If commercial banks are maintaining a 5 percent reserve/deposit ratio and the Fe

ID: 1091200 • Letter: I

Question

If commercial banks are maintaining a 5 percent reserve/deposit ratio and the Fed lowers the required reserve ratio to 3 percent, then banks may ______ their loans and deposits, and the money supply may _____.

decrease; decrease

In a certain economy, the components of planned spending are given by:

C = 500 + 0.8(Y - T) - 300r
Ip = 200 - 400r
G = 200
NX = 10
T = 150

Given the information about the economy above, what would be the impact on short-run equilibrium output of a one-percentage-point increase in the real interest rate, assuming that the multiplier is equal to 5?

Short-run equilibrium output would decrease by 7 units.

increase; increase increase; decrease decrease; increase

decrease; decrease

Short-run equilibrium output would increase by 35 units. Short-run equilibrium output would decrease by 700 units. Short-run equilibrium output would decrease by 35 units.

Short-run equilibrium output would decrease by 7 units.

Refer to the figure above. Based on the diagram, if potential output equals 5,000 and the real interest rate is 5%, then there is ______ gap and the Fed must ______ the real interest rate so that output will equal potential output.

a recessionary; raise a recessionary; reduce no output; not change an expansionary; raise

Explanation / Answer

A increase; decrease

B Short-run equilibrium output would decrease by 35 units.

C an expansionary; raisean expansionary; raise

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If commercial banks are maintaining a 5 percent reserve/deposit ratio and the Fe

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