1) When the money supply exceeds the demand for money,
theory predicts
a.
the real interest rate will drop
b.
the nominal interest rate will drop
c.
the discount rate will increase
d.
the price level will rise
e.
the federal funds rate will rise
2) As income rises, money demand
a.
rises, because there are more goods to buy
b.
falls, because with higher income, you don’t need as
much money
c.
stays the same, because money and income aren’t
the same thing.
d.
rises, because higher income makes velocity fall
e.
rises, because prices will rise which makes people
demand more money
3) A brokerage firm creates a new free account where you
can sell financial investments and have the proceeds
deposited in your checking account the next day. This will
a.
Increase money multiplier because people will
prefer checking accounts
b.
Decrease the money multiplier because people will
not want to save their money
c.
Increase money demand because people will want
to buy more goods
d.
Decrease money demand because its less costly to
do banking
e.
Not affect the money market, only the market for
loanable funds.
4) What would best describe what causes inflation?
a.
greed
b.
more money chasing fewer goods
c.
excess money demand
d.
higher prices
e.
the spiral of higher wages leading to higher prices
5) The most important factor that determines the rate of
inflation is
a.
The greediness of businesses to make profit
b.
The strength of the dollar in international exchange
markets
c.
The size of the government deficit
d.
The increase in the money supply
e.
How high the minimum wage rate is set.
6) The Fed is
a.
a private corporation that owns other banks
b.
a private corporation that controls but does not own
other banks
c.
under direct control of the president
d.
under direct control of Congress
e.
part of the US government, but fairly independent
7) People would increase velocity because
a.
banking has become less convenient
b.
they want to spend more money
c.
money has become expensive to hold
d.
inflation is declining
e.
real income growth is higher
8) The cost of holding money is the
a.
the price of goods and services which the money
could buy
b.
inverse of the price level which prevails at the
current time
c.
expected real rate of interest a person could earn by
holding another asset
d.
nominal interest rate a person could earn by holding
another asset
e.
current inflation rate
9) Assume that real GDP grows at 3%, and velocity
increases by 1%. What is the inflation rate if the money
supply grows by 4%?
a.
-2%
b.
0%
c.
2%
d.
6%
e.
8%
10) Which of the following best illustrates the medium
exchange function of money?
a.
You keep some money hidden in your shoe.
b.
The government sets tax rates in terms of currency
c.
You keep track of the value of your assets in terms
of currency.
d.
You pay for your Starbucks double-latte using
currency.
e.
None of the above.
11) Which of the following functions of money is also a
common function of most other financial assets?
a.
Earns a positive nominal interest rate
b.
A store of value.
c.
A unit of account.
d.
Medium of exchange.
e.
None of the above.
12) Economists use the word "money" to refer to
a.
Income generated by the production of goods and
services.
b.
Those assets regularly used to buy goods and
services.
c.
The value of a person's assets.
d.
The value of stocks and bonds.
e.
A sure thing
13) Which of the following is not included in M1
a.
checkable deposits
b.
currency
c.
demand deposits
d.
savings deposits
e.
travelers checks
14) Credit cards are
a.
Included in M2, but not M1
b.
Included in M1 and M2
c.
Considered checkable deposits
d.
not money
e.
All of the above
15) In the market for money, hoarding is
a.
the method people use to deal with an excess supply
b.
how people will try to acquire more money
c.
the process that will make prices rise
d.
the same as savings
e.
all the above
16) Which of the following does the Federal Reserve not do
a.
conduct monetary policy
b.
act as a lender of last resort
c.
make loans to individuals
d.
regulate the banking system
e.
control the money supply
17) When the Fed Conducts Open Market Purchases
a.
It buys treasury securities, which increases the
money supply.
b.
It buys treasury securities, which decreases the
money supply.
c.
It borrows money from member banks, which
increases the money supply.
d.
It lends money to member banks, which decreases
the money supply.
e.
Private banks buy treasury securities from the Fed,
which increases the money supply.
18) The required reserve ratio is 5%, and a bank receives a
new deposit of $1000. This bank
a.
Will increase its required reserves by $50.
b.
Will initially see its total reserves increased by
$1000.
c.
Will be able to make a new loan of $950
d.
Will create money when it lends the excess reserves
out.
e.
All of the above.
19) If the required reserve ratio increased from 10% to 20%,
the money multiplier would
a.
Rise from 10 to 20.
b.
Rise from 5 to 10.
c.
Fall from 10 to 5.
d.
Fall from 20 to 10.
e.
Not change.
20) When the price level falls, the number of dollars needed
to buy goods
a.
Increases, so the value of money rises.
b.
Increases, so the value of money falls.
c.
Decreases, so the value of money rises.
d.
Decreases, so the value of money falls.
e.
Decreases, but the value of money doesn't change.
21) In the 14th century, the Western African Emperor
Kankan Musa traveled to Cairo where he gave away a lot of
gold, which was used as a medium of exchange. We would
predict that this
a.
Raised both the price level and the value of gold.
b.
Raised the price level, but decrease the value of
gold.
c.
Lower the price level, but increase the value of
gold.
d.
Lower both the price little and the value of gold.
e.
Had no effect on prices or the value of gold in
Cairo.
22) The principle of monetary neutrality implies that an
increase in money supply will
a.
Increase real income, and the price level.
b.
Increase real income, but not the price level.
c.
Increase the price level, but not real income.
d.
Increase neither the price level nor real income.
e.
Increase real income, but reduce the price level.
23) According to the equation of exchange, if P = 12, Y = 6,
and M = 8, then V =
a.
16
b.
9
c.
6
d.
4
e.
1
24) The Velocity of Money is
a.
The rate at which the Fed put money into the
economy.
b.
The same thing as the long-term growth rate of the
money supply.
c.
The money supply divided by nominal income.
d.
The average number of times per year a dollar is
spent.
e.
The rate at which prices rise.
25) Which of the following statements about U.S. inflation is
not correct?
a.
Low inflation was viewed as a triumph of President
Carter's economic policy.
b.
There were long periods in the nineteenth century
during which prices fell.
c.
The U.S. public has viewed inflation of even 7
percent as a major economic problem.
d.
The U.S. inflation rate has varied over time, but
international data shows even more variation.
e.
All the above are true
26) Which of the following is correct?
a.
hyperinflation is a period of extraordinarily high
inflation.
b.
deflation is negative inflation, not just a decrease in
the inflation rate.
c.
during the 1990s US inflation averaged about 2%
per year.
d.
the highest inflation rates for the US were
experienced in the 1970’s.
e.
All of the above are correct.
27) The inflation tax
a.
is an alternative to income taxes and government
borrowing.
b.
is easy for a government to impose
c.
taxes most those who hold the most money.
d.
is the revenue created when the government prints
money.
e.
All of the above are correct.
Answers:
1) d. when supply exceeds demand there is a money
surplus. The market will raise demand by making the price
level rise.
13) d. M1 does not include savings accounts. Only currency
(and coin) and checkable deposits (including travelers
checks).
14) d. Credit cards are not a store value, so they are not
money. When you use a credit card, you are not providing
anything of value. You are promising to provide something
of value later, thus credit cards are a “deferred” payment.
15) b. Hoarding is what people do to try to acquire more
money because money supply is less than money demand
(people have less money than they want). It means people
are neither spending nor saving the money. And since
people are not spending, the prices will fall.
16) c. The Fed only makes loans to member banks, not to
individuals.
17) a. OMO purchases is the Fed going into the open market
to buy securities which causes the money supply to increase.
18) e. If a $1,000 is deposited into a bank, then its reserves
rise by $1,000 initially (before the bank has made any loans).
If there’s a 5% reserve requirement, the bank must keep $50
in reserve (5% of $1,000). This means the bank can lend out
$950, and as they do, this will multiple the money.
2) a. Higher income means more goods to buy so more
money demand.
19) c. With 10% reserve requirement, the money multiplier
would be 10 (= 100% / 10%). With a 20% requirement, the
money multiplier would be 5 (= 100% / 20%).
3) d. This is a decrease in the cost of banking. So people
will want to hold less money and try to put more in financial
investments (portfolio choice). This increases velocity.
20) c. With lower prices, you need fewer dollars to buy
goods, so money has more value.
4) b. Inflation occurs when Money Supply expands over
Money Demand causing a potential surplus. The market
adjusts prices higher (inflation) to compensate. Higher
prices is inflation, not what causes it.
5) d. The only factor that would cause inflation in this list
is an increase in the money supply, and it's the biggest factor.
6) e. The Fed is part of the US government. But because
the governors are appointed for long terms and they generate
their own funding, they are largely independent of politics.
7) c. If the nominal interest rate rose, money becomes
more expensive to hold. People will increase velocity to try
and hold less money.
8) d. What you give up by having money is the nominal
interest paid on other assets. By holding money, you lose
both the real interest rate and inflation.
9) c. The formula is money growth plus velocity growth
minus real income growth. So we have 4% + 1% - 3% =
2%.
10) d. Medium of exchange means that you purchase things
with money, like coffee.
11) b. Financial assets are a store of wealth, as is money. By
having a financial asset, including money, you are holding on
to something that has value (though that value may be
changing). Money is different from other financial assets,
though, because it’s also a medium of exchange.
12) b. Basic definition of money is an asset (or store of
value) that purchases things (or a medium of exchange)
21) b. An increase in the money supply will create a money
surplus. This will cause splurging which will make prices go
up and the value of money go down.
22) c. Money neutrality means that an increase in the money
supply will only affect nominal variables, like prices, but not
affect real variables, like real income. So real income won’t
change. But prices will rise.
23) b. 12 * 6 = 8 * V. So V = 72 / 8 = 9.
24) d. Velocity is the number of times in a year that money
will circulate through the economy and purchases new final
goods or services
25) a. The highest inflation rates of US history were
experienced while Carter was president. Inflation was
brought down under the Reagan administration.
26) e. All statements are true.
27) e. All are true