Deck 4: Financial Markets

Question 1

Banks are different from other financial intermediaries because:

A) banks receive funds and make loans.
B) banks are open longer hours.
C) banks do not need to hold reserves against their deposits.
D) banks can conduct open market operations on their own.
E) some of a bank's deposits are money.

Answer 1

some of a bank's deposits are money.

Question 2

Which of the following is a liability on a bank's balance sheet?

A) Bonds.
B) Current account deposits.
C) Reserves.
D) Loans.
E) None of the above.

Answer 2

Current account deposits.

Question 3

Which of the following is a stock variable?

A) Money.
B) Saving.
C) Income.
D) Both A and B.
E) Both B and C.

Answer 3

Money.

Question 4

As of 2008, the Australian government insures each bank account up to what amount for three years?

A) $10,000.
B) $100,000.
C) $60,000.
D) $150,000.
E) Accounts are fully insured.

Question 5

Which of the following generally occurs when a central bank pursues contractionary monetary policy?

A) The central bank sells bonds and the interest rate increases.
B) The central bank sells reserves and the interest rate increases.
C) The central bank sells bonds and the interest rate decreases.
D) The central bank purchases bonds and the interest rate decreases.
E) The central bank purchases bonds and the interest rate increases.

Question 6

Which of the following is a liability for the central bank?

A) Bonds.
B) Savings accounts.
C) Loans.
D) Currency.
E) Current account deposits.

Question 7

Which of the following is not a characteristic of bonds?

A) They cannot be used for transactions.
B) They are sold for a price that varies inversely with the interest rate.
C) They pay a positive interest.
D) They pay a negative interest.
E) They pay zero interest.

Question 8

The cash rate is determined in which of the following markets?

A) The money market.
B) The wholesale funds market.
C) The bond market.
D) The market for central bank money.
E) The market for reserves.

Question 9

We would expect which of the following to occur when the central bank conducts an open market sale of bonds?

A) An increase in the money multiplier.
B) An increase in the monetary base.
C) A decrease in the monetary base.
D) An increase in high- powered money.
E) A decrease in the money multiplier.

Question 10

An increase in the interest rate will cause:

A) a decrease in the supply of central bank money.
B) a decrease in the demand for reserves.
C) a decrease in the demand for currency.
D) both A and C.
E) both B and C.

Question 11

If individuals do not hold currency, we know that:

A) The money multiplier is 1/8.
B) c = 0.
C) M = Dd.
D) H = Rd.
E) All of the above.

Question 12

Which of the following is not included as a component of the M1 definition of money?

A) Coins and bills held by banks.
B) Bonds.
C) Coins and bills held by the non- bank public.
D) Current account deposits.
E) None of the above.

Question 13

Which of the following events will cause the interest rate to decrease?

A) A decrease in high- powered money.
B) A decrease in monetary base.
C) An increase in the reserve deposit ratio .
D) An open market purchase of bonds.
E) An increase in income.

Question 14

Which of the following is a component of high powered money?

A) Bonds held by banks plus current account deposits.
B) Bonds held by banks, loans, and bank reserves.
C) Currency in circulation plus bank reserves.
D) Currency in circulation plus current account deposits.
E) The sum of currency in circulation, bank reserves, and current account deposits.

Question 15

We would expect which of the following to occur when the central bank conducts an open market purchase of bonds?

A) An increase in the money multiplier.
B) An increase in reserves.
C) A decrease in central bank money.
D) A decrease in reserves.
E) A decrease in the money multiplier.

Question 16

Suppose a one- year discount bond offers to pay $1250 in one year and currently sells for $1150. Given this information, we know that the interest rate on the bond is:

A) 12.7%.
B) 8.7%.
C) 9.7%.
D) 15.7%.
E) 6.7%.

Question 17

Which of the following is not a component of money?

A) Current account deposits.
B) Bonds held by the non- bank public.
C) Coins and bills held by the non- bank public.
D) Coins and bills held by banks.
E) None of the above.

Question 18

If individuals do not hold current account deposits, we know that:

A) The money multiplier is 1/c.
B) c = 1.
C) M = CUd.
D) H = CUd.
E) All of the above.

Question 19

Which of the following is not included as a component of money?

A) Saving.
B) Reserves.
C) Income.
D) Bonds.
E) All of the above.

Question 20

Which of the following will cause a rightward shift in the money demand curve?

A) An increase in the money supply.
B) A decrease in the interest rate.
C) A decrease in income.
D) A decrease in the money supply.
E) An increase in income.

