1. Consumption increases from $20,000 to $21,500 when disposable income increases from $23,000 to $25,000. What is the marginal propensity to consume?

a. 1.33 b. 0.75 c. 1,500 d. 4.

2. Same information as Q.1, Keynesian model: If only consumption varies with income, what is the multiplier?

a. 3 b. 2 c. 1.5 d. 4.

3. The nominal interest rate is

a. the opportunity cost of holding money b. the real interest rate plus the inflation rate

c. the real interest rate minus the inflation rate d. both a. and b. e. both a. and c.

4. If the inflation rate increases, the velocity of money will

a. increase b. decrease c. remain unchanged d. decrease, then return to the original level

Questions 5. and 6. are on the following:

In the country Simplifia, there is a Federal Reserve System ("Fed," Central Bank) and just two commercial banks, First National and Second National. The Fed issues the currency and sets the reserve requirements for the banks, which are 20% of deposits. There are no savings or time deposits, just checking accounts. There are many government bonds in existence, most of which are held by insurance companies, and there is an active bond market.

If initially the commercial banks have no excess reserves, and the Fed sells $100 million of government securities to the non-bank public, after a few weeks what is the maximum likely change in the money supply?

5. a. increase b. decrease c. no change

6. By how much? a. + $100 million b. - $100 million c. + $500 million d. - $500 million

7. When Joe Frat went to Orlando for the football game, he had more cash in his pocket than he normally does on campus. This is an illustration of which motive for holding money, i.e. component of the demand for money?

a. speculative b. transactions c. precautionary d. nominal.

8. Suppose a bank with no excess reserves receives a deposit of $100,000 into a checking account, and then has $80,000 worth of excess reserves. What is the required reserve ratio?

a. 10% b. 20% c. 80% d. insufficient information to answer.

9. The Fed buys $10 billion of bonds from the public (e.g. life insurance companies). What is the immediate effect on the money supply?

a. Increase of $10 bn. b. Reduction of $10 bn. c. no change.

10. Same as 9., if the required reserve ratio is 10%, what is the maximum effect on the money supply in the long run?

a. Increase of $100 bn. b. Reduction of $100 bn. c. no change.
 

For answers, click  here