39. Ifthe required reserve ratio is 5 percent and there are no leakages from the

Question

39. Ifthe required reserve ratio is 5 percent and there are no leakages from theloan process, what is the maximum amount of money that can be created from a $4 million injection by the Fed into the banking system? a) $4 million b) $200,000 c) $20 million d) $80 million e $4.2 million 40. The unemployment rat e is calculated by dividing the number of all people that aren't working a job by thetotal labor force. a) True bj False 41. Friction al unemployment often occurs when: a) The economy enters a recession b) People first enter the labor force c People are discriminated against d) People lose a job because their skills become obsolte 42. If the rate of unemployment equals the natural or target rate of unemployment, then: a) Actual output exceeds potential output b) Real output equals nominal output c) Potential output equals adtual output d) Real output exceeds nominal output 43. Using 1982 as the base period, if the CPI in 1980 was 82.4, and it was 90.9 in 1981, what is the best estimate of therate of inflation from 1980to 1981? a) 8.5 percent b) 9.4 percent c) 10.3 percent d) 12.2 percent 44. In constructing theCPI, it is assumed that: a) The quantity of the goods purchased remained con stant between the base year and the year in question b) Both the prices and the quantities of the goods purchased remained constant between the base year and the year in question c) Neither the prices nor the quantities of thegoods purchased remained constant between the base year and the year in question d) The prices of the goods purchased remained con stant between thebaseyear and the year in question 45. In the AS/AD model, an increase in the money supply causes a decrease in the interest rate and an increase in investment spending a) True b) False

Explanation / Answer

39. D. $80 million.

Explanation: The reserve requirement is 5% = 0.05

The money multiplier = 1/reserve requirement = 1/0.05 = 20

So, any dollar amount injected by the Fed will create 20 times more money. So, if $4 million is injected by the Fed, the maximum money creation will be = $4 million * 20 = $80 million.

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