Test Bank (chapter 04) - Macroeconomics, 6e (Blanchard╱Johnson).doc

Macroeconomics, 6e (Blanchard/Johnson)Chapter 4: Financial Markets4.1 Multiple Choice Questions1) Which of the following is a characteristic of bonds?A) pay zero nominal interestB) can be used for transactionsC) are sold for a price that varies inversely with the interest rateD) all of the aboveE) none of the aboveAnswer: CDiff: 12) Which of the following is a flow variable?A) incomeB) moneyC) financial wealthD) all of the aboveE) none of the aboveAnswer: ADiff: 13) Which of the following is a component of money?A) bondsB) savingC) incomeD) stocksE) none of the aboveAnswer: EDiff: 14) Which of the following is a component of money?A) coins held by the nonbank publicB) bills held by banksC) checkable depositsD) all of the aboveAnswer: DDiff: 15) Which of the following will cause an increase in the amount of money that one wishes to hold?A) an increase in the interest rate increaseB) a reduction in the interest rate increaseC) a reduction in incomeD) none of the aboveAnswer: BDiff: 26) The money demand curve will shift to the right when which of the following occurs?A) an increase in incomeB) a reduction in the interest rateC) an increase in the money supplyD) all of the aboveE) none of the aboveAnswer: ADiff: 27) The money demand curve will shift to the left when which of the following occurs?A) a reduction in the interest rateB) an increase in the interest rateC) an open market sale of bonds by the central bankD) an increase in incomeE) none of the aboveAnswer: EDiff: 28) Which of the following is NOT included as a component of the M1 definition of money?A) bondsB) checkable depositsC) coins and bills held by the nonbank publicD) all of the aboveE) none of the aboveAnswer: ADiff: 19) In 2006, the average U.S. household held approximately how much currency (dollar bills and coins)?A) $50B) $100C) $600D) $1600E) none of the aboveAnswer: DDiff: 210) Which of the following countries has adopted the U.S. dollar as its own currency?A) EcuadorB) MexicoC) CanadaD) FranceE) AustraliaAnswer: ADiff: 211) At the current interest rate, suppose the supply of money is less than the demand for money. Given this information, we know thatA) the price of bonds will tend increase.B) the price of bonds will tend to fall.C) production equals demand.D) the goods market is also in equilibrium.E) the supply of bonds also equals the demand for bonds.Answer: BDiff: 212) The interest rate will increase as a result of which of the following events?A) an increase in incomeB) an open market purchase of bonds by the central bankC) a reduction in incomeD) all of the aboveE) none of the aboveAnswer: ADiff: 213) Which of the following is NOT an asset on a banks balance sheet?A) reservesB) loansC) checkable depositsD) all of the aboveE) none of the aboveAnswer: CDiff: 114) Which of the following is a liability on a banks balance sheet?A) checkable depositsB) reservesC) loansD) all of the aboveE) none of the aboveAnswer: ADiff: 115) Which of the following is a liability for the central bank?A) currencyB) bondsC) savings accountsD) loansE) checkable depositsAnswer: ADiff: 116) Suppose a one-year discount bond offers to pay $1000 in one year and currently sells for $950. Given this information, we know that the interest rate on the bond isA) 5.3%.B) 9.5%.C) 10%.D) 90%.E) 110%.Answer: ADiff: 217) Suppose a one-year discount bond offers to pay $1000 in one year and currently has a 15% interest rate. Given this information, we know that the bonds price must beA) $869.56.B) $1150.C) $850.D) $950.E) none of the aboveAnswer: ADiff: 218) Banks are different from other financial intermediaries becauseA) banks receive funds and make loans.B) some of a banks deposits are money.C) banks can conduct open market operations on their own.D) banks do not need to hold reserves against their deposits.E) banks are open longer hours.Answer: BDiff: 119) Which of the following generally occurs when a central bank pursues expansionary monetary policy? A) the central bank purchases bonds and the interest rate increases.B) the central bank purchases bonds and the interest rate decreases.C) the central bank sells bonds and the interest rate increases.D) the central bank sells bonds and the interest rate decreases.Answer: BDiff: 220) Which of the following generally occurs when a central bank pursues contractionary monetary policy? A) the central bank purchases bonds and the interest rate increases.B) the central bank purchases bonds and the interest rate decreases.C) the central bank sells bonds and the interest rate increases.D) the central bank sells bonds and the interest rate decreases.Answer: CDiff: 221) Which of the following will occur when the central bank pursues expansionary monetary policy?A) a leftward shift in the money demand curve and a leftward shift in the money supply curveB) a rightward shift in the money demand curve and a leftward shift in the money supply curve.C) a leftward shift in the money demand curve and a rightward shift in the money supply curve.D) a rightward shift in the money demand curve and a rightward shift in the money supply curve.E) none of the aboveAnswer: EDiff: 222) Which of the following is a component of high powered money?A) bonds held by banks, loans, and bank reservesB) currency in circulation plus bank reservesC) currency in circulation plus checkable depositsD) bonds held by banks plus checkable depositsE) the sum of currency in circulation, bank reserves, and checkable depositsAnswer: BDiff: 223) For this question, assume that individuals do NOT hold currency (i.e., c = 0). If the ratio of reserves to deposits is .10, the money multiplier