Question

1. Sam deposits $20,000 in the First National Bank, the reserve ratio is 12%, then he withdraws all the money(principal without interest) and deposits in the Second National Bank, and then withdraws and deposits again. Suppose this process continues and all the banks’ reserve ratios are all 12%, how much money supply is generated through all the banking systems?________ (Hint: Use geometric sequence to compute the MS, i.e. Sn=a1(1-qn)/(1-q), where Sn is the sum of the sequence, a1 is the first item, q is the multiplier, n is the number of process)

A.98,166

B.122,238

C.135,511

D.166,667

2. In early 2008, the central bank of Zimbabwe announced the inflation rate in that country had reached 24,000 percent, which of the following statements is NOT correct?

            A. Zimbabwe prints too much money to compensate its huge government budget deficit.

            B. Excessive money growth triggers this hyperinflation in Zimbabwe.

            C. Zimbabwe may experience extreme low level of nominal interest rate and households are afraid to save in local banks, they prefer to change for US dollars.

            D. If Zimbabwe borrowed money from loanable funds market, then it would raise the real interest rate in that market and “crowds out” private investors.

3. When deciding how much to save, people care most about ______, and inflation will ______ people’s incentive to save.

            A. after-tax nominal interest rate, encourage

            B. after-tax real interest rates, discourage

            C. after-tax nominal interest rates, discourage

            D. after-tax real interest rates, encourage

4. Which of the following statements is NOT correct?

A. If there is inflation, then a firm that has kept its price fixed for some time will have a low relative price.

B. Relative-price variability rises with inflation, leading to a misallocation of resources.

C. Higher inflation makes relative prices more variable, making it less likely that resources will be allocated to their best use.

D. Relative-price variability costs are costs incurred by people trying to protect themselves from the effects of inflation

5. Filling in the following blanks by choosing from two alternatives:

A. increases money supply.

B. decreases money supply.

(a) The Fed buys government bonds in open-market operations. ______

(b) The Fed increases the reserve requirement. ______

(c) The discount rate that the Fed makes loans to the banks serving as reserves increases. ______

(d) The Fed decreases the interest rate it pays on reserves. ______

(e) The FOMC increases the target for the federal funds rate.______

6. If the price level increased from 120 to 130, then what was the inflation rate?

            A. 1.1 percent

            B. 7.7 percent

            C. 10.0 percent

            D. 8.3 percent

7. See the table below and answer the following questions:

First National Bank
Assets		Liabilities and Owners’ Equity
Reserves	$1,200	Deposits	$9,000
Loans	$8,000	Debt	$800
Short-term securities	$800	Capital (owners’ equity)	$200

The required reserve ratio is 12 percent. Which of the following is true? ______

A. This banks reserve ratio is 12 percent. Its excess reserves are $0.

B. This banks reserve ratio is 13.3 percent. Its excess reserves are $120.

C. This banks reserve ratio is 15 percent. Its excess reserves are $240.

D. This banks reserve ratio is 10 percent. Its excess reserves are $300.

Answer 1

5. a) A. increases money supply.

Buying of government securities increases money supply.

b) B. decreases money supply.

Increase in reserve requirement means banks hold more reserves with themselves thus reduces money supply.

c) B. decreases money supply.

d) A. Increases money supply

When interest on reserves reduces then banks keeps less money with themselves and increases money supply.

e) B. decreases money supply.

Target of federal funds rate decreases the lending among banks and thus decreases money supply.

6. Inflation = (130 - 120)/120 x 100 = 1000/120 = 8.33%

Answer is d) 8.3%

7. Banks reserve ratio = 1200/9000 x 100 = 13.3%

Required reserve = 12% of deposits = 12% of 9000 = 1080

Excess reserve = Actual reserve - Required reserve = 1200 - 1080 = 120

B. This banks reserve ratio is 13.3 percent. Its excess reserves are $120.