Question

1. Assuming that crowding out is not an issue, if Congress increases business taxes at the same time that the Federal Reserve conducts an open market sale, output and price level are likely to change in which of the following ways?
Output / Price Level
A. Increase / Decrease.
B. Decrease / Increase
C. Indeterminate / Decrease.
D. Decrease / Indeterminate.
E. Decrease / Decrease.
2. The election of a new president resulted in a significant increase in business confidence regarding the economy. How will this new confidence impact the loanable funds market in the short run?
Demand for Loanable Funds / Real Interest Rate
A. Increase / Increase.
B. Increase / Decrease.
C. Increase / No Change.
D. Decrease / Decrease.
E. Decrease / Increase
3. When a bank’s excess reserves increase by $375 after $500 was deposited in the bank, the reserve requirement must be
a. 10 percent.
b. 15 percent.
c. 20 percent.
d. 25 percent.
e. 30 percent.

Answer 1

Answer:

1. E. Decrease/ Decrease

The higher taxes on businesses will reduce output because businesses will have less incentive to produce, and therefore, will produce less.

When the Fed conducts an open market sale, it reduces the money supply. This decreases the price level.

2. A. Increase / Increase.

The higher demand for loanable funds due to increased business confidence will also increase the value of the real interest rate.

3. d. 25 percent.

If the excess reserves are $375, then, the required reserves are $125. And $125 is the 25% of $500.