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Economics MCQ - Economics Section 2

66 A decrease in a central bank’s policy rate might be expected to increase inflationary pressure by:

If a decrease in the central bank’s policy rate is successfully transmitted via the money markets to other parts of the financial sector, consumer demand might increase as the rate of interest on mortgages and other credit declines. This will put an upward pressure on consumer prices.

67 An increase in the growth rate of money supply will:

An increase in the growth rate of money supply will cause the domestic currency to depreciate relative to those of the country’s trading partners.

68 Demand shocks are a rise in inflation caused by:

Demand shocks cause a risk in inflation resulting from increased consumer confidence leading to more consumption as well as increased investment growth rates.

69 When the demand for money is infinitely elastic, further injections of money into the economy fails to affect real activity. This is known as:

A liquidity trap occurs when further injection of money into the economy does not affect real activity.

70 Central banks targeting low inflation usually do not set the inflation target at 0%. The most likely reason is:

When the bank targets inflation, the actual inflation may vary by some percentage. If it goes below zero percent, it results in negative inflation called deflation, which is not good for any economy.

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Question:

If the reserve requirement for banks in an economy is 8%, the total money created from a deposit of $100 into an account is closest to:

A. $800.
B. $1,050.
C. $1,250.

Correct answer: C

Explanation:

The increase in money from an additional deposit in the banking system = new deposit / reserve requirement = $100 / 0.08 = 1250.

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