isA) .1.B) .9.C) 4.D) 5.E) 10.Answer: EDiff: 224) Which of the following will cause the money multiplier to become smaller?A) an increase in high powered moneyB) a decrease in the ratio of reserves to checkable depositsC) an increase in the publics preference for checking deposits as opposed to holding currencyD) a reduction in high powered moneyE) none of the aboveAnswer: EDiff: 325) The money supply will tend to fall when which of the following occurs?A) a central bank sale of bondsB) a decrease in the ratio of reserves to depositsC) a shift in public preferences away from currency to checkable depositsD) all of the aboveE) none of the aboveAnswer: BDiff: 326) Which of the following events will cause the interest rate to increase?A) an open market sale of bondsB) an increase in the reserve deposit ratio (i.e., )C) an increase in incomeD) all of the aboveAnswer: DDiff: 227) The federal funds rate is determined in which of the following markets?A) the market for U.S. treasury securitiesB) the money marketC) the bond marketD) the market for central bank moneyE) none of the aboveAnswer: EDiff: 128) For this question, assume that individuals do NOT hold currency (i.e., c = 0). The money multiplier is equal toA) 1.B) 1/(1 - c).C) .D) 1/(1- ).E) none of the aboveAnswer: EDiff: 229) For this question, assume that individuals do NOT hold currency (i.e., c = 0). The money multiplier is equal toA) 1/(1-c).B) 1/c + (1-c).C) c + (1-c).D) 1/.E) none of the aboveAnswer: DDiff: 230) For this question, assume that individuals hold both currency and checkable deposits. The money multiplier is equal toA) 1/c.B) 1/c + (1-c).C) c + (1-c).D) 1/.E) 1/(1-c)Answer: BDiff: 331) We would expect which of the following to occur when the central bank pursues expansionary monetary policy?A) an increase in bond prices and an increase in the interest rate (i)B) a reduction in bond prices and an increase in iC) an increase in bond prices and a reduction in iD) a reduction in bond prices and a reduction in iE) none of the aboveAnswer: CDiff: 232) We would expect which of the following to occur when the central bank pursues contractionary monetary policy?A) an increase in bond prices and an increase in the interest rate (i)B) a reduction in bond prices and an increase in iC) an increase in bond prices and a reduction in iD) a reduction in bond prices and a reduction in iE) none of the aboveAnswer: BDiff: 233) Based on our understanding of the determinants of the interest rate and bond prices, we know that a reduction in income will causeA) an increase in bond prices and an increase in the interest rate (i).B) a reduction in bond prices and an increase in i.C) an increase in bond prices and a reduction in i.D) a reduction in bond prices and a reduction in i.E) none of the aboveAnswer: CDiff: 234) We would expect which of the following to occur when the central bank conducts an open market sale of bonds?A) a reduction in the monetary base (H)B) a reduction in the money multiplierC) an increase in HD) an increase in the money multiplierE) both C and DAnswer: ADiff: 235) We would expect which of the following to occur when the central bank conducts an open market purchase of bonds?A) a reduction in the monetary base (H)B) a reduction in the money multiplierC) an increase in the money multiplierD) an increase in the money supplyAnswer: DDiff: 236) The FDIC currently insures each bank account up to what level?A) $10,000B) $50,000C) $250,000D) $150,000Answer: CDiff: 137) An increase in the reserve ratio, , will causeA) an increase in the monetary base (H).B) a reduction in H.C) an increase in the money multiplier.D) a reduction in the money multiplier.E) none of the aboveAnswer: DDiff: 238) A reduction in the reserve ratio, , will causeA) an increase in the monetary base (H).B) a reduction in H and a reduction in the money multiplier.C) an increase in the money multiplier.D) a reduction in the money multiplier.Answer: CDiff: 239) An increase in the parameter c, the proportion of money individuals wish to hold as currency, will tend to cause which of the following?A) an increase in the monetary base (H)B) a reduction in HC) an increase in the money multiplierD) a reduction in the money multiplierAnswer: DDiff: 240) A reduction in the parameter c, the proportion of money individuals wish to hold as currency, will tend to cause which of the following?A) an increase in the monetary base (H)B) a reduction in HC) an increase in the money multiplierD) a reduction in the money multiplierAnswer: CDiff: 241) An increase in income will tend to cause which of the following?A) an increase in the monetary base (H)B) a reduction in HC) an increase in the interest rateD) a reduction in the money multiplierE) none of the aboveAnswer: CDiff: 242) If individuals do not hold currency, we know thatA) M = D.B) H = R.C) the money multiplier is 1/.D) all of the aboveAnswer: DDiff: 243) If individuals do not hold checkable deposits, we know thatA) M = CU.B) H = CU.C) the money multiplier is 1.D) all of the aboveAnswer: DDiff: 244) An increase in the interest rate will causeA) a reduction in the supply of central bank money.B) a reduction in the demand for currency.C) a reduction in the demand for reserves.D) all of the aboveE) both B and CAnswer: EDiff: 245) An increase in income will causeA) a reduction in the supply of central bank money.B) a reduction in the demand for currency.C) a reduction in the demand for reserves.D) none of the aboveE) both B and CAnswer: DDiff: 246) An increase in income will causeA) a reduction in the supply of central bank money.B) a reduction in the demand for currency.C) an increase in the demand for reserves.D) none of the