Parkin&Bade, Macroeconomics, 2nd edition

Chapter 10: Money, the Price Level and Inflation

Multiple choice: Choose the one alternative that best completes the statement or answers the question.

1) Which statement about money is most correct?

A) Money has been around for a long time and only includes cheque and savings accounts.

B) Money has been around for a long time and only includes dollar bills and coins.

C) Money is a new invention and only includes dollar bills and coins.

D) Money is a new invention and can include anything that is accepted as a means of payment.

E) Money has been around for a long time and can include anything that is accepted as a means of payment.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

2) Money is any commodity or token that is

A) backed by gold.

B) generally accepted as a means of measurement.

C) generally accepted as a means of payment.

D) a store of value.

E) issued by the government.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

3) A common trait of money through history and across cultures is that money

A) was always issued by the local government.

B) was always based on gold or some other precious commodity.

C) was always fiat money.

D) was always generally accepted as a means of payment.

E) always had mystical properties.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

4) For an asset to be a "means of payment," the asset

A) requires a double coincidence of wants.

B) must be able to be used to settle a debt.

C) must be valuable and backed by the government.

D) must be used when bartering.

E) must be valuable and backed by gold.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

5) Money serves as a

A) means of payment, legal obligation and public tax.

B) means of settling debts, transaction lubricant and private commodity.

C) means to conduct barter transactions.

D) medium of exchange, unit of account and store of value.

E) means of worker exploitation and capitalist enrichment.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

6) In performing which of its primary functions does money solve the problem of the double coincidence of wants?

A) Money supply

B) Unit of account

C) Medium of exchange

D) Barter system

E) Store of value

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

7) When we use money to purchase goods and services, we are using money as a

A) store of value.

B) unit of account.

C) reserve of wealth.

D) medium of exchange.

E) bartering tool.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

8) What is a problem with barter that makes it so difficult to use?

A) Barter omits the store of value role for money.

B) Barter requires the use of only fiat money.

C) Individuals have to produce something to trade with.

D) Barter is very efficient but illegal because it avoids taxation.

E) Barter requires a double coincidence of wants.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

9) The unit of account is defined as

A) the medium of exchange.

B) the exchange of goods and services directly for other goods and services.

C) barter.

D) an object that is accepted in return for goods and services.

E) an agreed upon measure for stating prices of goods and services.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

10) The function of money that helps assess the opportunity cost of an activity is money's use as a

A) barter tool.

B) unit of account.

C) store of value.

D) medium of exchange.

E) store of debt.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

11) Money is used as a ________ when you visit the local farmers' market and compare prices across different vendors.

A) store of value

B) medium of exchange

C) unit of account

D) means of payment

E) measure of barter

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

12) When we keep part of our wealth in a bank cheque account, we are using money as a

A) unit of currency.

B) medium of exchange.

C) barter token.

D) unit of account.

E) store of value.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

13) The word "fiat" is

A) Latin for "backed by gold."

B) the term used to define the concept of barter.

C) used to describe money from when Kings ruled by decree or fiat.

D) another word to mean the "double coincidence of wants."

E) used to describe today's money because it is money set by law.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

14) Fiat money means

A) that the money can be converted into gold.

B) only currency counts as money.

C) the government has decreed that something is money.

D) Italian currency.

E) that money's value does not change.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

15) Which of the following is an example of money?

A) A debit card.

B) Currency inside the banks.

C) Cheques written as payment for a good or service.

D) A credit card used as a payment for a good or service.

E) Currency in your wallet.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

16) When you use a credit card to pay your university fees,

A) you've used the credit card as money because you received something in return.

B) the credit card is not money but is an ID card for an instant loan.

C) the credit card is not money because it involves an electronic transaction.

D) you've used the credit card as money because it is a means of payment.

E) the credit card is not money because it is not officially issued by the government.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

17) Credit cards are

i. a generally accepted form of payment and therefore part of M1.

ii. included in M1 because you write a cheque to pay your monthly bill.

iii. a means of borrowing money.

