Question

Test 5 #16-20

(16)
Lowering the discount will increase the money supply. true false
(17)
If the required reserve ratio is 10%, the increase in the money supply that results from $500,000 of new deposits equals $5,000. $50,000. $500,000. $5,000,000.
(18)
If the Federal Reserve purchases government bonds, all of the following will occur except commercial bank reserves will increase. the discount rate will be forced up. the money supply will increase. there will be a multiple expansion of banking deposits.
(19)
When real income increases, people will demand more money to do more shopping. people will demand less money and save more. people will invest more in interest-bearing assets. the demand for money is unaffected.
(20)
The supply curve for loanable funds slopes upward because as the interest rate increases, the quantity of loanable funds supplied decreases. people will forego consumption at higher interest rates and save. as the interest rate increases, the supply of loanable funds increases. all of the above.

Answer 1

16. Lowering the discount will increase the money supply True.

17. If the required reserve ratio is 10%, the increase in the money supply that results from $500,000 of new deposits equals $5,000,000.

multiply the change in deposits of $500,000 by the money multiplier (1/.10) to calculate an increase in the money supply of $5,000,000.

18. If the Federal Reserve purchases government bonds, all of the following will occur except the discount rate will be forced up

19. If real income increases, then nominal income rises faster than prices, and people tend to go shopping.

20.The demand curve is downward sloping because as the interest rate decreases, firms will want to borrow more money. Firms demand loanable funds (investment). (When demand for investment increases, quantity of loanable funds increases and real interest rate increases. When demand for investment decreases, quantity, quantity of loanable funds decreases and real interest rate decreases). The supply curve is upward sloping because as the interest rate increases, people will want to save more. Individuals supply loanable funds through savings. (When supply for savings increases, quantity of loanable funds increases and the real interest rate decreases. When supply for savings decreases, quantity of loanable funds decreases and the real interest rate increases).