aboveAnswer: CDiff: 247) An open market sale of securities will tend to causeA) a reduction in the supply of central bank money.B) a reduction in the demand for currency.C) a reduction in the demand for reserves.D) none of the aboveAnswer: ADiff: 248) Suppose a one-year discount bond offers to pay $100 in one year and currently sells for $99. Given this information, we know that the interest rate on the bond isA) 11.1%.B) 10%.C) 5.3%.D) 9.9%.Answer: ADiff: 249) Which of the following is an asset of a central bank?A) currencyB) bondsC) reservesD) none of the aboveAnswer: BDiff: 250) Which of the following is an asset for both a bank and a central bank?A) currencyB) depositsC) bondsD) all of the aboveE) none of the aboveAnswer: CDiff: 251) Which of the following affects demand for money?A) pricesB) nominal incomeC) interest rateD) all of the aboveE) none of the aboveAnswer: DDiff: 24.2 Essay Questions1) First, explain why the money demand curve is downward sloping. Second, explain what factor(s) will cause shifts in the money demand curve.Answer: The money demand curve is downward sloping (with the interest rate on the vertical axis). It is assumed that money pays no interest. At the same time, individuals earn interest when they hold bonds. So, as the interest rate increases, individuals are more willing to incur the costs associated with converting bonds to money when they wish to buy goods. So, an increase in the interest rate causes a reduction in money demand. Money demand depends on the level of transactions and on the interest rate. As the level of transactions increases, individuals will increase money demand. Assuming that nominal income is correlated with nominal transactions, an increase in nominal income will cause an increase in money demand and shifts in the curve.2) Explain what types of policies a central bank can implement to reduce the interest rate.Answer: Central banks have two options to reduce the interest rate: a central bank purchase of bonds or a reduction in the required reserve ratio. Both policies result in an increase in the money supply and a reduction in the interest rate.3) Graphically illustrate and explain what effect an increase in real income will have on the money market.Answer: An increase in income will cause an increase in transactions and an increase in money demand. The money demand curve will shift to the right causing an excess demand for money and excess demand for bonds. The interest rate will rise to restore money market equilibrium. There is no change in money supply as a result of this.4) Graphically illustrate and explain what effect a purchase of bonds by the Federal Reserve will have on the money market.Answer: A Fed purchase of bonds will cause an increase in H and an increase in the money supply. At the initial interest rate, there will be an excess supply of money. The interest rate will fall to restore money market equilibrium. All else fixed, there will be no change in money demand.5) Use the market for central bank money to answer this question. Graphically illustrate and explain what effect a Federal Reserve purchase of bonds will have on this market and on the equilibrium interest rate.Answer: A Fed purchase of bonds will cause an increase in the supply of central bank money. To restore equilibrium in this market, the interest rate will have to fall. As it does, the quantity demanded for central bank money will rise and, therefore, restore equilibrium. 6) Use the market for central bank money to answer this question. Graphically illustrate and explain what effect an increase in the reserve deposit ratio () will have on this market and on the equilibrium interest rate.Answer: An increase in the parameter will cause an increase in banks demand for reserves and, therefore, an increase in the demand for central bank money. This will cause an excess demand for central bank money at the initial interest rate. In this case, the interest rate will rise to restore equilibrium.7) Explain what effect changes in each of the following variables has on the demand for central bank money: (1) the interest rate, i; and (b) real income, Y.Answer: Interest rate. A reduction in the interest rate will cause an increase in money demand (movement along the demand curve). This will cause an increase in the demand for currency that will cause an increase in the demand for central bank money. The increase in the demand for money will also cause an increase in the demand for deposits and, therefore, an increase in banks demand for reserves. This will also cause an increase in the demand for central bank money. In this case, we only move along the demand curve.Real income. An increase in Y will cause an increase in money demand and, as described above, an indirect increase in the demand for currency and reserves. So, this increase in Y will cause an increase in the demand for central bank money and a shift in the curve.8) Discuss the tools of the Federal Reserve and explain how each can be used to change the money supply and equilibrium interest rate.Answer: The Fed has three tools: discount rate, open market operations, and the reserve ratio. An open market sale or purchase will cause a change in H and M. This will in turn cause a change in the money supply. A change in the required reserve ratio will cause a change in the money multiplier and, therefore, the money supply. When the money supply changes, the interest rate will change. Changes in the discount rate do not directly cause changes in the money supply.9) What is the money multiplier and what factors determine its size?Answer: The money multiplier represents the effect of a given change in high powered money