Question 21

Which of the following events will cause the interest rate to increase?

A) A decrease in income.
B) An open market sale of bonds.
C) An increase in reserves.
D) A decrease in the reserve deposit ratio .
E) An increase in monetary base.

Question 22

A decrease in the reserve ratio, 8, will cause:

A) An increase in the monetary base.
B) An increase in the money multiplier.
C) A decrease in reserves.
D) A decrease in the money multiplier.
E) A decrease in the monetary base.

Question 23

A decrease in income will tend to cause which of the following?

A) A decrease in the monetary base.
B) An increase in the interest rate.
C) A decrease in the interest rate.
D) An increase in central bank money.
E) An increase in the monetary base.

Question 24

Assume that individuals hold both currency and current account deposits. The money multiplier is equal to:

A) 1/8.
B) [c+8(1- c)].
C) 1/(1- c).
D) 1/c.
E) 1/[c+8(1- c)].

Question 25

An increase in income will cause:

A) a decrease in the supply of reserves.
B) a decrease in the demand for currency.
C) an increase in the supply of reserves.
D) an increase in the supply of central bank money.
E) an increase in the demand for currency.

Question 26

Suppose a one- year discount bond offers to pay $1250 in one year and currently has an 18% interest rate. Given the information, we know that the bond's price must be:

A) $759.
B) $1159.
C) $1059.
D) $859.
E) $959.

Question 27

A decrease in income will cause:

A) an increase in the supply of monetary base.
B) an increase in the supply of central bank money.
C) an increase in the demand for currency.
D) a decrease in the demand for currency.
E) a decrease in the supply of monetary base.

Question 28

Which of the following will cause a leftward shift in the money demand curve?

A) An open market sale of bonds by the central bank.
B) An open market purchase of bonds by the central bank.
C) An increase in income.
D) A decrease in the interest rate.
E) A decrease in income.

Question 29

Which of the following will occur when the central bank pursues contractionary monetary policy?

A) A leftward shift in the money demand curve and a leftward shift in the money supply curve.
B) No shift in the money demand curve and a rightward shift in the money supply curve.
C) No shift in the money demand curve and a leftward shift in the money supply curve.
D) A leftward shift in the money demand curve and a rightward shift in the money supply curve.
E) A rightward shift in the money demand curve and a leftward shift in the money supply curve.

Question 30

We know that the amount of money that individuals want to hold will:

A) increase as financial wealth increases.
B) increase as income decreases.
C) decrease as the interest rate increases.
D) increase as the interest rate increases.
E) decrease as income increases.

Question 31

A decrease 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 money multiplier.
B) A decrease in the money multiplier.
C) An increase in the monetary base.
D) An increase in central bank money.
E) A decrease in monetary base.

Question 32

Which of the following will occur when the central bank pursues expansionary monetary policy?

A) A rightward shift in the money demand curve and a leftward shift in the money supply curve.
B) A rightward shift in the money demand curve and a rightward 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 leftward shift in the money demand curve and a leftward shift in the money supply curve.
E) None of the above.

Question 33

At the current interest rate, suppose the supply of money is greater than the demand for money. Given this information, we know that:

A) the supply of bonds equals the demand for bonds.
B) the goods market is in equilibrium.
C) the price of bonds will tend to increase.
D) the price of bonds will tend to decrease.
E) production equals demand.

Question 34

An increase in income will tend to cause which of the following?

A) An increase in the interest rate.
B) An increase in central bank money.
C) A decrease in monetary base.
D) A decrease in the interest rate.
E) An increase in the monetary base.

Question 35

In an economy in which individuals do not hold currency , which of the following expressions represents the money multiplier?

A) [c+8(1- c)].
B) 1/[c+8(1- c)] .
C) 1/(1- c).
D) 1/8.
E) 1/c8.

Question 36

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) A decrease in the monetary base.
B) An increase in reserves.
C) A decrease in the money multiplier.
D) An increase in the monetary base.
E) An increase in the money multiplier.

Question 37

Which of the following is not an asset on a bank's balance sheet?

A) Bonds.
B) Current account deposits.
C) Reserves.
D) Loans.
E) None of the above.

Question 38

Which of the following events will most likely cause an increase in the money supply?

A) An increase in the ratio of reserves to deposits.
B) A central bank sale of bonds.
C) A shift in public preferences away from deposits toward currency.
D) A decrease in the ratio of reserves to deposits.
E) None of the above.

