4.1
Which asset is the most liquid?
A. Real estate
B. Fine art
C. Bonds
D. Money
D. Money
What is the nominal interest rate?
A. Inflation-adjusted rate
B. Real purchasing power gain
C. Stated rate advertised by banks
D. Rate after taxes
C. Stated rate advertised by banks
What is the key difference between MB and MS?
A. MB includes stocks
B. MS includes reserves
C. MB is smaller; MS is larger due to bank lending
D. They are always equal
C. MB is smaller; MS is larger due to bank lending
Who conducts monetary policy?
A. Congress
B. Federal Reserve
C. Banks
D. Firms
B. Federal Reserve
Who supplies loanable funds?
A. Borrowers
B. Savers
C. Government only
D. Firms only
B. Savers
What best describes a financial asset?
A. A physical good used for consumption
B. Something that stores value and can be used to hold wealth
C. Only cash in circulation
D. Government-issued currency only
B. Something that stores value and can be used to hold wealth
Nominal interest rate = 6% and inflation = 2%. Real interest rate equals:
A. 8%
B. 4%
C. 3%
D. −4%
B. 4%
What is included in the money supply (MS)?
A. Bank reserves only
B. Currency + checkable deposits
C. Stocks and bonds
D. Physical capital
B. Currency + checkable deposits
Contractionary policy does what to MS?
A. Increases
B. Decreases
C. Keeps constant
D. Doubles
B. Decreases
If business optimism increases, what happens?
A. DLF left
B. DLF right
C. SLF left
D. SLF right
B. DLF right
Why might investors buy bonds instead of holding cash?
A. Bonds are easier to spend
B. Bonds earn interest income
C. Bonds are perfectly safe
D. Bonds are more liquid than money
B. Bonds earn interest income
Who controls the money supply in the United States?
A. Congress
B. Treasury Department
C. Federal Reserve
D. Commercial banks only
C. Federal Reserve
What directly controls the monetary base?
A. Commercial banks
B. Households
C. Federal Reserve
D. Firms
C. Federal Reserve
Why is monetary policy preferred over fiscal policy?
A. It increases taxes
B. It has shorter lags
C. It controls GDP directly
D. It avoids inflation
B. It has shorter lags
If savings increase, what happens?
A. SLF left
B. SLF right
C. DLF right
D. DLF left
B. SLF right
Why do stocks generally offer higher expected returns than bonds?
A. Stocks are government insured
B. Stocks involve greater risk and uncertainty
C. Bonds cannot lose value
D. Stock prices never fall
B. Stocks involve greater risk and uncertainty
A $1,000 deposit enters a banking system with a 20% reserve ratio. Maximum money created equals:
A. $1,000
B. $2,000
C. $5,000
D. $20,000
C. $5,000
Which correctly explains why MD uses nominal interest rate?
A. It ignores inflation
B. It includes inflation and real return
C. It only reflects GDP
D. It controls MS
B. It includes inflation and real return
If the Fed sells bonds, what happens?
A. MS right, i down
B. MS left, i up
C. MS right, i up
D. MS left, i down
B. MS left, i up
If SLF increases, what happens to r?
A. Rises
B. Falls
C. Stays same
D. Doubles
B. Falls
During economic uncertainty, investors move from stocks to bonds because:
A. Bonds have higher potential profit
B. Bonds are considered safer assets
C. Stocks pay guaranteed income
D. Bonds are more liquid than money
B. Bonds are considered safer assets
Why doesn’t the real-world money multiplier reach its theoretical maximum?
A. Banks never lend
B. Households hold cash and banks keep excess reserves
C. The Fed blocks lending
D. Loans destroy deposits
B. Households hold cash and banks keep excess reserves
If MS decreases and MD decreases equally, what happens to i?
A. Increases
B. Decreases
C. Stays the same (roughly)
D. Becomes zero
C. Stays the same (roughly)
If interest on reserves increases, banks will:
A. Lend more
B. Lend less and hold reserves
C. Ignore it
D. Increase taxes
B. Lend less and hold reserves
What is crowding out?
A. Increase in saving
B. Government borrowing raising r and reducing private investment
C. Lower inflation
D. Increased GDP
B. Government borrowing raising r and reducing private investment