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1. Keynes called money people hold to make routine day-to-day purchases the:
a. transactions demand for holding money.
b. precautionary demand for holding money.
c. speculative demand for holding money.
d. store of value demand for holding money.
2. One reason that people hold money is to pay for unexpected car repairs and other unpredictable expenses. This
motive for holding money is called:
a. transactions demand.
b. precautionary demand.
c. speculative demand.
d. noncyclical demand.
3. Keynes called the money people hold in order to buy bonds, stocks, or other nonmoney financial assets the:
a. transactions demand for holding money.
b. precautionary demand for holding money.
c. speculative demand for holding money.
d. unit of account demand for holding money.
4. Other things being equal, the quantity of money that people wish to hold can be expected to(refer to the Money
Demand Curve):
a. increase as the interest rate increases.
b. decrease as the interest rate increases.
c. decrease as real GDP increases.
d. none of the above.
5. Which of the following falls when bond prices rise?
a. Stock prices.
b. Interest rates.
c. Money demand.
d. Money supply.
6. Using the aggregate supply and demand model, assume the economy is operating along the intermediate portion
of the aggregate supply curve. An increase in the money supply will increase the price level and:
a. lower both the interest rate and real GDP.
b. raise both the interest rate and real GDP.
c. lower the interest rate and raise GDP.
d. raise the interest rate and lower real GDP.
7. Monetarists believe that an increase in the money supply will lead to:
a. both c and d.
b. all of the following.
c. an increase in the price level.
d. an increase in nominal GDP
e. an increase in real GDP.
8. If M stands for the money supply, V for the velocity of money, P for the average selling price, and Q for the
output of goods and services, the equation of exchange is:
a. MP = VQ.
b. MV = PQ.
c. MQ = VP.
d. MP = PQ.
9. The V in the equation of exchange represents the:
a. variation in the GDP.
b. variation in the CPI.
c. variation in real GDP.
d. average number of times per year a dollar is spent on final goods and services.
10. The quantity theory of money of the Classical economists says that a change in the money supply will produce a:
a. proportional change in the price level.
b. greater than proportional change in the price level.
c. less than proportional change in the price level.
d. wide variation in the velocity of money.
11. The Phillips curve relates the inflation rate to the:
a. unemployment rate.
b. GDP.
c. disposable personal income.
d. interest rate.
12. On a Phillips curve diagram, an increase in the rate of inflation, other things being equal, is represented by a (an):
a. upward movement along the Phillips curve.
b. downward movement along the Phillips curve.
c. upward shift of the Phillips curve.
d. downward shift of the Phillips curve.
13. The long-run Phillips curve:
a. is downward sloping.
b. is upward sloping.
c. shows there is no tradeoff between unemployment and inflation.
d. is horizontal at the natural rate of inflation.
14. Those who believe the economy will fix itself:
a. Wishfulthinkerists
b. Classical Economists
c. Keynesians
d. Monetarists
15. Those who believe the government should use changes in Government Spending and taxation to affect the
Aggregate Demand are known as:
a. Wishfulthinkerists
b. Classical Economists
c. Keynesians
d. Monetarists
16. Those who belive the government should influence the money supply to correct the economy are called:
a. Wishfulthinkerists
b. Classical Economists
c. Keynesians
d. Monetarists
17. This type of economic policy involves government spending and taxation to affect EITHER AGGRGATE
SUPPLY OR AGGREGATE DEMAND.
a. Fiscal
b. Monetary
c. Supply-Side
d. Keynesian
18. This type of economic policy involves the government influencing the supply of money to affect aggregate
demand.
a. Fiscal
b. Monetary
c. Supply-Side
d. Keynesian
19. If the money supply increases, this will cause the interest rate to rise, investment to fall and GDP to fall.
a. True
b. False
20. According to Keynesian theory, changes in the money supply have a direct and immediate impact on aggregate
demand.
a. True
b. False
21. Assume that Paris First National Bank is a thriving bank with deposits of $20 million. If the required reserve ratio
is 20 percent and the bank is fully loaned out, the bank will keep what amount of required reserves?
a. $2 million.
b. $4 million.
c. $10 million.
d. $16 million.
e. $20 million.
