Q: A bank has \$$100 million in checkable deposits and is required to keep 10% as reserves. If the bank holds \15 $$million in reserves, what are its excess reserves?

$$ 15\text{ million} - (0.10 \times 100\text{ million}) = 5\text{ million} $$

Q: Suppose the required reserve ratio is 20%. If \$1,000 is deposited into a bank, what is the maximum possible increase in the money supply using the simple money multiplier?

$$ \text{Maximum Increase} = 1,000 \times 5 = 5,000 $$

Q: If the velocity of money ($$V) is $$constant, real GDP ($$Y) $$grows at 2% per year, and the money supply ($$M) $$grows at 5% per year, what is the implied inflation rate according to the quantity theory of money?

$$ \text{Inflation Rate} = 5\% - 2\% = 3\% $$

Question 1

Suppose the economy is initially at long-run equilibrium. A sudden increase in oil prices causes a negative supply shock. Using the AD/AS model, what is the most likely short-run effect on output and the price level?

Accepted Answer

Output decreases and the price level increases.

Question 2

Which of the following best describes the 'wealth effect' as it relates to the downward slope of the aggregate demand curve?

Accepted Answer

As the price level falls, the real value of household wealth increases, leading to higher consumption.

Question 3

A bank has \$$100 million in checkable deposits and is required to keep 10% as reserves. If the bank holds \15 $$million in reserves, what are its excess reserves?

Accepted Answer

$$
15	ext{ million} - (0.10 	imes 100	ext{ million}) = 5	ext{ million}
$$

Question 4

Which of the following is NOT a function of money?

Accepted Answer

A source of government revenue

Question 5

If the Federal Reserve wants to decrease the money supply, which of the following actions should it take?

Accepted Answer

Sell government securities in open market operations.

Question 6

Suppose the required reserve ratio is 20%. If \$1,000 is deposited into a bank, what is the maximum possible increase in the money supply using the simple money multiplier?

Accepted Answer

$$
	ext{Maximum Increase} = 1,000 	imes 5 = 5,000
$$

Question 7

Which of the following would shift the long-run aggregate supply (LRAS) curve to the right?

Accepted Answer

An increase in the labor force due to immigration.

Question 8

Which of the following best explains why fiat money has value?

Accepted Answer

It is accepted by people as a means of payment and is declared legal tender by the government.

Question 9

If the velocity of money ($$V) is $$constant, real GDP ($$Y) $$grows at 2% per year, and the money supply ($$M) $$grows at 5% per year, what is the implied inflation rate according to the quantity theory of money?

Accepted Answer

$$
	ext{Inflation Rate} = 5\% - 2\% = 3\%
$$

Question 10

Which of the following is an example of a liability on a commercial bank’s balance sheet?

Accepted Answer

Checkable deposits

Question 11

A central bank implements contractionary monetary policy. Which of the following is the most likely short-run effect on the AD/AS model?

Accepted Answer

Aggregate demand shifts left, reducing output and the price level.

Question 12

Which of the following best describes the 'interest rate effect' as a reason for the downward slope of the aggregate demand curve?

Accepted Answer

As the price level falls, interest rates decrease, leading to higher investment spending.

Question 13

Which of the following is a distinguishing feature of fractional reserve banking?

Accepted Answer

Banks keep only a fraction of deposits as reserves and lend out the rest.

Question 14

Suppose the Federal Reserve lowers the interest rate on reserve balances (IORB Rate). What is the most likely effect on bank lending and the money supply?

Accepted Answer

Banks will lend more, increasing the money supply.

Question 15

Which of the following scenarios best illustrates the concept of 'double coincidence of wants' in a barter economy?

Accepted Answer

A farmer wants shoes and finds a shoemaker who wants wheat.

Question 16

If the Federal Reserve conducts quantitative easing, which of the following is most likely to occur?

Accepted Answer

The Fed purchases long-term securities, increasing the money supply and lowering long-term interest rates.

Question 17

Which of the following would cause the short-run aggregate supply (SRAS) curve to shift to the left?

Accepted Answer

An increase in the price of oil

Question 18

Suppose the economy is experiencing stagflation. Which combination of changes in output and the price level is most consistent with this scenario?

Accepted Answer

Output decreases and the price level increases.

Question 19

Which of the following is included in M2 but NOT in M1?

Accepted Answer

Savings deposits

Question 20

A bank faces a sudden surge of withdrawals by depositors who fear the bank may fail. This scenario is best described as:

Accepted Answer

A bank run

Macroeconomics Study Guide: AD/AS Model, Money & Banking, and Monetary Policy

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