A) i only

B) ii only

C) iii only

D) i and iii

E) i and ii

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

18) Electronic cash (or e-cash), like Bitcoin,

A) is not money because it is not universally accepted as a means of payment.

B) is part of M1 but not M3.

C) is not a secure means of payment.

D) is not money because it is not officially issued by the government.

E) is part of the M3 money supply but not part of the M1 money supply.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

19) M1 is composed of

A) traveller's cheques, credit cards and e-cash.

B) currency inside of banks, traveller's cheques and government-issued cheques.

C) currency held by individuals and businesses and current account deposits owned by individuals and businesses.

D) current account deposits owned by individuals and businesses, saving deposits, and certificates of deposit.

E) currency held by individuals and businesses, traveller's cheques, and the credit line on credit cards.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

20) Which of the following items is included in the M1 money supply?

A) A credit card with a $5,000 limit.

B) Coins in a vending machine, waiting to be used as change.

C) $50 notes held at a Westpac branch.

D) $1,500 in a fixed-term savings account.

E) A $5,000 student loan granted to an Australian citizen.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

21) Which of the following are included in the M3 definition of money?

A) Currency outside of banks and credit lines on credit cards

B) Currency inside of banks and banks' reserves

C) Currency both inside and outside of banks

D) Currency outside of banks, current account deposits and other deposits

E) Government bonds

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

22) Which of the following is NOT a function of money?

i. Unit of account

ii. Store of value

iii. Unit of debt

A) i only

B) ii only

C) iii only

D) i and ii

E) ii and iii

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

23) Which of the following are examples of deposit-taking institutions?

i. Banks

ii. Western Union

iii. Building Societies

A) i, ii and ii

B) iii only

C) i and iii

D) i only

E) i and ii

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

24) A building society is

A) a government bank.

B) a cooperative that receives deposits and makes loans to provide mortgage finance.

C) an institution that accepts only deposits made in money.

D) a non-profit firm that receives deposits from its members and makes loans to them.

E) a private firm that receives deposit and makes loans.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

25) Banks earn a profit by

A) making loans at a higher interest rate than the rates they offer on their deposits.

B) keeping as many reserves on hand as possible.

C) making loans at a lower interest rate than the rate they offer on their deposits.

D) not paying interest on their reserves.

E) charging an interest rate on their depositors' accounts.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

26) Which of the following are assets of banks?

i. Reserves

ii. Loans

iii. Deposits

A) i only

B) ii only

C) i and ii

D) ii and iii

E) i, ii and iii

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

27) The largest category of banks' assets is

A) loans.

B) currency.

C) cheque account deposits.

D) investment securities.

E) reserves and liquid assets.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

28) Which of the following is NOT held as an asset by banks?

A) Reserves

B) Loans

C) Currency in the banks' vaults

D) Investment securities

E) Deposits

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

29) When goldsmiths issued receipts to gold owners, and those gold receipts circulated while gold stayed in the goldsmiths' safes,

A) the gold receipts were considered money because they were used as a means of payment.

B) an infant banking system developed in sixteenth century Europe.

C) fiat money was created.

D) money was invented.

E) Both A and B are correct.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

30) A public authority that provides banking services to banks and regulates financial institutions and markets is called a

A) central bank.

B) commercial bank.

C) mint.

D) money market fund.

E) thrift institution.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

31) Because the Reserve Bank of Australia is a central bank, it provides banking services to

A) the government only.

B) consumers and business.

C) banks.

D) businesses only.

E) no one.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

32) The Board of the Reserve Bank of Australia consists of

A) six external members and the secretary to the Treasury.

B) the governor, the vice governor and six external members from business.

C) only the governor and the deputy governor.

D) the governor, the deputy governor, the secretary to the Treasury and six external members.

E) the governor, the deputy governor and six external members.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

33) What are the two liabilities of the Reserve Bank?