22. If your bank receives a checkable deposit of $20,000, and the banking system makes loans totaling $180,000, the
maximum possible, then the required reserve ratio must be:
f. 0.10.
g. 0.20.
h. 0.25.
i. 0.40.
j. 0.50.
Exhibit 1 Balance sheet of First Iliad State Bank
Assets
Required reserves
Excess reserves
Loans
Liabilities
$1,000,000
0
$_________
Demand deposits $10,000,000
23. In Exhibit 1, if the required reserve ratio is raised to 15 percent, First Iliad State will have to convert loans worth:
a. $9,000,000 to required reserves.
b. $1,500,000 to required reserves.
c. $500,000 to required reserves.
d. $1,000,000 to required reserves.
e. $450,000 to required reserves.
24. In Exhibit 1, if the required reserve ratio is lowered to 5 percent, First Iliad State will be able to make additional
loans worth:
a. $9,000,000.
b. $1,500,000.
c. $500,000.
d. $1,000,000.
e. $450,000.
25. In Exhibit 1, if the required reserve ratio is lowered to 8 percent, then First Iliad
State will:
a. have to convert loans worth $800,000 to required reserves
b. have to convert loans worth $200,000 to required reserves.
c. be able to make additional loans worth $800,000.
d. be able to make additional loans worth $200,000.
e. not have to act.
26. In Exhibit 1, if the required reserve ratio is raised to 18 percent, then First Iliad
State will:
a. have to convert loans worth $800,000 to required reserves.
b. have to convert loans worth $200,000 to required reserves.
c. be able to make additional loans worth $800,000.
d. be able to make additional loans worth $200,000.
27. Suppose a bank has checkable deposits of $100,000 and the required reserve ratio is 20 percent. If the bank
currently has $100,000 in reserves, it could expand the money supply by as much as:
a. $100,000.
b. $400,000.
c. $0.
d. $20,000.
e. $80,000.
28. If Matt Taylor gets his $800 loan from the Paris First National Bank in cash rather than in the form of a new
checkable deposit, the:
a. Paris First National Bank will get $800 in new reserves.
b. Paris First National Bank will not get $800 in new reserves.
c. assets of the Paris First National Bank will increase by $800.
d. assets of the Paris First National Bank will decease by $88.
e. liabilities of the Paris First National Bank will increase by $800.
29. Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a
$1,000 cash deposit, then, excluding the $1,000 initial deposit, the banking system can increase the money supply
by:
a. $900.
b. $910.
c. $1,000.
d. $9,000.
e. $10,000.
30. Assume all banks in the system started with balance sheets as shown in Exhibit 6 and the Fed made a $20,000
open-market purchase. The result would be a (an):
a. $200,000 expansion of the money supply.
b. $20,000 expansion of the money supply.
c. $20,000 contraction of the money supply.
d. infinite contraction of the money supply.
31. Assume a simplified banking system subject to a 25 percent required-reserve ratio. If there is an initial increase in
excess reserves of $100,000, the money supply:
a. increases $100,000.
b. increases $400,000.
c. increases $125,000.
d. decreases $500,000.
32. If a bank keeps some of its excess reserves, the money multiplier:
a. increases.
b. stays the same.
c. goes to zero.
d. decreases.
e. increases, then decreases.
33. If a bank receives a new deposit of $10,000, and the required reserve ratio is 25 percent, then the new money that
can be created by the banking system, including the initial deposit, is:
a. $25,000.
b. $2,500.
c. $4,000.
d. $40,000.
e. $10,000.
34. When the required reserve ratio is lowered,
a. the money multiplier increases, and the amount of excess reserves increases in the
banking system.
b. the money multiplier decreases, and the amount of excess reserves increases in the
banking system.
c. the money multiplier decreases, and the amount of excess reserves decreases in the
banking system.
d. the money multiplier increases, and the amount of excess reserves decreases in the
banking system.
e. there is no change in either the money multiplier or the amount of excess reserves in
the banking system.