Economics 155 Practice Exam Questions - Monetary Theory and Policy

1. Suppose that a wealthy Arabian deposits $5 million in the Chase Manhattan Bank (assume that this money came from outside the U.S.). You know that the required reserve ratio is equal to 20% and the excess reserve ratio for all banks is equal to 5% (assume that nobody holds cash.) What is the maximum amount of money that can be created by this deposit (not including the original deposit)?: A. $25 million.; B. $20 million.; C. $80 million.; D. $15 million.; E. $100 million.

2. All of the following would tend to make actual deposit creation less than the theoretical maximum except:: A. a desire of banks to delay making loans in expectation of higher interest rates.; B. households withdrawing deposits after losing their faith in the banking system.; C. banks deciding that extra cash is needed in the vaults in order to adequately covering the day to day operations of the bank.; D. an increase in the legal reserve requirement.; E. All of the above would make actual deposit creation less than the theoretical maximum.

3. Suppose that the Federal Reserve decides to sell U.S. bonds on the open market. This will result in:: A. the money supply increasing, interest rates decreasing, and investment increasing.; B. the money supply decreasing, interest rates decreasing, and investment increasing.; C. the money supply decreasing, interest rates increasing, and investment increasing.; D. the money supply increasing, interest rates increasing, and investment decreasing.; E. the money supply decreasing, interest rates increasing, and investment decreasing.

4. Suppose the market interest rate doubles from 10% to 20%. All else equal we would expect the price of a bond which pays $1000 a year forever to:: A. rise from $10,000 to $20,000.; D. fall from $10,000 to $5,000.; C. rise, but it is impossible to determine by how much.; D. fall, but it is impossible to determine by how much.; E. none of the above.

5. If the money supply doubled, the quantity theory of money would predict that:: A. aggregate output would double.; B. the price level would fall.; C. the price level would double.; D. the price level would more than double.

6. As the interest rate rises, the cost of holding money:: A. rises.; B. falls.; C. is unaffected.; D. none of the above.

7. The transactions demand for money as a percentage of aggregate income will be greatest is incomes are paid:: A. annualy.; B. weekly.; C. daily.; D. monthly.; E. semi-monthly.