Dr. Barry Haworth
University of Louisville
Department of Economics
Economics 202
Final Exam: Practice Final
1) The problem of "double coincidence of wants" is eliminated when money has what quality?
a. store of value
b. measure of value
c. medium of exchange
d. when money is considered an asset
e. provides for anonymous exchange
2) When money has the quality of “store of value”, that means:
a. money provides relative value in a store (e.g. in terms of setting prices for goods and services)
b. money provides consumers with something that is mutually accepted in all transactions
c. money provides consumers with something that allows for anonymous transactions in the
underground economy
d. money is an asset that can increase one’s wealth
e. money provides consumers with a means of making current, rather than future transactions
Questions 3-5 relate to the money market model from class.
3) Higher income is most likely to lead to which of the following:
a. no shift in money demand, but a decrease in the quantity of money demanded
b. no shift in money demand, but an increase in the quantity of money demanded
c. shift right in money supply
d. shift right in money demand
e. none of the above
4) Higher interest rates are most likely to lead to which of the following:
a. no shift in money demand, but a decrease in the quantity of money demanded
b. no shift in money demand, but an increase in the quantity of money demanded
c. shift right in money supply
d. shift right in money demand
e. none of the above
5) Situations like Y2K, where consumers withdraw large amounts of cash from bank accounts
due to fear of financial collapse, are most likely to lead to which of the following:
a. no shift in money demand, but a decrease in the quantity of money demanded
b. no shift in money demand, but an increase in the quantity of money demanded
c. shift right in money supply
d. shift right in money demand
e. none of the above
6) The US dollar is an example of what type of money:
a. gold standard money
b. fiat money
c. commodity money
d. inflationary money
7) According to Gresham's law, what happens with something like “gold coins” when some of
the coins are filed down to remove some of the gold, which is then sold as a commodity:
a. people will use fewer gold coins in exchange
b. people will use of defaced gold coins and withhold (i.e. not use) non-defaced gold coins
c. there will be an increase in demand for gold coins
d. there will be significant inflation
Questions #8-10 use the information in the T-accounts below.
Assume these two banks are the only banks in the system and that RR = required reserves, ER =
excess reserves, G = government securities, L = loans, and DD = demand deposits.
Bank A
Assets
Liabilities
Bank B
Assets
Liabilities
______ RR DD $5,000
______ RR DD $4,000
______ ER
______ ER
$1,000 G
$1,000 G
$1,000 L
$1,000 L
8) If the required reserve ratio (RR ratio) is 10%, then what is the overall amount of RR held
by these two banks (i.e. RR at Bank A + RR at Bank B)?
a. $9,000
b. $500
c. $900
d. $1,000
e. none of the above
9) If the RR ratio = 20%, then what is the overall amount of ER held by these two banks?
a. $9,000
b. $4,100
c. $1,800
d. $3,200
e. none of the above
10) If the required reserve ratio is 10%, and the Fed buys $1,000 of G from Bank A, then what is
the amount of (potential) expansion of the money supply?
a. $10,000
b. $1,000
c. $5,000
d. $100
e. none of the above
11) When the reserve ratio is 5%, which situation allows the biggest money supply increase:
a. when consumers hold no cash (i.e. all their transactions money is held in a checking acct)
b. when consumers hold 10% of their transactions money as cash (90% in a checking acct)
c. when consumers hold 25% of their transactions money as cash (75% in a checking acct)
d. when consumers hold 50% of their transactions money as cash (50% in a checking acct)
e. when consumers hold 75% of their transactions money as cash (25% in a checking acct)
12) The Federal Open Market Committee is directly responsible for which activity:
a. determine changes in the discount rate
b. determine changes in the reserve ratio
c. purchase and sale of government securities with financial intermediaries
d. report to Congress every 6 months
e. all of the above
13) Increasing the discount rate has which of the following effects on the economy:
a. causes an immediate decrease in AS
b. fewer loans by member banks
c. causes an increase in investment expenditure
d. leads to an increase in borrowing from the Fed, not member banks
e. leads to an increase in borrowing from both the Fed and member banks
14) Which of the following is a monetary instrument:
a. expenditure on road construction
b. open market operations
c. transfer payment
d. tax rate cut
e. increases in the price level
15) Based on the discussion from lecture, which of the following situations is the best example
of the monetary transmissions mechanism at work:
a. a decrease in the discount rate and market interest rates lead to an increase in borrowing by
firms and subsequent increase in investment expenditure and aggregate demand
b. rising GDP leads to the Federal Reserve choosing to increase the money supply
c. A rising price level lowers consumption as there is less real income available to consumers
d. A lower tax rate increases the incentive for firms to invest, which leads to greater investment
expenditure and an increase in aggregate demand
16) Assume that government introduces an aggressive version of what’s known as
accommodating monetary policy. What is the most likely impact from this policy?
a. no shift occurs in the short run and we observe what amounts to a permanent tradeoff in the
long run between the unemployment and inflation rates
b. the Phillips Curve shifts out to the right in the short run and we observe what amounts to a
permanent tradeoff in the long run between the unemployment and inflation rates
c. the Phillips Curve shifts out to the left in the short run and we observe what amounts to a
permanent tradeoff in the long run between the unemployment and inflation rates
d. no shift occurs in the short run and no permanent tradeoff in the long run exists between the
unemployment and inflation rates
In lecture, we discussed two groups of economic policymakers, the Passive group and the Active
group. The former believes in a less active role for government, the latter a more active role.
Questions #17-20 address the distinction between these two groups.
17) If the government pursues a course of increased debt-financed government expenditure, then
which of the following outcomes would the Passive group predict is most likely:
a. output would increase in the long run
b. private sector investment would increase
c. crowding out would occur
d. there will be an increase in private sector borrowing over the long run
18) Which of the following statements comes closest to what the Passive group believes about
the AS curve:
a. in both the short run and long run, the AS curve is horizontal
b. in the short run, the AS curve is vertical to near-vertical and in the long run, the AS curve is
vertical
c. in the short run, the AS curve is horizontal and in the long run, the AS curve is vertical
d. in the short run, the AS curve is vertical and in the long run, the AS curve is horizontal
e. in the short run, the AS curve is horizontal and in the long run the AS curve is irrelevant,
because “we’re all dead” in the long run”
19) Which of the following is the best example of what the Passive group believes about
unemployment:
a. only cyclical unemployment will ever exist
b. both frictional and cyclical unemployment exist, but no other type exists
c. unemployment is always frictional and rarely, if ever, involuntary
d. no unemployment of any type will ever exist
20) On which of the following statements would the Passive and Active groups agree:
a. expansionary monetary policy increases interest rates in the short run
b. expansionary monetary policy increases output in the long run
c. expansionary monetary policy decreases unemployment in the long run
d. expansionary monetary policy increases inflation in the long run