Nathan has been unable to trust banks since the failure of his savings and loan bank. He claims that storing his hard-earned money at home is costless. Is Nathan correct? Why?
What is Nathan is incorrect because the opportunity cost of holding money is the interest income that could have been earned from holding other financial assets, such as bonds.
What is adjusted by the actual inflation rate ,Nominal Wages, Real Interest Rate ,Unemployment Rate , Automatic Stabilizers
What is Real Interest Rate
Real values are adjusted for inflation. A real interest rate is adjusted for inflation.
Why the amount predicted by the value of the simple money multiplier may be overstated?
What is it does not take into account excess reserves
The amount predicted by the simple money multiplier may be overstated because it does not take into account a bank’s desire to hold excess reserves or the public holding more currency.
Suppose that the banking system in an economy has ample reserves, and the economy has entered a recession. List a monetary policy action the central bank can take to restore full-employment output in the short run?
What is decrease the discount rate, buy bonds or decrease the reserve requirement
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Rankings lists these assets from the least liquid to the most liquid?
Cash, bonds, house, savings account
What is
House, bonds, savings account, cash are listed in order from least liquid to most liquid.
Spencer took a 9 percent one-year fixed-rate loan to buy a new car. He expected to pay a real interest rate of 5 percent. If at the end of the year Spencer only paid a 3 percent real interest rate. What is the actual inflation rate
what is the actual inflation rate 6%
the difference between the nominal interest rate and the actual real interest rate, 9%−3%=6%.
Northern City Bank keeps no excess reserves. Assume Northern City Bank receives a cash deposit of $50 dollars. As a result of the deposit, Northern City Bank’s required reserves increase by $10. What is the maximum possible change in the money supply in the banking system that could result from the $50 deposit?
What is The money supply will increase by a maximum of $200.
Since the bank keeps no excess reserves, all excess reserves will be lent out and will result in a maximum increase in loans of $200, which is the product of excess reserves
(=deposits−required reserves=$50−$10=$40)
and the money multiplier
(=1required reserve ratio=1(required reserves / deposits)
=1($10/ $50)=10.2=5).
Therefore, the money supply will increase by a maximum of $200.
The graph above shows two aggregate demand curves, AD1 and AD2, and an aggregate supply curve, AS. The shift in the aggregate demand curve from AD1 to AD2 could be caused by what kind of change in the money supply?
What is a decrease in the money supply
Decreasing the money supply raises nominal interest rates decreasing interest sensitive spending lowering aggregate demand
Assume a country’s banking system has limited reserves. Which event would have caused the shift of the money supply curve from S1 to S2 in the money market shown above?
What is The purchase of government bonds on the open market by the central bank,
How will the following situation affect the M1 money Supply
Leila deposited coins from her piggy bank into her checking account.
What is M1 remains unchanged
M1 is composed of currency in circulation and checkable deposits. This transaction will keep M1 unchanged because currency will decrease and checkable deposits will increase by the same amount.
f the interest rate on a one-year loan is 5% and the expected inflation rate is −2% for the same period, what is the expected real interest rate on the loan?
What is 7%
The expected real interest rate is calculated as the nominal interest rate minus the expected inflation rate; 5%−(−2%)=7%.
Assume that the reserve requirement is 15 percent and that a bank receives a new checking deposit of $200. How will bank's balance sheet assets and liabilities change?
What is Liabilities: Increase by $200
Required Reserves: Increase by $30
Assume a country’s banking system has limited reserves. If the central bank buys government bonds from individuals on the open market and banks do not loan out any excess reserves created by the open market purchase, what will happen to the money supply?
What is the money supply will increase
Use the graph to answer the question.
at the nominal interest rate (i3) ? do you have a shortage, surplus or equilibrium?
What is There is a shortage in the money market because the quantity demanded is greater than the quantity supplied.
At i3 the quantity of money demanded is greater than the quantity of money supplied; therefore, there is a shortage in the money market.
Is the following included in the monetary base
Currency held by the public and commercial bank reserves held with the central bank
What is yes
The monetary base includes currency in circulation and bank reserves.
describe the relationship between the nominal interest rate and the quantity of money people want to hold as depicted by the money demand curve?
What is an Inverse relationship and the money demand curve is downward sloping.
As the nominal interest rate falls, people hold more money because the opportunity cost of holding money decreases, which leads to a downward-sloping money demand curve.
Country X’s economy is enjoying political stability and attracting an increase in foreign financial capital. At the same time Country X’s government is borrowing to finance spending. How will these changes affect the loanable funds market in Country X?
What is There will be an indeterminate effect on the equilibrium real interest rate.
The increase in foreign financial capital increases the supply of loanable funds, which lowers the real interest rate. The increase in government borrowing increases the demand for loanable funds, which increases the real interest rate. Thus, the overall impact on the equilibrium real interest rate is indeterminate.
if an economy is currently experiencing a decrease in the price level and the banking system has limited reserves, what monetary policy actions can be implemented to reverse the change in the price level in the short run?
What are buying bonds on the open market, lowering the reserve requirement or decreasing the discount rate
Buying bonds on the open market is an expansionary monetary policy in a limited reserves banking system. This policy would cause the price level to increase, reversing the change in the price level in the short run.
Country X’s economic situation is depicted by the graph above. What will happen if Country X’s central bank conducts a contractionary monetary policy?
What is The economy will be in a recessionary gap; the price level and the real output level will decrease.
The economy is currently in long-run equilibrium producing the full-employment output. A contractionary monetary policy will cause the AD curve to shift to the left, leading to a decrease in the price level and the real output level. Real output will be lower than full employment and the economy will be in a recessionary gap.
Mia transferred $1,000 from her checking account to a certificate of deposit. How will the M1 and M2 measures of the money supply change?
What is M1 will decrease and M2 will not change.
M1 is composed of currency in circulation, demand deposits, and other liquid deposits such as savings deposits. M2 is composed of M1 and other small-denomination time deposits and balances in retail money market funds. Therefore, transferring money from checking accounts to certificates of deposit will reduce M1 but will not affect M2.
An increase in the price level will affect the money market and bond market in which of the following ways?
What is The nominal interest rate rises, and the price of previously issued bonds falls.
A rise in price level causes the money demand curve to shift to the right, causing the nominal interest rate to rise. Nominal interest rates and bond prices move in opposite directions. Therefore, an increase in the nominal interest rate will result in a decrease in the price of previously issued bonds.
outhern City Bank has $100 million in deposits and has $8 million in excess reserves. If the required reserve ratio is 5%, what is the money multiplier and how much money can be increased in the banking system?
What is The money multiplier is 20, and loans can increase in the banking system by a maximum of $160 million.
The money multiplier is the inverse of the required reserve ratio and is equal to 10.05=20. The bank can lend out its excess reserves up to $8 million. When the bank lends out all its excess reserves, loans in the banking system can increase by a maximum of $160 million which is equal to the product of the bank’s excess reserves and the money multiplier; $8million×20 = $160million.
In the short run, an expansionary monetary policy would most likely result in what changes in the price level and real gross domestic product (GDP) ?
What is increase in price level and increase in real gdp
AD shifts right
Use the graph to answer the question.
The loanable funds market is currently in equilibrium at a real interest rate of r1. How will An increase in household savings will affect the loanable funds market?
What is The supply of loanable funds will increase and the real interest rate will decrease.
An increase in household savings will shift the supply curve of loanable funds to the right, which results in a lower real interest rate.