A) Gold and Reserve Bank notes

B) Australian dollar securities and foreign exchange

C) Australian dollar reserves and banks' reserve deposits.

D) Gold and foreign exchange

E) Reserve Bank notes and banks' reserve deposits

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

34) The monetary base consists of

A) gold and Reserve Bank notes.

B) Australian dollar securities and foreign exchange.

C) Australian dollar reserves and banks' reserve deposits.

D) Reserve Bank notes and banks' reserve deposits.

E) gold and foreign exchange.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

35) Banks create money by

A) lending to the Reserve Bank.

B) asking the Reserve Bank to print more currency.

C) making loans.

D) buying government securities.

E) printing currency.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

36) A bank's desired reserve ratio is

A) the ratio of currency to deposits.

B) the ratio of deposits to currency.

C) the ratio of deposits to reserves that a bank wants to hold to meet daily business requirements.

D) the ratio of reserves to deposits that a bank wants to hold to meet daily business requirements.

E) determined by actual reserves less desired reserves.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

37) Riley deposits $4,000 cash in her cheque account at Fershur Bank. If the desired reserve ratio is 5 per cent, Fershur Bank's

A) desired reserves increase by $200 and its excess reserves increase by $3,800.

B) assets and liabilities change in opposite directions.

C) desired reserves increase by $4,000.

D) liabilities do not change but its assets increase.

E) excess reserves increase by $4,000.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

38) A bank has $200 of reserves and $4,000 of deposits. It is just meeting its desired reserves and has no excess reserves. Thus the desired reserve ratio is

A) 10 per cent.

B) 5 per cent.

C) $200.

D) 25 per cent.

E) 20 per cent.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

39) The part of a bank's reserves that are larger than desired are called

A) required reserves.

B) non-required reserves.

C) excess reserves.

D) additional reserves.

E) unnecessary reserves.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

40) Assume the First Bank of Townsville makes a loan of $2,500. This loan will

A) increase the First Bank of Townville's liabilities at the Reserve Bank.

B) increase the First Bank of Townville's reserves.

C) decrease the quantity of money initially by $2,500.

D) have no change on the quantity of money, just its composition.

E) increase the quantity of money initially by $2,500.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

41) A currency drain occurs when the

A) non-bank public increases its holdings of currency outside the banking system.

B) Reserve Bank sells government securities.

C) Reserve Bank increases the required reserve ratio.

D) banks reduce the number of loans they create with their excess reserves.

E) None of the above.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

42) The greater the currency drain ratio,

A) the smaller is the quantity of deposits and money that the banking system can create.

B) the larger the ratio of excess reserves to currency.

C) the smaller is the quantity of currency the public hold outside the bank.

D) the larger is the quantity of deposits and money that the banking system can create.

E) None of the above.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

43) The currency drain reduces the amount of

A) currency available for banks to borrow from the Reserve Bank.

B) open market operations the Reserve Bank can make.

C) reserves available to banks to make loans.

D) currency the Reserve Bank has outstanding in the economy.

E) the monetary base.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

44) The two policy tools the Reserve Bank uses to influence the interest rate and regulate the amount of money circulating in the economy are

A) setting the cash rate and the market interest rate.

B) credit easing and setting the required reserve ratio.

C) open market operations and setting the cash rate.

D) open market operations and setting tax rates.

E) open market operations and setting the excess reserve ratio.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

45) Open market operations are the

A) borrowing of reserves by the Reserve Bank from the banking system.

B) purchase or sale of government securities by the Reserve Bank.

C) minimum percentage of loans that banks must retain as reserves in the open market.

D) lending of reserves to the banking system by the Reserve Bank.

E) purchase or sale of gold by the Reserve Bank.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

46) When the Reserve Bank engages in open market operations, it is buying or selling

A) securities newly issued by private companies.

B) loans made to banks to meet the legal reserve requirement ratio.

