Q: A bank has assets of $$\500$ million and liabilities of $$\$$480$$ million. What is the bank's shareholder equity?

$$\text{Shareholder Equity} = \text{Assets} - \text{Liabilities} = \500$$\text{m} - \$$480\text{m} = \20$$\text{m}$

Q: Suppose the government increases its spending by $$\100$ million and the marginal propensity to consume (MPC) is 0.8$. What is the total change in aggregate demand, assuming no crowding out?

$$\Delta AD = \frac{1}{1 - MPC} \times \Delta G = \frac{1}{1 - 0.8} \times 100 = 5 \times 100 = \500$ million

Q: Suppose the government cuts taxes by $$\50$ million. If the marginal propensity to consume (MPC) is 0.75$, what is the total change in aggregate demand from this tax cut?

$$\Delta AD = \frac{MPC}{1 - MPC} \times \Delta T = \frac{0.75}{0.25} \times 50 = 3 \times 50 = \150$ million$$

Question 1

Suppose the nominal interest rate is 6% and the expected inflation rate is 2%. According to the Fisher equation, what is the real interest rate?

Accepted Answer

$$r = i - \pi^e = 6\% - 2\% = 4\%$$

Question 2

A bank has assets of $$\500$ million and liabilities of $$\$$480$$ million. What is the bank's shareholder equity?

Accepted Answer

$$	ext{Shareholder Equity} = 	ext{Assets} - 	ext{Liabilities} = \500$$	ext{m} - \$$480	ext{m} = \20$$	ext{m}$

Question 3

If the Federal Reserve wants to decrease the Federal Funds Rate, which of the following actions is it most likely to take?

Accepted Answer

Buy government bonds from banks, increasing the supply of reserves

Question 4

Which of the following best describes 'maturity transformation' performed by banks?

Accepted Answer

Using short-term deposits to make long-term loans

Question 5

A bank experiences a sudden withdrawal of deposits by many customers, fearing the bank's insolvency. What is this scenario called?

Accepted Answer

A bank run

Question 6

If the market interest rate rises from 4% to 6%, what happens to the price of an existing bond with a fixed coupon rate?

Accepted Answer

The price of the bond falls

Question 7

Which of the following is NOT a function of financial intermediaries?

Accepted Answer

Setting the federal funds rate

Question 8

Suppose the government increases its spending by $$\100$ million and the marginal propensity to consume (MPC) is 0.8$. What is the total change in aggregate demand, assuming no crowding out?

Accepted Answer

$$\Delta AD = \frac{1}{1 - MPC} 	imes \Delta G = \frac{1}{1 - 0.8} 	imes 100 = 5 	imes 100 = \500$ million

Question 9

Which of the following would shift the aggregate demand (AD) curve to the right?

Accepted Answer

A decrease in household tax rates

Question 10

During which phase of the business cycle is unemployment typically at its lowest?

Accepted Answer

Expansion (Boom)

Question 11

If the Federal Reserve raises the Interest on Reserves (IOR), what is the likely immediate effect on the supply of reserves in the Federal Funds Market?

Accepted Answer

The supply of reserves remains unchanged, but the equilibrium Federal Funds Rate rises

Question 12

Which of the following is an example of an automatic stabilizer?

Accepted Answer

Unemployment insurance payments that increase during a recession

Question 13

Suppose the government cuts taxes by $$\50$ million. If the marginal propensity to consume (MPC) is 0.75$, what is the total change in aggregate demand from this tax cut?

Accepted Answer

$$\Delta AD = \frac{MPC}{1 - MPC} 	imes \Delta T = \frac{0.75}{0.25} 	imes 50 = 3 	imes 50 = \150$ million$$

Question 14

Which of the following best describes the goal of countercyclical fiscal policy?

Accepted Answer

To reduce the severity of economic fluctuations by adjusting government spending and taxes

Question 15

If the Federal Reserve sells government bonds to banks, what is the effect on the banks' balance sheets?

Accepted Answer

Banks' reserves decrease and government securities increase by the amount of the bonds purchased

Question 16

Which of the following would be an appropriate monetary policy response to high inflation?

Accepted Answer

Sell government bonds to banks and/or raise the Interest on Reserves (IOR)

Question 17

If a negative supply shock (such as a sudden increase in oil prices) hits the economy, how would this be represented in the AD/AS model?

Accepted Answer

A leftward shift of the Short Run Aggregate Supply (SRAS) curve

Question 18

Which of the following statements about the credit market is correct?

Accepted Answer

Savers supply credit, while borrowers demand credit

Question 19

If the economy is in a recession, which of the following policy combinations would be most appropriate to stimulate aggregate demand?

Accepted Answer

Expansionary monetary policy and expansionary fiscal policy

Question 20

Which of the following would cause the demand for reserves in the Federal Funds Market to increase?

Accepted Answer

Banks expect higher liquidity needs in the near future

Credit Markets, Monetary System, Short-Run Fluctuations, and Countercyclical Policy: Study Guide

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