# The speculative demand for money, economics homework help

NEW ENGLAND COLLEGE

INTRODUCTION TO MACROECONOMICS

FIFTH HOMEWORK ASSIGNMENT

 1. The speculative demand for money is: A) directly related to the interest rate. B) independent the interest rate. C) inversely related to the interest rate. D) none of the above.

E)  (A) and (C) above.

 2. An example of a double coincidence of wants is: A) a car mechanic who wants a TV set finds an owner of an electronics store who wants a car repaired. B) a car dealer who wants a TV set finds an electronics store owner who wants money. C) an electronics store owner who wants car repairs finds a car mechanic who wants money. D) all of the above are examples.

E)  none of the above.

 3. “Tuition at State University this year is \$12,000.”  Which function of money does this statement best illustrate? A) store of value B) medium of exchange C) unit of account D) credit score.

E)  any of the above.

 4. Expansionary monetary policy: A) increases the money supply, interest rates, consumption, and investment. B) decreases the money supply, interest rates, consumption, and investment. C) increases the money supply, decreases interest rates, and increases investment. D) decreases the money supply, increases interest rates, and decreases investment.

E)  ((B) and (D) above.

 5. To increase the money supply, the Federal Reserve could: A) lower the discount rate. B) buy government bonds. C) lower reserve requirements. D) do all of the above.

E)  none of the above.

 6. Suppose that the required reserve ratio is 10% and banks have no excess reserves.  The total demand deposit in the system is \$100,000. Now the monetary authorities lower the required reserve ratio to 5%. Which of the following will likely follow? A) The amount of excess reserves in the banking system will be \$5,000. B) The amount of excess reserves in the banking system will be \$10,000. C) Banking system can create more money. D) All of the above.

E)  (A) and (C) above.

 7. If a bank gets a new deposit of \$100 cash and it has a 20% required reserve ratio, then the money supply can eventually increase by: A) \$20. B) \$100. C) \$500. D) \$1,000.

E)  none of the above.

 8. If the Federal Reserve increases the discount rate: A) the money supply will decrease. B) the money supply will increase. C) the money supply will not change. D) the federal funds rate must decrease.

E)  any of the above.

 9. Which of the following is NOT considered one of the functions of money? A) serving as a medium of exchange. B) serving as a store of value. C) serving as a unit of account. D) being durable.

E)  (A), (B) and (C) above.

 10. Commodity money is: A) whatever the government has decreed is money. B) Something that is used as money and also has intrinsic value. C) money used for buying commodities. D) whatever people accept as money.

E)  none of the above.

 11. Bank reserves are: A) the fraction of deposits kept in gold with the Federal Reserve. B) the deposits lent to finance illiquid investments. C) the fraction of deposits kept in cash form. D) gold kept in the bank’s vault.

E)   none of the above.

 12. Federal funds rate is: A) the rate banks pay to the Federal Reserve System. B) the rate banks charge their best customers. C) the rate government pays when it borrows from the public. D) the rate banks pay to other banks when they borrow from each other.

E)  none of the above.

 13. The discount rate is the interest rate the Federal Reserve charges on loans to: A) consumers. B) the federal government. C) state governments. D) banks.

E)  none of the above.

 14. The three primary monetary policy tools are: A) interest rates, taxes, and government purchases, B) currency, near-moneys, and reserve ratio. C) deposit insurance, discount rate, and money multiplier. D) reserve requirements, the discount rate, and open-market operation.

E)  none of the above.

 15. If the Fed conducts a \$10 million open-market purchase of government bonds and the reserve requirement is 10%, the maximum amount of eventual change in the money supply is: A) an increase of \$100 million. B) A decrease of \$100 million. C) A decrease of \$10 million. D) an increase of \$10 million.

E)  none of the above.

 16. The Federal Open Market Committee is in charge of: A) setting the discount rate. B) setting the required reserve ratio. C) setting the prime rate. D) setting the federal funds rate

E)  none of the above.

 17. People demand money to: A) for speculative purposes. B) for transaction purposes. C) for precautionary purposes. D) all of the above.

E)  none of the above.

 18. To expand the money supply, the Federal Reserve would have to do which of the following? A) purchase government bonds. B) sell government bonds. C) raise discount rate. D) raise required reserve ratio.

E)  none of the above.

 19. To increase the money supply and decrease the interest rate, the Federal Reserve can: A) buy bonds. B) sell bonds. C) tell the banks to make more loans. D) tell the banks to make fewer loans.

E)  none of the above.

 20. If the economy is experiencing an inflationary gap, the Federal Reserve should ______ the money supply in order to ______ the GDP. A) increase; decrease B) decrease; increase C) increase; increase. D) decrease; decrease

E)  none of the above.

 21. Legal Reserve Ratio: A) determines the maximum amount of reserves a bank must hold. B) determines the minimum amount of reserves a bank must hold. C) is established by Congress. D) is set by the American Bankers Association.

E)  none of the above.

 22. Banks in a fractional banking system can create money when they: A) make loans. B) accept deposits. C) hold excess reserves. D) pay withdrawals to depositors.

E)  all of the above.

 23. If the required reserve ratio is 5%, a deposit of \$1,000 will eventually increase the money supply by: A) \$1,000. B) \$20,000. C) \$10,000. D) \$50,000.

E) none of the above.

 24. If the Fed sells \$10 million government bonds and the reserve requirement is 20%, the money supply can eventually: A) increase by \$10 million. B) increase by \$8 million. C) decrease by \$10 million. D) decrease by \$50 million.

E)  increase by \$50 million.

 25. Open-market operations occur when the Federal Reserve: A) buys government bonds from the federal government. B) buys or sells government bonds. C) buys or sells existing U.S. Treasury bills. D) does all of the above.

E)  none of the above.

ESSAY:

In the United States, the Federal Reserve frequently engages in buying and selling of the government securities as well as other policies.  In recent years, the Fed has reduced the Discount Rate several times.  The Fed has also purchased substantial amount of government securities.  Explain the logic of these actions by the Fed.  Why are they doing this and what they hope to accomplish?  Take a stand in support or against these actions and state your reasoning. If you were to advise the President, what course of action would you recommend