
monetary; fiscal
monetary; international
8.
amounts of money.
700
800
NO 900
YES 1000
1100
Feedback

9. Lower real income ____ the demand for money and a lower price level ___ the
demand for money.
increases; increases
OK decreases; decreases
10. Because a decrease in the nominal interest rate reduces the opportunity cost
of holding money, the money demand curve:
shifts to the right.
shifts to the left.
is vertical.
OK slopes downward.
slopes upward.
increase; increases
OK increase; decreases
decrease; decreases
decrease; increases
300 econs, and the desired reserve/deposit ratio is 15 percent. If commercial
banks borrow 100 econs in reserves from the Central Bank through discount window
lending, then the money supply in Macroland will _____ to _____ econs, assuming
that the public does not wish to change the amount of currency it holds.
NO increase; 3,133
increase; 4,100
YES increase; 4,667
decrease; 3,133
decrease; 2,400
Feedback

10. Lower nominal interest rates ____ the demand for money and a lower price
NO increase; increases
YES increase; decreases
decrease; decreases
decrease; increases
Feedback
1. Three macroeconomic factors that affect the demand for money are:
OK the nominal interest rate; real income, and the price level.
the nominal interest rate; capital, and labor.
globalization, skill-biased technological change, and labor mobility.
capital, labor, and technology.
average labor productivity, real income, and the nominal interest rate.
2. Because a decrease in the nominal interest rate reduces the opportunity cost
of holding money, the money demand curve:
NO shifts to the right.
shifts to the left.
is vertical.
YES slopes downward.
slopes upward.
Feedback

3. The money demand curve will shift to the left if:
NO the nominal interest rate increases.
the nominal interest rate decreases.
price level increases.
YES real income decreases.
real income increases.
Feedback

4. The decision about the forms in which to hold one's wealth is called the
________ decision.
Taylor
OK portfolio allocation
Fisher effect
life-cycle
reaction function
5. Suppose that money demand in millions of dollars equals P(Y-50,000 i), where
the price level (P) equals one, real income (Y) equals 10,000 and the nominal
interest rate ( i ) is expressed as a decimal (for example, 5 percent is 0.05).
Suppose also that the Federal Reserve has set the money supply to 7,500 so that
the equilibrium nominal interest rate equals 0.05. If real income increases to
12,000 and the Fed takes no action, the equilibrium interest rate will:
NO decrease to 0.03.
remain at 0.05.
increase to 0.07.
YES increase to 0.09.
increase to 0.10.
Feedback

6. A policy reaction function describes how the action a policymaker takes
depends on:
YES the state of the economy.
public approval ratings.
whether or not it is an election year.
NO the reaction of special interest groups.
the political affiliation of the policymaker.
Feedback

7. The money demand curve relates ________ to the ________.
NO aggregate demand; price level
aggregate demand; nominal interest rate
the aggregate quantity of money demanded; price level
YES the aggregate quantity of money demanded; nominal interest rate
the aggregate quantity of money demanded; aggregate demand
Feedback

8. When Argentines increase their savings in U.S. dollars, the U.S. money:
supply curve shifts left.
supply curve shifts right.
NO supply and demand curves shift left.
demand curve shifts left.
YES demand curve shifts right.
Feedback

9.
The following table shows Jay's estimated annual benefits of holding different
amounts of money.
How much money will Jay hold if the nominal interest rate is 8 percent? (Assume he
wants his money holdings to be in multiples of $100.)
100
YES 200
NO 300
400
500
Feedback

10. Which of the following would be expected to decrease the U.S. demand for
money?
OK Grocery stores begin to accept credit cards in payment.
The economy enters a boom period.
Political instability increases dramatically in developing nations.
Households fear increasing computer glitches will severely limit their
ability to use ATMs.
Financial investors become concerned about the increasing riskiness of
stocks.
1. Higher nominal interest rates ____ the demand for money and a higher price
increase; increases
increase; decreases
decrease; decreases
OK decrease; increases
2.
purchases; 100
OK sales; 100
purchases; 900
sales; 900
purchases; 700
3.
purchases; 200
sales; 200
OK purchases; 400
sales; 400
purchases; 500
4. If the nominal interest rate is below the equilibrium value, then money
demand is ______ than money supply, bond prices will ____, and the nominal
interest rate will ____.
OK greater; fall; increase
greater; fall; decrease
greater; rise; increase
less; fall; increase
less; rise; decrease
5. For the past 40 years the Federal Reserve has expressed policy in terms of a
target value for:
bank reserves.
the Federal Reserve discount rate.
YES the federal funds rate.
NO open market operations.
commercial bank lending.
Feedback

