Money, Banking, and Monetary Policy Multiple Choice

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B (the price in this case measures the relative price (value) of the pop.) (THIS EXPLANATION SEEMS TO INDICATE THAT THE ANSWER SHOULD REALLY BE C)

Which function of money best defines $1.25 as the price of a 20 oz. bottle of pop?
A. Medium of exchange
B. Unit of account
C. Store of value
D. Transfer of ownership
E. Fiat Money

A (The reserve ratio = Required Reserves/checking deposits = .1 = 10%. Excess reserves = (checking deposits - required reserves) = ($500 - $50) = $450)

If a bank has $500 in checking deposits and the bank is required to reserve $50, what is the reserve ratio? How much does the bank have in excess reserves?
A. 10%, $450
B. 90%, $50
C. 90%, $450
D. 10%, $50
E. 10%, $500

D (the Fed has no control of tax rates, which are an example of fiscal policy. All of the other choices are tools of monetary policy.)

Which is NOT a way the Fed can affect the money supply?
A. Change the discount rate
B. An open market operation
C. Change the reserve ratio
D. change tax rates
E. Buy Treasury securities from commercial banks

B (If the demand for money is downward sloping, the nominal interest rate falls because the money supply curve has shifted rightward)

If the money supply increases, what happens in the money market? (Assuming money demand is downward sloping.)
A. nominal interest rate rises
B. nominal interest rate falls
C. nominal interest rate does not change
D. Transaction demand for money falls
E. Transaction demand for money rises

E (If the central bank has decided that moving to full employment requires an increase in the federal funds rate, it must sell bonds to decrease the money supply. The resulting increase in interest rates decreases AD and puts downward pressure on the price level.)

To move the economy closer to full employment, the central bank decides that the federal funds rate must be increases. The appropriate open market operation is to ___________, which _________ the money supply, ____________ aggregate demand, and fight __________.
A. Buy bonds, Increases, Increase, Unemployment
B. Buy bonds, Increases, Increase, Inflation
C. Sell bonds, Decreases, Decrease, Unemployment
D. Sell bonds, Decreases, Increase, Inflation
E. Sell bonds, Decreases, Decrease, Inflation

B (Expansionary monetary policies decrease the interest rate causing AD to increase, which increases GDP at equilibrium and increases employment.)

Which of the following is a predictable advantage of expansionary monetary policy in a recession?
A. Decreases aggregate demand so that the price level falls
B. Increases aggregate demand, which increases real GDP and increases employment
C. Increases unemployment, but low prices negate this effect
D. It keeps interest rates high, which attracts foreign investment.
E. It boosts the value of the dollar in foreign currency markets

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