C) capital equipment.

D) government securities.

E) gold.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

47) If Reserve Bank notes are $65 billion and banks' deposits at the Reserve Bank are $22 billion, the stock of gold and foreign exchange is $74 billion, and the Reserve Bank owns $13 billion of government securities, what does the monetary base equal?

A) $76 billion

B) $87 billion

C) $65 billion

D) $88 billion

E) $74 billion

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

48) Suppose the Reserve Bank buys $200 million of securities in the open market from Bank West. After the transaction which of the following occurs?

i. Bank West has $200 million less in securities.

ii. The Reserve Bank has $200 million more in securities.

iii. The Reserve Bank decreases Bank West's reserve deposit account at the Reserve Bank.

A) i only

B) ii only

C) iii only

D) i and ii

E) i and iii

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

49) When the Reserve Bank engages in open market operations to buy securities

A) the monetary base decreases by the amount of the open market purchase.

B) the monetary base increases by more than the amount of the open market purchase.

C) the monetary base increases by the amount of the open market purchase.

D) the monetary base increases by less than the amount of the open market purchase.

E) None of the above.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

50) Suppose the Reserve Bank buys $50 million worth of securities from ANZ. As a result, the monetary base ________, and the quantity of money will ________ $50 million due to the ________.

A) increases; decrease by; currency drain

B) decreases; decrease by less than; expenditure multiplier

C) increases; increase by more than; money multiplier

D) decreases; decrease by more than; money multiplier

E) increases; increase by more than; expenditure multiplier

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

51) When the Reserve Bank buys government securities, the immediate effect of the purchase is that banks'

A) reserves increase.

B) assets increase.

C) deposits increase.

D) reserves decrease.

E) loans decrease.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

52) If required reserves are 20 per cent and the Reserve Bank buys $10,000 worth of government securities, what is the change in the banks' total reserves?

A) $8,000

B) $100,000

C) $20,000

D) $10,000

E) $2,000

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

53) When the Reserve Bank purchases government securities,

A) required reserves in the banking system increase, leading to more loans being made.

B) the monetary base does not change.

C) required reserves in the banking system decrease, leading to fewer loans being made.

D) excess reserves in the banking system increase, leading to more loans being made.

E) excess reserves in the banking system decrease, leading to fewer loans being made.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

54) When the Reserve Bank ________ securities in an open market operation, banks' reserves ________, and therefore lending ________.

A) buys; decrease; decreases

B) buys; increase; increases

C) sells; increase; increases

D) buys; do not change; does not change

E) sells; decrease; increases

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

55) The number by which a change in the monetary base is multiplied to find the resulting change in the quantity of money is called the

A) currency multiplier.

B) money multiplier.

C) currency drain.

D) desired reserve ratio.

E) open market operation.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

56) If the money multiplier is 3.0, a $1,000 increase in the monetary base

A) increases the quantity of money by $3,000.

B) decreases the quantity of money by $3,000.

C) increases the money multiplier by 3 per cent.

D) decreases the quantity of money by 3 per cent.

E) increases the monetary base by $300.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

57) An open market purchase of securities by the Reserve Bank leads to all of the following EXCEPT

A) an increase in bank lending.

B) an increase in the monetary base.

C) a decrease in the quantity of money.

D) an increase in banks' reserves.

E) an initial increase in excess reserves.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

58) When the Reserve Bank sells government securities to banks, the sale

A) decreases banks' reserves.

B) increases banks' reserves.

C) creates more excess reserves.

D) increases the quantity of money.

E) increases the monetary base.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

59) If a bank has $25,000 in excess reserves and the desired reserve ratio is 20 per cent, what is the maximum this bank can loan?

A) $25,000

B) $20,000

C) $5,000

D) $125,000

E) $30,000

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

60) C/D is the currency drain ratio and R/D is the desired reserve ratio. The money multiplier equals

A) .

B) .

C) .

D) .

