QUESTION: 1317

First National Bank currently does not have the legally required cash reserves on hand. The bank expects this situation will only last a day or two. In order to rectify the reserve problem, the bank treasurer borrows cash on

the intra-bank loan market. The loan was actually granted by the Central Bank. This is the only action by the Central Bank that day. How has the Central Bank's actions impacted the demand curve for the purchase of intra-bank loans and the interest rate paid on those loans?

Demand curve shifts upward, interest rate falls
Demand curve shifts upward, interest rate increases
Quantity demanded increases, interest rate falls
Demand curve does not change, interest rate increases
Quantity demanded decreases, interest rates rise

Answer(s): A

Explanation:

When a bank lacks reserves it has essentially loaned too much money, i.e. it has put too much money into circulation. If the Central Bank lends money to the bank to cover the shortfall, then the cash from the excess loans can stay in circulation.
If the reserve loan had come from another bank, then this would have simply transferred excess reserves from one bank to another. Since the Central Bank stepped in, banks with excess reserves will now choose to make more traditional loans and further expand the money supply.
Remember that the borrower has sold a loan and the lender has bought a loan. Therefore, the Central Bank's actions have increased demand for intra-bank loans. This would cause the interest rate paid to fall.

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QUESTION: 1318

According to the New Classical View, ________ is unaffected by deficits since people will save more money in order to pay the higher future taxes.

the real interest rate
the marginal tax rate
price equalization
the supply-side
fiscal policy

Answer(s): A

Explanation:

New classical economies stress that debt financing merely affects the timing of taxes, not their magnitude. Debt financing substitutes higher future taxes for lower current taxes. As a result, households reduce their current consumption in response to additional government debt as surely as would be the case if an equivalent amount of current taxes were levied.

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QUESTION: 1319

If the Central Bank wishes to diminish unemployment, it would attempt to ________ the money supply by ________ short-term interest rates.

decrease, increasing
stabilize, decreasing
stabilize, increasing
increase, decreasing
increase, increasing
stabilize, stabilizing
decrease, decreasing

Answer(s): D

Explanation:

The central bank would increase the money supply in an attempt to decrease unemployment. This can be accomplished by decreasing short-term rates.

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QUESTION: 1320

An individual who is employed part time but who is looking for a full-time job is classified as

frictionally unemployed.
employed.
structurally unemployed.
cyclically unemployed.

Answer(s): B

Explanation:

Since the individual is currently employed he or she is considered employed, technically. Such a person is underemployed but not technically unemployed.

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QUESTION: 1317

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QUESTION: 1318

Explanation:

QUESTION: 1319

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QUESTION: 1320

Explanation: