Question

Stacy deposits $1,000 in her checking account. The bank ends up loaning $400 from the $1,000 to another customer, and placing $600 in the bank’s vault. Thus, as a result of Stacey’s deposit and the bank’s actions, the money supply has

Select one:

a. Increased by $400.

b. Declined by $200.

c. Increased by $200.

d. Declined by $400.

Anna deposits $300 in her checking account, and her bank loans the $300 out to Jim the next day. Who is the legal owner of the $300 in cash?

Select one:

a. The bank

b. Both Anna and Jim can claim legal ownership of the $300.

c. Anna

d. Jim

In the Austrian View of the Business Cycle, one of the factors that contributes to the unsustainability of economic growth generated by an increase in the money supply by the central bank is that

Select one:

a. Households will respond to a decline in the interest rate by lowering their saving.

b. Business will lower their investment in response to the lower interest rate.

c. The government does not support the boom by increasing its spending.

d. Households lower their consumption expenditures, resulting in businesses becoming less optimistic.

Assuming the money multiplier is equal to 20 and the central bank manages to take $10,000 of cash out of the circulation (the monetary base thus declines by $10,000), the overall money supply

Select one:

a. Declines by $200,000.

b. Increases by $500.

c. Declines by $500.

d. Increases by $200,000.

Answer 1

1) ans) a. Money supply has increased by $400. It is because after deposit of $1000 to the bank $400 has been advances as a loan. This $400 is increasing the supply of money as if to the another person. So this $400 increased the money supply.

2)ans. b. Both Anna and Jim can claim legal ownership of the $300. It is because first Anna has given the money to bank as a deposit so Anna can claim from bank legally that money. At the same time as Jim has been given or sansctioned the money in favour of Jim, so Jim can claim that money legally.

3) ans. a. Household will respond to a decline in the interest rate by lowering their savings. The household decline their savings when there is lower in interest rate. This lower interest rate and savings actually disturb capital investment.

4) ans. a. When there is decline in monetary base by $10,000 and money multiplier is 20, then total money supply is declined by $10,000*20 =$200,000. Because money supply change is equal to monetary base*money multiplier.