Download 1 SAMPLE TEST 3 QUESTIONS TRUE

SAMPLE TEST 3 QUESTIONS
TRUE-FALSE (1.5 points each). Circle your answer.
1. To decrease the money supply, the Fed buys government securities.
TRUE
FALSE
2. If the velocity of money circulation, V, is 10 and the money supply, M, is $250, then,
the nominal GDP will be $25.
TRUE
FALSE
3. If you have a checking account at Citibank, the account is a liability to the bank.
TRUE
FALSE
MULTIPLE CHOICE (3 points each). Circle your answer.
4. Excess reserves make a bank less vulnerable to panics, but bankers do not like to hold
excess reserves because holding excess reserves
a. are disliked by depositors.
b. means lower profits for banks.
c. are discouraged by government regulators.
d. are disliked by investors.
5. When a bank makes loans with excess reserves, it
a.
b.
c.
d.
creates money.
destroys money.
alters the composition of M1.
leaves the money supply unchanged.
6. If the Fed raises the discount rate, what will be the effect on the money supply?
a.
b.
c.
d.
It will decrease the money supply.
It will increase the money supply.
No change in the money supply.
It will shift the demand curve for money to the right.
7. If the Fed decides to sell T-bills, it increases the supply of T-bills. How will this affect the
a.
b.
c.
d.
price of T-bills and the interest rate?
T-bill prices fall and interest rates fall.
T-bill prices rise and interest rates rise.
T-bill prices rise and interest rates fall.
T-bill prices fall and interest rates rise.
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8. According to the monetarists, the velocity of money is
a.
b.
c.
d.
constant by definition.
highly variable and unpredictable.
constant as a matter of empirical proof.
not constant but predictable.
SHORT ESSAYS.
14. (12 points).
Show and explain how an expansionary monetary policy works (who does what?).
Name the gap the policy closes.
You need to use the Money Market Diagram, the Income-Expenditure Diagram and the
Aggregate Demand –Aggregate Supply Diagram.
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15. (12 points).
Show and explain how a contractionary monetary policy works (who does what?).
Name the gap the policy closes.
You need to use the Money Market Diagram, the Income-Expenditure Diagram and the
Aggregate Demand –Aggregate Supply Diagram.
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16. (6 points)
Suppose there is a deposit of $70,000 comes into a back and the bank Required Reserve
Ratio is 20%.
a) by how much the Required Reserves of the bank will increase after the transaction is
processed (give a number and show all your calculations)?
b) by how much the Excess Reserves of the bank will increase after the transaction is
processed? (give a number and show all your calculations)?
17. (12 points)
Table 1 contains historical data for nominal GDP, M1, and M2. Use this data to compute
V1, velocity based on M1; and V2, velocity based on M2.
Table 1.
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Nominal
GDP
($ billions)
5,803.20
5,986.20
6,318.90
6,642.30
7,054.30
7,400.50
7,813.20
8,318.40
8,781.50
9,268.60
9,872.90
M1
($ billions)
M2
($ billion)
810.6
859.0
965.9
1078.4
1145.0
1142.5
1105.8
1069.1
1079.8
1101.7
1103.9
3228.1
3348.2
3411.2
3448.3
3495.0
3566.3
3737.1
3920.3
4207.4
4526.2
4801.3
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v1
v2
N18 (6 points).
Figure 14-1
In Figure 14-1, there are four levels of income. G is government expenditures and TT is
taxes less transfers.
a) At which levels of income does the budget produce a surplus? ___________________
b) At which levels of income does the budget produce a deficit? ____________________
c) At which levels of income is the budget balanced? _____________________________
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N19 ( 4 points).
Figure 15-3
Given the situation in Figure 15-3:
a) What kind of a gap we have if the economy is as pictured in graph (1) _____________
b) What movement will we be expecting in graph (2) when the gap in graph (1) is closed?
________________
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