6. When commercial banks borrow reserves from the Fed, the quantity of reserves
in the banking system _____ and ultimately the money supply _____.
OK increases; increases
7.
OK Jim writes a check for $200 to pay down his credit card balance.
account.
Jim writes a $200 check for cash and holds the cash.
account.
8. Reserve requirements set by the Federal Reserve are the:
OK minimum value of reserves to deposits that commercial banks are allowed
to maintain.
maximum value of reserves to deposits that commercial banks are allowed
to maintain.
minimum amount of currency banks must hold in their vaults.
maximum amount of currency banks are allowed to hold in their vaults.
minimum amount of bonds commercial banks must purchase from the Federal
Reserve.
9.
The following table shows Jay's estimated annual benefits of holding different
amounts of money.
How much money will Jay hold if the nominal interest rate is 6 percent? (Assume he
wants his money holdings to be in multiples of $100.)
100
200
YES 300
NO 400
500
Feedback

10.
equals 500. If the Federal Reserve wants to raise the interest rate to 7%, it must
_____ the money supply to _____.
increase; 300
OK decrease; 300
increase; 900
increase; 700
decrease; 700
Multiple Choice
1. The Federal Reserve can decrease the money supply by:
OK increasing reserve requirements.
decreasing the discount rate.
introducing deposit insurance.
decreasing velocity.
conducting open market purchases.
2. For the past 40 years the Federal Reserve has expressed policy in terms of a
target value for:
bank reserves.
the Federal Reserve discount rate.
OK the federal funds rate.
open market operations.
commercial bank lending.
3. The interest rate that commercial banks charge each other for very short-
term loans is called the:
prime rate.
OK federal funds rate.
Federal Reserve discount rate.
commercial paper rate.
bank loan rate.
4. If the money supply is less than money demand, people will ____ bonds which
will cause bond prices to ____ and the nominal interest rate to _____ until money
demand equals money supply.
YES sell; fall; rise
sell; fall; fall
sell; rise; fall
buy; fall; rise
NO buy; rise; fall
Feedback

5.
purchases; 200
sales; 200
OK purchases; 800
sales; 800
purchases; 1,000
6. When making discount window loans, the Federal Reserve lends bank reserves
to:
the U.S. Treasury.
the nonbank public.
OK commercial banks.
foreign governments.
discount retailers.
7. Because the Fed determines the money supply, the:
money demand curve is downward sloping.
money demand curve is upward sloping.
YES money supply curve is vertical.
NO money supply curve is downward sloping.
money supply curve is upward sloping.
Feedback

8. Which of the following would be expected to decrease the U.S. demand for
money?
OK Grocery stores begin to accept credit cards in payment.
The economy enters a boom period.
Political instability increases dramatically in developing nations.
Households fear increasing computer glitches will severely limit their
ability to use ATMs.
Financial investors become concerned about the increasing riskiness of
stocks.
9. If the money supply exceeds money demand, people will ____ bonds which will
cause bond prices to ____ and the nominal interest rate to _____ until money
demand equals money supply.
NO sell; fall; rise
sell; fall; fall
sell; rise; fall
buy; fall; rise
YES buy; rise; fall
Feedback

10. When Argentines increase their savings in U.S. dollars, the U.S. money:
supply curve shifts left.
supply curve shifts right.
supply and demand curves shift left.
demand curve shifts left.
OK demand curve shifts right.

Econ CH 14

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money demand = cash + checking

1. If the Fed wishes to reduce nominal interest rates, it must engage in an

For more information, see p. 393 of your textbook.

2. When banks borrow funds via the Fed's discount window:

For more information, see p. 395 of your textbook.

3. A policy reaction function describes how the action a policymaker takes

Jim has the following assets and liabilities:

For more information, see p. 385 of your textbook.

What is Joan's money demand?

For more information, see p. 392 of your textbook.

For more information, see p. 395 of your textbook.

For more information, see p. 395 of your textbook.

Jim has the following assets and liabilities:

For more information, see p. 387 of your textbook.

For more information, see p. 386 of your textbook.

For more information, see p. 393 of your textbook.

For more information, see p. 393 of your textbook.

For more information, see p. 395 of your textbook.

1. The portfolio allocation decision is the decision about:

For more information, see p. 394 of your textbook.

For more information, see p. 393 of your textbook.

For more information, see p. 393 of your textbook.

For more information, see p. 396 of your textbook.

For more information, see p. 385 of your textbook.

For more information, see p. 393 of your textbook.

For more information, see p. 389 of your textbook.

For more information, see p. 386 of your textbook.

For more information, see p. 395 of your textbook.

For more information, see p. 387 of your textbook.

For more information, see p. 389 of your textbook.

For more information, see p. 389 of your textbook.

For more information, see p. 393 of your textbook.

For more information, see p. 389 of your textbook.

For more information, see p. 388 of your textbook.

For more information, see p. 390 of your textbook.

For more information, see p. 386 of your textbook.

For more information, see p. 394 of your textbook.

Jim has the following assets and liabilities:

For more information, see p. 386 of your textbook.

For more information, see p. 392 of your textbook.

For more information, see p. 392 of your textbook.

For more information, see p. 392 of your textbook.

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