Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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Liquidity preference is the theory of how
a. | equilibrium in the asset market determines the equilibrium nominal interest
rate. | b. | households choose their demand for money. | c. | firms decide how
much corporate bonds to float on the market. | d. | the Fed chooses its money
supply. |
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2.
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Which of the following is a unit in which the propensity to hold money can be
measured?
a. | Year. | c. | Per year. | b. | Dollar. | d. | Per dollar. |
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3.
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An increase in the nominal interest rate will decrease money demand because
it
a. | increases the opportunity cost of holding money and makes bonds more attractive
assets. | b. | reduces the liquidity of money, making money less attractive to
hold. | c. | reduces the velocity of circulation of money. | d. | reduces investment
demand, hence GDP. |
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4.
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A decrease in the money supply would
a. | increase the price of corporate bonds and reduce the interest
rate. | b. | increase the price of corporate bonds and raise the interest
rate. | c. | decrease the price of corporate bonds and reduce the interest
rate. | d. | decrease the price of corporate bonds and raise the interest
rate. |
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5.
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The real money demand function for an economy which is at full employment GDP
level of 400, is MD/P = 10 + 0.5Y - 250i. If the money supply is $370 and the price level
$2, the nominal interest rate which clears the money market is
a. | 10%. | b. | 15%. | c. | 1%. | d. | Cannot determine, not enough
information. |
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6.
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If money supply increases by 10% and the price level increases by 8%, then the
LM curve
a. | shifts to the left. | b. | shifts to the right. | c. | is not
affected. | d. | is not affected if money demand is not sensitive to interest rate
changes. |
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7.
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Which of the following is not a function of the U.S. Fed?
a. | Conduct open market operations. | b. | Act as lender of last resort to commercial
banks. | c. | Control the currency to deposit ratio. | d. | Control the required reserve
ratio. |
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8.
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The money multiplier is the ratio of
a. | bank reserves to total bank deposits. | b. | bank reserves to the monetary
base. | c. | the currency in the hands of the public to their total bank
deposits. | d. | the money supply to the monetary base. |
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9.
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If a central bank buys government bonds on the open market, it
a. | increases the money supply. | b. | reduces the money supply. | c. | must increase the
interest rate. | d. | increases the economy's demand for money. |
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10.
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If the currency-to-deposit ratio is 20%, the reserve-to-deposit ratio is 10%,
and the monetary base is $10,00, then the money supply is
a. | 50,000. | c. | 10,900. | b. | 40,000. | d. | 37,000. |
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