ECONOMICS TEST QUESTION BANK 2024 QUESTIONS WITH COMPLETE SOLUTIONS GRADED A+

If banks decide to keep fewer excess reserves and instead lend more, which of the following is the most likely effect? - CORRECT ANSWER The nominal interest rate decreases. Which of the following statements is true when the money market is in equilibrium? - CORRECT ANSWER No economic forces are acting on the economy to change the interest rate. Which of the following could have caused this change? - CORRECT ANSWER a decrease in the money supply Liquidity preference theory is used to motivate - CORRECT ANSWER the demand for money. What happens if banks decide to start keeping excess reserves instead of fully loaning out? - CORRECT ANSWER The money supply decreases. Which of the following describes the process that returns the money market to equilibrium when the quantity of money demanded is greater than the money supply? - CORRECT ANSWER People sell their bonds, which lowers bond prices, which in turn increases interest rates. What happens to the nominal interest rate and the quantity of money in the money supply if the demand for money increases? - CORRECT ANSWER Nominal interest rate increases; no change in the quantity of money. The current interest rate in Atlantis is 4%. At an interest rate of 4%, households want to hold 4 million in cash and 2 million in bonds. However, M1 is currently 3 million. Which of the following best describes what will happen in the money market in Atlantis? - CORRECT ANSWER The nominal interest rate will increase, which will lower the quantity of money demanded If a new technology is invented that makes it easier to withdraw money from the bank, which of the following will occur in the money market? - CORRECT ANSWER The demand for money decreases and the nominal interest rate decreases All of the following lead to an increase in nominal interest rates EXCEPT - CORRECT ANSWER The central bank buy bonds The development of online banking has made it easier for people to move wealth to cash from other forms of assets. What change would counteract the effect of this on the nominal interest rate? - CORRECT ANSWER A decrease in the money supply Hamsterville's national income increased due to an increase in government spending. How does an increase in national income affect the money market and interest rates? - CORRECT ANSWER Demand for money increases; interest rates increase Which of the following increases the demand for money? - CORRECT ANSWER A higher price level