Real interest rate equals nominal interest rate minus the expected rate of inflation.

An increasing real interest rate means that my investment will enable me to buy more real goods in the future. I would only invest in new technology if I felt the investment would allow me to consume more in the future then I could now. An increase in the price level would erode my investment if the nominal interest rate did not impute these expectations. I believe the answer to this question is " A". Expectations of future growth such as new technology increase the demand for loanable funds. This would shift the demand to the right and increase the real interest rate from r to r in the graph. ! is incorrect because higher inflationary expectations decreases the real interest rate. " is incorrect because it#s not illustrated on this graph. I believe a decrease in consumption would lower the price level and the expected inflation and increase the real rate. $owever% this is not what the question as&s. ' is incorrect because a decrease in budget deficits will increase the supply of loanable funds% shift the supply to the right and the real rate would be lower. E is incorrect because an increase in savings would shift the supply curve to the right and decrease the real interest rate. The full test can be found at www.reffonomics.com. (croll down to )onetary and *iscal +olicy and ma&e sure you sign the guest boo&. This site is highly recommended

The money supply is equal to the monetary base times the money multiplier. The monetary base equals reserves plus currency held by the population. The money multiplier equals ,-RR where RR is the reserve ratio. Reserves are under the control of the *E'. In the graph% the money supply has increased so the *E' must have increased the money supply by increasing reserves. " is the correct answer. An increase in bond purchases pumps money into ban& in the form of excess reserves that can be loaned out. The loans will expand the money supply by the amount of the loan times the money multiplier. A is incorrect because a higher rate at the discount window would discourage member borrowing. ! is incorrect because decease in ban& reserves would mean less money to loan out or perhaps a tight monetary policy. ' is incorrect since the appreciation of the .(' in foreign currency mar&ets is unrelated to the money supply. E is incorrect since there was an increase in the quantity of money demanded to hold not a decrease.

A is correct. The change in demand from ' to ' predicts that business will demand more investment funds for capital goods. ! is incorrect as it shows a decrease in demand. " is incorrect as it shows that households are saving more. +erhaps income has increased. !ut households are saving more at every interest rate. ' is incorrect as it shows that households are saving less. +erhaps income has decreased and households are saving less at every interest rate. E is incorrect as it shows no change in demand for loanable funds.

The correct answer is !. An accountant would credit Reserves and decrease the amount of reserves and debit 0oans showing an increase in 0oans Receivable. Excess reserves are loaned out to create money. After the initial loan% there would be no change in the 1et 2orth or Total Assets or Total 0iabilities. A is correct as the accountant would have made two debits. " is incorrect as loans would have increased not decreased. ' is incorrect as the accountant would have made two debits. E is incorrect as two credits were made. 3. 2hich of the following best describes the monetary base of an economy4 A. !. ". '. the currency in circulation the currency in circulation and reserves held by ban&s the currency in circulation% reserves held by ban&s% loans made by ban&s the currency in circulation% reserves held by ban&s% loans made by ban&s and currency held by the Treasury E. reserves held by ban&s ! is correct by definition. 5. 6elocity is calculated by dividing A. real 7'+ by the price level !. nominal 7'+ by the price level ". real 7'+ by the money supply

'. nominal 7'+ by the money supply E. real 7'+ by the nominal 7'+

!egin with the Equation of Exchange and divide by ). 6elocity% 6% equals nominal 7'+ divided by the money supply9 )., 0etter ' is the correct answer. Answer A deserves comment. 'ividing !:T$ sides the equation by + would give the economist real money% )-+% assuming that 6 is constant.

' is correct. A higher interest rate induces households to forego current consumption in favor of future consumption. $ouseholds care about the amount of goods and services they can buy so the real interest rate is used. (ince 1et "apital Inflows can increase the supply of loanable funds% some students might thin& A is correct. The currency exchange mar&et determines the exchange rate 1:T the real interest rate as as&ed.
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=. If !etty (ue deposits her >3?? paychec& into the Refbrun !an&% the ban& will not have an increase in A. !. ". '. E. reserves assets liabilities net worth excess reserves

' is correct. Assets minus liabilities equal 1et 2orth. In this question% 0iabilities increased by >3?? and reserves% an Asset% increased by >3??. >3?? @ >3?? equals ? so net worth did not change. A. 2hich of the following would diminish the affect of the money multiplier4 ABnC A. !. ". '. E. expansionary monetary policy increase in household incomes increase in spending increase in excess reserves held by ban&s decrease in cash held by the public

E is the best answer in my opinion% but no answer is correct. The money multiplier is ,-RR where RR is the reserve ratio. The )( D ,-RRB)!C where )( is the money supply and )! is the monetary base. To diminish the affect of the money multiplier% the )! would have to decrease. If the public held more cash% say under the mattress% then the multiplier would be less. A is incorrect as the *E' can chose to lower the RR and increase )). ! is incorrect an increase in incomes means that )( would have to increase. ' could be correct. I thin& this is what is happening now. !an&s are refusing to lend money. I believe that ' is incorrect since the )! is reserves plus currency. +erhaps the composition of the )! has changed but not the multiplier. ,?. Excess reserves are; A. !. ". '. E. Reserves that the ban&s are required to hold Total reserves that ban&s hold Reserves that cannot be used for loans Reserves that ban&s hold that are greater than the legally required reserves Reserves that have not created a liability to the ban&s

' is correct by definition.