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 ECON 2105 Principles of Macroeconomics

Problem Set 5 Mankiw Chapter 29

dUE fRIDAY 18:00 September 12, 2008

 

Directions: Print this answer sheet out at your computer. Work individually or in a group with a maximum of three people. A group will submit one answer sheet with each group member’s name at the top. Read each question carefully. Each question has only one correct answer. Place the letter that corresponds to the correct answer alongside the number that corresponds to the question on the problem set on this answer sheet. Turn in only the answer sheet no later than 18:00 of the date indicated above.

 

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ECON 2105 Principles of Macroeconomics

Problem Set 5 Mankiw Chapter 29

dUE fRIDAY 18:00 september 12, 2008

 

____               1.     Which of the following best illustrates the unit of account function of money?

a.

You list prices for candy sold on your Web site, www.sweettooth.com, in dollars.

b.

You pay for your WNBA tickets with dollars.

c.

You keep $10 in your backpack for emergencies.

d.

None of the above is correct.

 

____               2.     Which of the following best illustrates the medium of exchange function of money?

a.

You keep some money hidden in your shoe.

b.

You keep track of the value of your assets in terms of currency.

c.

You pay for your double latte using currency.

d.

None of the above is correct.

 

____               3.     Liquidity refers to

a.

the ease with which an asset is converted to the medium of exchange.

b.

a measurement of the intrinsic value of commodity money.

c.

the suitability of an asset to serve as a store of value.

d.

how many time a dollar circulates in a given year.

 

____               4.     Which list ranks assets from most to least liquid?

a.

currency, fine art, stocks

b.

currency, stocks, fine art

c.

fine art, currency, stocks

d.

fine art, stocks, currency

 

____               5.     Demand deposits are included in

a.

M1 but not M2.

b.

M2 but not M1.

c.

M1 and M2.

d.

neither M1 nor M2.

 

____               6.     Given the following information, what would be the values of M1 and M2?

 

Small time deposits

$650 billion

Demand Deposits and other Checkable Deposits

$300 billion

Savings-type deposits

$750 billion

Money market mutual funds

$600 billion

Travelers' checks

$25 billion

Large time deposits

$600 billion

Currency

$100 billion

Miscellaneous Categories in M2

$25 billion

 

a.

M1 = $400 billion, M2 = $2,475 billion.

b.

M1 = $125 billion, M2 = $3,025 billion.

c.

M1 = $425 billion, M2 = $2, 450 billion.

d.

M1 = $425 billion, M2 = $1,875 billion.

 

 


____               7.     When the Federal Reserve conducts open-market operations to increase the money supply, it

a.

redeems Federal Reserve notes.

b.

buys government bonds from the public.

c.

raises the discount rate.

d.

decreases its lending to member banks.

 

____               8.     The Fed can increase the price level by conducting open market

a.

sales and raising the discount rate.

b.

sales and lowering the discount rate.

c.

purchases and raising the discount rate.

d.

purchases and lowering the discount rate.

 

____               9.     A bank’s assets include

a.

both its reserves and the deposits of its customers.

b.

neither its reserves nor the deposits of its customers.

c.

its reserves, but not the deposits of its customers.

d.

the deposits of its customers, but not its reserves.

 

____               10.  If banks desire to hold no excess reserves, the reserve ratio is 10 percent, and a bank that was previously just meeting its reserve requirement receives a new deposit of $400, then initially the bank has a

a.

$400 increase in excess reserves and no increase in required reserves.

b.

$400 increase in required reserves and no increase in excess reserves.

c.

$360 increase in excess reserves and $40 increase in required reserves.

d.

$40 increase in excess reserves and $360 increase in required reserves.

 

Use the balance sheet for the following questions.

 

Table 29-3

Last Bank of Cedar Bend

Assets

 

Liabilities

 

Reserves

$25,000

Deposits

$150,000

Loans

$125,000

 

 

 

____               11.  Refer to Table 29-3. If the reserve requirement is 10 percent, then this bank

a.

is in a position to make a new loan of $15,000.

b.

has less reserves than required.

c.

has excess reserves of less than $15,000.

d.

None of the above is correct.