Question 39

Assume that individuals do not hold currency . The money multiplier is equal to:

A) 1/(1- 8).
B) 1/8.
C) 1/c.
D) 1- c.
E) 1/(1- c).

Question 40

Based on our understanding of the determinants of the interest rate and bond prices, we know that a decrease in income will cause:

A) A decrease in bond prices and an increase in i.
B) An increase in bond prices and an increase in the interest rate (i).
C) No change in bond prices and a decrease in i.
D) An increase in bond prices and a decrease in i.
E) A decrease in bond prices and a decrease in i.

Question 41

What is the money multiplier and what factors determine its size?

Question 42

Which of the following generally occurs when a central bank pursues expansionary monetary policy?

A) The central bank purchases bonds and the interest rate decreases.
B) The central bank sells bonds and the interest rate increases.
C) The central bank purchases bonds and the interest rate increases.
D) The central bank sells bonds and the interest rate decreases.
E) The central bank purchases reserves and the interest rate decreases.

Question 43

A decrease in the interest rate will cause:

A) an increase in the demand for money.
B) an increase in the demand for monetary base.
C) an increase in the supply of central bank money.
D) both A and C.
E) both B and C.

Question 44

The interest rate will increase as a result of which of the following events?

A) An open market sale of bonds by the central bank.
B) An increase in the bond price.
C) An open market purchase of bonds by the central bank.
D) A decrease in income.
E) An increase in reserves.

Question 45

We would expect which of the following to occur when the central bank pursues contractionary monetary policy?

A) No change in bond prices and an increase in i.
B) A decrease in bond prices and an increase in i.
C) A decrease in bond prices and a decrease in i.
D) An increase in bond prices and an increase in the interest rate (i).
E) An increase in bond prices and a decrease in i.

Question 46

Which one of the following will cause a decrease in the money multiplier?

A) An increase in the ratio of reserves to deposits.
B) A decrease in the ratio of reserves to deposits.
C) A decrease in the public's preference for current account deposits as opposed to holding currency.
D) An increase in high powered money.
E) A decrease in high powered money.

Question 47

Use the market for central bank money to answer this question. Graphically illustrate and explain what effect a decrease in the reserve deposit ratio (8) will have on this market and on the equilibrium interest rate.

Question 48

Use the market for central bank money to answer this question. Graphically illustrate and explain what effect a Reserve Bank of Australia purchase of bonds will have on this market and on the equilibrium interest rate.

Question 49

Explain the policies a central bank can implement to increase the interest rate.

Question 50

Assume that individuals do not hold currency . If the ratio of reserves to deposits is 0.3, the money multiplier is:

A) 0.33.
B) 3.33.
C) 1.33.
D) 2.33.
E) 5.33.

Question 51

Use the market for central bank money to answer this question. Graphically illustrate and explain what effect an increase in the reserve deposit ratio (8) will have on this market and on the equilibrium interest rate.

Question 52

Graphically illustrate and explain what effect a purchase of bonds by the Reserve Bank of Australia will have on the money market.

Question 53

Use the market for central bank money to answer this question. Graphically illustrate and explain what effect a Reserve Bank of Australia sale of bonds will have on this market and on the equilibrium interest rate.

Question 54

First, explain why the money demand curve is downward sloping. Second, explain what factor(s) will cause shifts in the money demand curve.

Question 55

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.

Question 56

We would expect which of the following to occur when the central bank pursues expansionary monetary policy?

A) No change in bond prices and a decrease in i.
B) A decrease in bond prices and a decrease in i.
C) An increase in bond prices and a decrease in i.
D) A decrease in bond prices and an increase in i.
E) An increase in bond prices and an increase in the interest rate (i).

Question 57

Explain the policies a central bank can implement to decrease the interest rate.

Question 58

Graphically illustrate and explain what effect a sale of bonds by the Reserve Bank of Australia will have on the money market.

Question 59

Discuss the tools of the Reserve Bank of Australia and explain how each can be used to change the money supply and equilibrium interest rate.

Question 60

An increase in the reserve ratio, 8, will cause:

A) An increase in the money multiplier.
B) A decrease in central bank money.
C) A decrease in the monetary base.
D) A decrease in the money multiplier.
E) An increase in the monetary base.

Question 61

Explain what effect changes in each of the following variables has on the demand for high- powered money: (1) the interest rate, i; and (b) real income, Y.

Question 62

Graphically illustrate and explain what effect a decrease in real income will have on the money market.