FREE Master of Economics: Money, Banks, and Interest Rates Questions and Answers

Question 1

Which of the subsequent would result in a bank losing reserves?

Accepted Answer

One of the bank's depositors pays out a cheque to a depositor of another bank.

Answer

The bank raises the interest rate it pays on deposits.

Answer

One of the bank's depositors makes an internet payment to another of its depositors.

Answer

One of the bank's depositors pays out a cheque to another of its depositors.

Question 2

Which of the following claims regarding bank money generation is untrue?

Accepted Answer

Unless the authorities intervened, there is no limit to how much money banks would be willing to create.

Answer

A bank creates money when it buys securities.

Answer

The increase in deposits that can occur when banks get £1 million extra reserves is greater than £1 million.

Answer

A bank creates money when it writes a higher number against the deposit of a depositor who wants an advance.

Question 3

Assume banks want a 4% ratio of reserves to deposits. And let's assume that the general public wants a 2% cash-to-deposit ratio. Which of the following statements is true?

1. The bank deposit multiplier is 25.
2. The money multiplier is 17.

Accepted Answer

Both 1 and 2.

Answer

1 only.

Answer

2 only.

Answer

Neither 1 nor 2.

Question 4

Which of the following would not cause a rightward change in the money demand curve?

Accepted Answer

A fall in the interest rate.

Answer

A rise in wealth.

Answer

A rise in incomes.

Answer

A move which means that all workers who were in the past paid weekly will in future be paid monthly.

Question 5

Which of the aforementioned claims regarding the IS curve is untrue?

Accepted Answer

A fall in the interest rate will shift IS to the right.

Answer

An increase in exports will shift IS to the right.

Answer

It shows that the lower is the interest rate, the higher is the equilibrium level of output.

Answer

The more responsive planned spending is to changes in the interest rate, the more interest elastic is the IS curve.

Question 6

Which of the LM curve's following claims is untrue?

Accepted Answer

An increase in the demand for money will shift LM right.

Answer

It shows that the higher is the level of output, the higher is the equilibrium rate of interest.

Answer

The more interest elastic is the demand for money, the more interest elastic is the LM curve.

Answer

An increase in the supply of money curve will shift LM right.

Question 7

Suppose the multiplier is four and the first increase in projected investment is £100 billion annually. Which of the subsequent claims is untrue?

Accepted Answer

The IS curve will shift to the right by less than £400 billion a year.

Answer

By ignoring the fact that a rise in output will lead to higher interest rates, the multiplier model will predict that the planned expenditure line will end up £100 billion a year higher than it started.

Answer

By ignoring the fact that a rise in output will lead to higher interest rates, the multiplier model will predict a rise in output of £400 billion a year.

Answer

By allowing for the fact that a rise in output will lead to higher interest rates, the IS-LM model will predict a rise in output of less than £400 billion a year.