Question

Initially a bank has a required reserve ratio of 20 percent and no excess reserves. If $1,000 is deposited into the bank, then ceteris paribus:

This bank can increase its loans by $1000.

This bank can increase its loans by $800.

Total reserves will increase by $800.

Required reserves will increase by $1000

Suppose a bank has $200,000 in deposits and a required reserve ratio of 20 percent. Then required reserves are:

$20,000.

$40,000.

$80,000.

$200,000.

If the annual interest rate printed on the face of a bond is 8 percent, the face value of the bond is $1,000, and you purchase the bond for $500, what is the current yield on the bond?

50 percent.

4 percent.

16 percent.

8 percent.

If the annual interest rate printed on the face of a bond is 5 percent, the face value of the bond is $1,000, and you purchase the bond for $1,500, what is the current yield on the bond?

3.3 percent.

15.0 percent.

7.5 percent.

5.0 percent.

If the anticipated inflation rate is 2 percent and the nominal interest rate is 6 percent, the real interest rate will be:

Negative 4 percent.

2 percent.

8 percent.

4 percent.

Answer 1

This bank can increase its loans by $800. This is because out of 1000 deposits, the bank will keep 20% or 200 as required reserves and the remaining 800 as excess reserves which could be used as loans

Required reserves are $40,000, which is 20% of 200,000.

Current yield = 8%*1000/500 = 16%

Current yield = 5%*1000/1500 = 3.33%

Real interest rate = nominal interest rate - inflation = 6% - 4% = 4 percent