Principles of Macroeconomics

1. Other things the same, when the interest rate rises,
a. people would want to lend more, making the supply of loanable funds increase.
b. people would want to lend less, making the supply of loanable funds decrease.
c. people would want to lend more, making the quantity of loanable funds supplied increase.
d. people would want to lend less, making the quantity of loanable funds supplied decrease.

2. If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied,
a. there is a surplus and the interest rate is above the equilibrium level.
b. there is a surplus and the interest rate is below the equilibrium level.
c. there is a shortage and the interest rate is above the equilibrium level.
d. there is a shortage and the interest rate is below the equilibrium level.

3. Suppose the economy is closed with national saving of $3 trillion, consumption of $10 trillion, and government purchases of $4 trillion. What is GDP?
a. $3 trillion
b. $9 trillion
c. $11 trillion
d. $17 trillion

4. Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 500. What value of government purchases would make national savings equal to 2,000 and at that value would the government have a deficit or surplus?
a. 1,500, deficit
b. 1,500, surplus
c. 1,000, deficit
d. 1,000, surplus

5. Suppose that in a closed economy GDP is equal to 15,000, government purchases are equal to 3,000, consumption equals 10,500, and taxes equal 3,500. What are private saving and public saving?
a. 1,500 and -500, respectively
b. 1,500 and 500, respectively
c. 1,000 and -500, respectively
d. 1,000 and 500, respectively

6. For an imaginary closed economy, T = $5,000; S = $11,000; C = $48,000; and the government is running a budget surplus of $1,000. Then
a. private saving = $10,000 and GDP = $55,000.
b. private saving = $10,000 and GDP = $63,000.
c. private saving = $12,000 and GDP = $67,000.
d. private saving = $12,000 and GDP = $69,000.

7. In the loanable funds model, an increase in an investment tax credit would create a
a. shortage at the former equilibrium interest rate. This shortage would lead to a rise in the interest rate.
b. shortage at the former equilibrium interest rate. This shortage would lead to a fall in the interest rate.
c. surplus at the former equilibrium interest rate. This surplus would lead to a rise in the interest rate.
d. surplus at the former equilibrium interest rate. This surplus would lead to a fall in the interest rate.

8. In a closed economy, if Y is 10,000, T is 1,000, G is 3,000, and C is 5,000, then
a. the government has a budget surplus and investment is 1,000
b. the government has a budget surplus and investment is 2,000
c. the government has a budget deficit and investment is 1,000
d. the government has a budget deficit and investment is 2,000

9. If the demand for loanable funds shifts to the left, then the equilibrium interest rate
a. and quantity of loanable funds rises.
b. and quantity of loanable funds falls.
c. rises and the quantity of loanable funds falls.
d. falls and the quantity of loanable funds rises.

10. Which of the following could explain an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds?
a. The demand for loanable funds shifted right.
b. The demand for loanable funds shifted left.
c. The supply of loanable funds shifted right.
d. The supply of loanable funds shifted left.

11. What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?
a. There would be an increase in the amount of loanable funds borrowed.
b. There would be a reduction in the amount of loanable funds borrowed.
c. There would be no change in the amount of loanable funds borrowed.
d. The change in loanable funds is uncertain.

12. If Congress increased the tax rate on interest income, investment
a. would increase and saving would decrease.
b. would decrease and saving would increase.
c. and saving would increase.
d. and saving would decrease.

13. Which of the following can the Fed do to change the money supply?
a. change reserves or change the reserve ratio
b. change reserves but not change the reserve ratio
c. change the reserve ratio but not change the reserve ratio
d. neither change reserves nor change the reserve ratio

14. When the Fed conducts open-market purchases,
a. banks buy Treasury securities from Fed, which increases the money supply.
b. banks buy Treasury securities from the Fed, which decreases the money supply.
c. it buys Treasury securities, which increases the money supply.
d. it buys Treasury securities, which decreases the money supply.

15. If the money multiplier is 3 and the Fed buys $50,000 worth of bonds, what happens to the money supply?
a. it increases by $100,000
b. it increases by $150,000
c. it decreases by $100,000
d. it decreases by $200,000

16. If the money multiplier is 3 and the Fed wants to increase the money supply by $900,000, it could
a. buy $300,000 worth of bonds.
b. buy $225,000 worth of bonds.
c. sell $300,000 worth of bonds.
d. sell $225,000 worth of bonds.

17. To increase the money supply, the Fed can
a. buy government bonds or increase the discount rate.
b. buy government bonds or decrease the discount rate.
c. sell government bonds or increase the discount rate.
d. sell government bonds or decrease the discount rate.

18. If the reserve ratio is 5 percent, then $1,000 of additional reserves can create up to
a. $5,500 of new money.
b. $5,000 of new money.
c. $4,000 of new money.
d. None of the above is correct.

19. If the reserve ratio is 4 percent, then the money multiplier is
a. 24.
b. 25.
c. 26.
d. 4.

20. On a bank's T-account, which are part of the bank's assets?
a. both deposits made by its customers and reserves
b. deposits made by its customers but not reserves
c. reserves but not deposits made by its customers
d. neither deposits made by its customers nor reserves

Problem

Assume that the reserve requirement is 20 percent. Also assume that banks do not hold excess reserves and there is no cash held by the public. The Federal Reserve decides that it wants to expand the money supply by $40 million dollars.

a. If the Fed is using open-market operations, will it buy or sell bonds?

b.. What quantity of bonds does the Fed need to buy or sell to accomplish the goal?

Explain your reasoning.