MEcon Master of Economics Master of Economics: Money, Banks, and Interest Rates 2

Question 1

Which theory posits that the nominal interest rate equals the real interest rate plus expected inflation?

Accepted Answer

Fisher Effect

Answer

The Fisher Effect states that nominal interest rates adjust one-for-one with changes in expected inflation, keeping the real rate constant.

Question 2

When a central bank engages in open market purchases, what immediately happens to bank reserves?

Accepted Answer

Reserves increase as the central bank buys bonds

Answer

Open market purchases inject reserves into the banking system because the central bank pays for bonds by crediting seller banks' reserve accounts.

Question 3

A bank has $500M in deposits and a required reserve ratio of 10%. It holds $60M in reserves. What is the bank's excess reserve position?

Accepted Answer

$10M excess

Answer

Required reserves are $50M (10% × $500M), so with $60M held, excess reserves equal $10M.

Question 4

In the money market model, what happens to the equilibrium interest rate when real GDP rises, ceteris paribus?

Accepted Answer

It rises because money demand increases

Answer

Higher real GDP raises the transactions demand for money, shifting the money demand curve right and pushing equilibrium interest rates up.

Question 5

Which type of financial institution accepts deposits and is primarily funded by those deposits to make mortgage loans?

Accepted Answer

Savings and loan association (thrift)

Answer

Savings and loan associations (thrifts) are deposit-taking institutions historically focused on funding residential mortgages.

MEcon Master of Economics Practice Test