E) .

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

61) If the currency drain ratio is 0.2 and the desired reserve ratio is 0.03, the money multiplier is

A) 3.23.

B) 0.76.

C) 5.22.

D) 6.67.

E) 4.46.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

62) If the currency drain ratio is 30 per cent and the desired reserve ratio is 10 per cent, the money multiplier is

A) 3.25.

B) 0.80.

C) 1.25.

D) 5.00.

E) 10.0.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

63) The Reserve Bank buys $50,000 of government securities. The desired reserve ratio is 10 per cent and the currency drain ratio is zero. What will be the change in the quantity of money?

A) $0

B) $5,000,000

C) $50,000

D) $500,000

E) $5,000

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

64) If the desired reserve ratio is 10 per cent and there is no currency drain, then a $100 increase in the monetary base leads the banking system to increase the quantity of money by

A) $1,000.

B) $110.

C) $1,100.

D) $400.

E) $900.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

65) The Reserve Bank conducts an open market purchase of securities of $5,000. If the currency drain ratio is 0 per cent and the desired reserve ratio is 10 per cent, then the total increase in the quantity of money is

A) $4,000.

B) $20,000.

C) $10,000.

D) $50,000.

E) $5,000.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

66) Which of the following reduces the money multiplier?

A) Banks loan all their excess reserves.

B) Bank customers hold some of the loan proceeds as currency outside the banking system.

C) The Reserve Bank sells government securities.

D) Banks impose a currency drain on bank customers.

E) Banks reduce the desired reserves ratio.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

67) If the Reserve Bank buys $10 million of government securities when the desired reserve ratio is 20 per cent and the currency drain ratio is 5 per cent, the quantity of money

A) increases by $50 million.

B) decreases by $50 million.

C) increases by $7.5 million.

D) decreases by $42 million.

E) increases by $42 million.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

68) In Australia for the M3 definition of money, the currency drain ratio was 3.6 per cent and the banks' reserve ratio was 1.6 per cent. So the money multiplier was about

A) 20.

B) 1.

C) 5.

D) 10.

E) 23.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

69) The quantity of money demanded

A) is equal to real GDP.

B) is the money people choose to hold.

C) is the total currency in circulation.

D) changes only when real GDP changes.

E) is the same as the money supply.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

70) When the opportunity cost of holding money increases, then

A) people want to hold more money.

B) people want to hold less money.

C) the nominal interest rate falls.

D) the real interest rate falls.

E) the quantity of money supplied increases.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

71) The opportunity cost of holding money instead of an interest-earning asset is the

A) inflation rate minus the nominal interest rate.

B) inflation rate.

C) inflation rate minus the real interest rate.

D) real interest rate.

E) nominal interest rate.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

72) When the nominal interest rate falls, the opportunity cost of holding money

A) decreases and the demand for money curve shifts rightward.

B) increases and there is a movement upward along the demand for money curve.

C) decreases and the demand for money curve shifts leftward.

D) increases and the demand for money curve shifts rightward.

E) decreases and there is a movement downward along the demand for money curve.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

73) The lower the nominal interest rate, the

A) greater the quantity of money supplied.

B) greater the quantity of money demanded.

C) greater the demand for money.

D) smaller the quantity of money demanded.

E) smaller the demand for goods and services.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

74) Suppose you can earn 5 per cent on your savings account if you deposit $500 in it. The inflation rate is 3 per cent. The opportunity cost of holding the $500 as money is

A) $100.

B) $25.

C) $80.

D) $30.

E) $525.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

75) The difference between the nominal interest rate and the real interest rate is the

A) price level.

B) GDP growth rate.

C) unemployment rate.

D) money growth rate minus the growth rate of real GDP.

E) inflation rate.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

76) The nominal interest rate is 12 per cent and the inflation rate is 4 per cent. The opportunity cost of holding a dollar for a year is

A) 16 cents.

B) 12 cents.

