Practice Problems Mods 25, 28, 29

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1 Practice Problems Mods 25, 28, 29 Multiple Choice Identify the choice that best completes the statement or answers the question. Scenario 25-1 First National Bank First National Bank has $80 million in checkable deposits, $15 million in deposits with the Federal Reserve, $5 million cash in the bank vault and $5 million in government bonds. 1. Use Scenario Consider the information for First National Bank. If the minimum reserve ratio is 20%, how much is the bank required to keep in reserves? A. $20 million B. $16 million C. $25 million D. $10 million E. $40 million 2. A bank run occurs when: A. too many people are trying to borrow more at one time. B. the assets of the bank are greater than the liabilities of the bank. C. interest rates start to increase. D. interest rates are higher than inflation rates. E. many bank depositors are trying to withdraw their funds from the bank. 3. Suppose a bank does NOT hold excess reserves and the reserve ratio is 20%. If Melanie deposits $1,000 of cash into her checking account and the bank lends $600 to Freda, the bank can lend an additional: A. $400. B. $200. C. $1,000. D. $5,000. E. $ Suppose a bank already has excess reserves of $800 and the reserve ratio is 30%. If Andy deposits $1,000 of cash into his checking account and the bank lends $600 to Melanie, that bank can lend an additional: A. $100. B. $800. C. $900. D. $300. E. $600. Scenario 25-2: Money Creation The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves. 5. Use Scenario By how much did the monetary base change? A. $0 B. $800 C. $1,000 D. $4,000 E. $5, Suppose the reserve ratio is 25%, then the money multiplier is

2 A. 5. B C. 4. D. 1/25. E Suppose a bank faces a 10% required reserve ratio, and it currently has $100 in required reserves. If it is fully loaned out, what is the amount of deposits this bank is holding? A. $900 B. $10 C. $1000 D. $10,000 E. $9, In a graph of a money demand curve, which of the following variables is plotted on the vertical axis? A. the interest rate on liquid assets, like short-term CDs B. the interest rate on 30-year Treasury bills C. the rate of price inflation D. the rate of return in the stock market E. the discount rate 9. A decrease in the demand for money would result from: A. an increase in income. B. a decrease in real GDP. C. an increase in the price level. D. an increase in nominal GDP. E. an increase in the supply of money. 10. If the equilibrium interest rate in the money market is 5%, at an interest rate of 2%: A. sellers of interest-bearing financial assets must offer higher interest rates to find willing buyers. B. sellers of interest-bearing financial assets must offer lower interest rates to find willing buyers. C. sellers of interest-bearing financial assets can offer 2% interest and still find willing buyers. D. There is a surplus of money in the money market. E. the money market is in equilibrium. 11. If the current interest rate is below the equilibrium rate, the: A. supply of non monetary financial assets is greater than the demand for them. B. demand for non monetary financial assets is greater than the supply. C. Surplus of money will cause interest rates to rise. D. supply of money is greater than the demand. E. money market is in equilibrium. Figure 28-2: A Money Market

3 12. Use the A Money Market Figure The accompanying graph shows the money market. In this market, the equilibrium interest rate is: A. r 1. B. r 2. C. r 3. D. M 0. E. r 3 r 1 Figure 29-1: Loanable Funds 13. Use the Loanable Funds Figure The accompanying graph shows the market for loanable funds in equilibrium. Which of the following might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $75? A. Capital inflows from foreign citizens are declining. B. The federal government is running a budget deficit rather than a surplus. C. Profit expectations are less optimistic for business investments. D. The government has eliminated taxes on income earned from interest. E. Consumers have decreased consumption as a fraction of disposable income.

4 Figure 29-2: Demand for Loanable Funds 14. Use the Demand for Loanable Funds Figure According to the accompanying figure, when the interest rate is 6%, the quantity demanded of loanable funds will equal: A. $30 billion. B. $40 billion. C. $50 billion. D. $60 billion. E. $70 billion. Figure 29-3: Loanable Funds Market

5 15. Use the Loanable Funds Market Figure If the interest rate is 8%, businesses will want to borrow approximately: A. $3 trillion. B. $2 trillion. C. $4 trillion. D. $1 trillion. E. $5 trillion 16. If the interest rate in the market for loanable funds is above the equilibrium interest rate, we know that: A. there is a shortage of loanable funds. B. savings exceed investment spending. C. the quantity demanded of loanable funds exceeds the quantity supplied of loanable funds. D. consumption is smaller than savings. E. the interest rate will begin to rise to clear the surplus of loanable funds. 17. A decrease in the demand for loanable funds would most likely be caused by a(n): A. decrease in the market interest rate. B. decrease in corporate income tax rates. C. increase in the amount of expected business opportunities. D. decrease in the amount of expected business opportunities. E. decrease in private savings. 18. All other things unchanged, an increase in loanable funds demand would most likely be caused by a(n): A. decrease in the amount of expected business opportunities. B. increase in the market interest rate. C. increase in corporate income tax rates. D. increase in the amount of government borrowing. E. increase in consumption spending. 19. Crowding out results in a(n): A. decrease in private investment spending resulting from government deficit spending. B. increase in physical capital accumulation which leads to higher economic growth. C. increase in private investment spending resulting from government deficit spending. D. increase in consumption spending as a result of higher investment spending. E. decrease in private investment spending due to a positive foreign capital inflow. 20. Expansionary monetary policies will interest rates and savings in the short run. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease E. increase; have no impact on

6 Practice Problems Mods 25, 28, 29 Answer Section MULTIPLE CHOICE 1. ANS: B PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: E REF: Module 25 SKL: Definitional 3. ANS: B PTS: 1 DIF: D REF: Module ANS: C PTS: 1 DIF: D REF: Module ANS: A PTS: 1 DIF: D REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: E REF: Module 28 SKL: Fact-Based 9. ANS: B PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: D REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: D REF: Module 29

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