answerstopracticequestions7spring2004

answerstopracticequestions7spring2004 - Economics 102...

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Economics 102 Spring 2004 Answers to Practice Homework 7 . Concepts: Definition and calculation of the money supply A bank’s balance sheet The Federal Reserve system The money multiplier The relationship between the money market and the bond market Multiple Choice Questions: 1. Which of the following is NOT a function of money? (a) It facilitates the barter system. (b) It serves as a store of wealth. (c) It serves as a unit of value. (d) It serves as a medium of exchange. ANS: (a) - barter is the transaction system used before the introduction of money. 2. The Required Reserve Ratio (RR) is a percentage set by the Federal Reserve System that requires banks to: (a) Lend the RR percent of the bank’s customer Demand Deposits (DD) to the public. (b) Hold the RR percent of the bank’s customer DD in the form of cash in their vault or in accounts at the Federal Reserve. (c) Pay RR percent of the bank’s customer DD to the Federal Reserve as an annual membership fee. (d) Hold the RRR percent of the bank’s customer DD in the forms of cash in their vault. ANS: (b) - The bank always has an account with the Fed that facilitates its daily operations. Moreover the funds that the bank holds as their required reserves is the portion of money that the bank CANNOT lend out to its customers. 3. An open market operation (OMO) refers to: (a) The purchase of goods and services by the Fed. (b) An announcement about the level of the money supply in the economy. (c) The process of printing more money and distributing it to the public.
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(d) The purchase or sale of bonds to influence the level of the money supply in the economy. ANS: (d) by definition. 4. Which of the following actions by the government is most likely to increase the money supply in an economy? (Hint: it is probably better to first answer Q3 of the problems) (a) Decreasing the RRR while selling bonds in the market. (b) Increasing the RRR while selling bonds in the market. (c) Buying bonds in the market. (d) None of the above would have any effect on the money supply. ANS: (c) by observations from Q3 in the problems. 5. Money Demand, when plotted against the interest rate, is downward sloping because: (a) At higher interest rates the opportunity cost of holding money is lower. (b) Banks typically want more savings when the interest rate is higher. (c) At higher interest rates the opportunity cost of holding money is higher. (d) Individuals dislike putting money in the bank.
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This note was uploaded on 08/08/2008 for the course ECON 102 taught by Professor Drozd during the Spring '08 term at Wisconsin.

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answerstopracticequestions7spring2004 - Economics 102...

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