 

Table 29-4

Bank of Tampa

Assets

 

Liabilities

 

Reserves

$100

Deposits

$1,000

Loans

$900

 

 

 

____               12.  Refer to Table 29-4. Assume that the Bank of Tampa is holding the required percent of deposits as reserves. Also, assume all other banks hold only the required percent of deposits as reserves and that people hold only deposits and no currency. What is the money multiplier?

a.

5

b.

10

c.

15

d.

20

 

 


Table 29-5

 

Bank of Springfield

Assets

 

Liabilities

 

Reserves

$12,000

Deposits

$240,000

Loans

$228,000

 

 

 

____               13.  Refer to Figure 29-5. If the Fed requires a reserve ratio of 4%, how much in excess reserves does the Bank of Springfield now hold?

a.

$1,200

b.

$2,400

c.

$2,880

d.

$3,000

 

____               14.  If the reserve ratio is 5 percent, $1,000 of additional reserves can create

a.

$5,500 of new money

b.

$5,000 of new money

c.

$4,000 of new money

d.

None of the above is correct.

 

____               15.  In Smallville, the money supply is $8 million and reserves are $1 million. Assuming that people hold only deposits and no currency, and that banks hold only required reserves, the required reserve ratio is

a.

14%

b.

12.5%

c.

8%

d.

None of the above is correct.

 

____               16.  The reserve requirement ratio is 10%. Which of the following pair of changes would both allow a bank to lend out an additional $10,000?

a.

the Fed buys a $10,000 bond from the bank or someone deposits $10,000 in the bank

b.

the Fed buys a $10,000 bond from the bank or the Fed lends the bank $10,000

c.

the Fed sells a $10,000 bond to the bank or someone deposits $10,000 in the bank

d.

the Fed sells a $10,000 bond to the bank or the Fed lends the bank $10,000

 

____               17.  The money supply decreases if the Fed

a.

sells Treasury bonds. The larger the reserve requirement, the larger the decrease will be.

b.

sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.

c.

buys Treasury bonds. The larger the reserve requirement, the larger the decrease will be.

d.

buys Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.

 

____               18.  The money supply increases when the Fed

a.

lowers the discount rate. The increase will be larger the smaller the reserve ratio is.

b.

lowers the discount rate. The increase will be larger the larger the reserve ratio is.

c.

raises the discount rate. The increase will be larger the smaller the reserve ratio is.

d.

raises the discount rate. The increase will be larger the larger the reserve ratio is.

 

____               19.  Which of the following lists two things that both increase the money supply?

a.

make open market purchases, raise the reserve requirement ratio

b.

make open market purchases, lower the reserve requirement ratio

c.

make open market sales, raise the reserve requirement ratio

d.

make open market sales, lower the reserve requirement ratio

 


____               20.  If the Fed makes open market purchases of bonds,

a.

the money supply increases by more than the amount of bonds purchased.

b.

the money supply increases by less than the amount of bonds purchased.

c.

the money supply decreases by more than the amount of bonds purchased.

d.

the money supply decreases by less than the amount of bonds purchased.

 

____               21.  In 1991 the Federal Reserve lowered the reserve requirement ratio from 12 percent to 10 percent. Other things the same this should have

a.

increased both the money multiplier and the money supply.

b.

decreased both the money multiplier and the money supply.

c.

increased the money multiplier and decreased the money supply.

d.

decreased the money multiplier and increased the money supply.

 

____               22.  If the reserve ratio is 10 percent, banks do not hold excess reserves and people hold only deposits and not currency, when the Fed sells $10 million dollars of bonds to the public, bank reserves

a.

increase by $1 million and the money supply eventually increases by $10 million.

b.

increase by $10 million and the money supply eventually increases by $100 million.

c.

decrease by $1 million and the money supply eventually increases by $10 million.

d.

decrease by $10 million and the money supply eventually decreases by $100 million.

 

The following questions are True-False and deal with chapters 21, 22, 23 in Miller et al. Mark a “T” or an “F” alongside the appropriate question number on the answer sheet.

 

23. The European Union is much more effective in controlling the cost of farm subsidy programs than is the U.S.

 

24. Under CAFÉ standards, U.S. automobile manufacturers can import fuel-efficient cars made in their plants overseas to increase the average gas mileage of their domestic fleets.

 

25. Imprisonment of convicted criminals appears to have little impact on crime rates.