Question

1. If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is immediate, then the

A) Interest rates will rise   b) Interest rates will fall c) Interest rates will fall immediately below the initial level when the money supply grows d) Interest rates will rise immediately below the initial level when the money supply grows

2. If a person selling bonds to the fed cashes the fed's check, then reserves _____   , but currency in circulation ______?

a) remain unchanged; increase b) remain unchanged; declines   c)increase; remains unchanged    d) decline; remains unchanged

3. IF the required reserve ratio is 10 percent, currency in circulation is 400 billion, checkable deposits are 900 billion, then the money supply is

a) 0.50    b) 0.05    c) 0.40   d)0.25

4. if the required reserve ratio is one third, currency in circulation is 300 billion, and checkable deposits are 900 billion, then the money supply is

a) 1200   b)2700 c) 3000    d) 18000

I know the answers to the first two questions (d,a) but can anyone explain why they're the right answers.

Answer 1

QUESTION 1. If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is immediate, then the

ANSWER : OPTION A : Interest rates will rise

If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is immediate, then the interest will rise not below but above the initial level when the money supply grows. Thus all the other options except OPTION A is incorrect and correct option is OPTION A.