Question

1. In 2000, home prices in the U.S. were rising around 15 percent per year and the interest rate

in the economy was 5 percent. Since the expectation of further appreciation of the houses continued

during the year 2001 and 2002, a good financial strategy at that time could be to:

A. borrow money and sell as many houses as one could.

B. lend money and sell as many houses as one could.

C. borrow money and buy as many houses as one could.

D. lend money and buy as many houses as one could

2. During a recession, monetary policy makers would probably recommend an open market:

A. sale of government securities that reduces interest rates.

B. purchase of government securities that reduces interest rates.

C. sale of government securities that raises interest rates.

D. purchase of government securities that raises interest rates.

3. If real income increases by 4 percent and the price level increases by 3 percent, nominal income must:

A. increase by 7 percent.

B. increase by 1 percent.

C. decrease by 1 percent.

D. decrease by 7 percent

4. For the owner of 500 shares of stock in General Electric, the shares of stock are a:

A. financial liability

B. financial asset

C. real liability

D. real asset

5. Which of the following is not included in the M1 definition of money?

A. Checking accounts.

B. Currency.

C. Traveler's checks.

D. Savings accounts.

6. Describe what happens to the following indicating as increases or decreases when the

Federal Reserve conducts a PURCHASE of government securities on the open market:

Bank Reserves____ → Money supply____ → Interest rates ____ → Investment ____ → Agg Demand ___

This policy would be expansionary/contractionary (circle or highlight one) monetary policy.

Answer 1

1. C) borrow money and buy as many houses as one could.

Since, the price is expected to rise in future you can sell the house at a higher price in the future.

2. B) purchase of government securities that reduces the interest rate.

Then only the money supply in the economy will increase. This in turn will increase the purchasing power of the people.

3. A) increase by 7 percent

Nominal income = real income + price increase = 4% + 3% =7%

4. B) financial assets

The ownership of assets are considered as financial assets.

Real assets are the physical assets that are having value with in.

5. D) Savings account

M1 includes checking account, travellr's cheque, currency and coins and demand deposits.

6. As a result of the purchase of the government securities

Bank reserves = increases

Money supply = increases

Interest rate = decreases

Investment= increases

Aggregate demand= increases

This policy will be an expansionary monetary policy.