C) 48 cents.

D) 8 cents.

E) 88 cents.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

77) The demand for money curve shows the relationship between the quantity of money demanded and

A) the inflation rate.

B) the nominal interest rate.

C) real GDP.

D) the real interest rate.

E) the price level.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

78) An increase in the nominal interest rate leads to

A) a leftward shift in the demand for money curve.

B) a rightward shift in the demand for money curve.

C) a movement downward along the demand for money curve.

D) a movement upward along the demand for money curve.

E) neither a shift in nor a movement along the demand for money curve.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

79) As the nominal interest rate increases, the opportunity cost of holding money ________ and the quantity of money demanded ________.

A) increases; increases

B) decreases; decreases

C) increases; decreases

D) increases; does not change because people need money

E) decreases; increases

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

80) As real GDP increases, which of the following occurs?

A) The demand for money curve shifts leftward.

B) The nominal interest rate falls as the demand for money curve shifts leftward.

C) The demand for money curve shifts rightward.

D) The demand for money decreases and there is a movement upward along the demand for money curve.

E) The demand for money increases and there is a movement downward along the demand for money

curve.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

81) If the price level increases, the

A) demand for money does not change and the quantity of money demanded does not change.

B) demand for money increases.

C) quantity of money demanded increases.

D) demand for money decreases.

E) quantity of money demanded decreases.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

82) Suppose that the price level does not change while real GDP decreases. As a result,

A) the demand for money decreases so that households and firms hold smaller amounts of money.

B) the supply of money curve shifts rightward.

C) the supply of money curve shifts leftward.

D) the quantity of money demanded decreases and there is a movement downward along the demand for money curve.

E) the demand for money increases and the demand for money curve shifts rightward.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

83) If the price level falls, the

A) quantity of money demanded increases.

B) demand for money decreases.

C) quantity of money demanded decreases.

D) demand for money increases.

E) demand for money does not change and the quantity of money demanded does not change.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

84) An increase in real GDP affects the demand for money because

A) tax payments rise because more income is earned.

B) there is an inverse relationship between the quantity of money demanded and nominal GDP.

C) the larger real GDP, the higher the real interest rate.

D) at the higher price level, it takes more dollars to make expenditures.

E) when real GDP increases, more money is needed to make expenditures.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

85) The demand for money increases and the demand curve for money shifts rightward as a result of

A) an increase in the use of credit cards.

B) a decrease in the real interest rate.

C) a decrease in the price level.

D) an increase in real GDP.

E) a decrease in the nominal interest rate.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

86) The demand for money increases and the demand for money curve shifts rightward if

A) the nominal interest rate increases.

B) the price level falls.

C) real GDP increases.

D) the inflation rate increases.

E) the real interest rate increases.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

87) During a(n) ________ the demand for money decreases because ________.

A) recession; nominal GDP increases

B) recession; the price level rises

C) equilibrium; real GDP decreases

D) recession; real GDP decreases

E) expansion; real GDP decreases

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

88) Which statement most accurately describes the effect financial technology has had on the demand for money in Australia?

A) It is not possible to tell what the effect would be because financial technology has not changed over the past three decades.

B) All advances in financial technology have decreased the demand for money.

C) Advances in financial technology have had no effect on the demand for money.

D) All advances in financial technology have increased the demand for money.

E) Some advances in financial technology have increased the demand for money while others have decreased it.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

89) All of the following shift the demand for money curve EXCEPT

A) an increase in the price level.

B) an improvement in financial technology.

C) a rise in the nominal interest rate.

D) a decrease in real GDP.

E) an increase in real GDP.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

90) In the above figure, a movement from point A to point B represents

A) a decrease in the demand for money that might be the result of a fall in the price level.

B) an increase in the quantity of money demanded.

C) an increase in the demand for money that might be the result of an increase in real GDP.

D) an increase in the demand for money that might be the result of a fall in the price level.

E) a decrease in the quantity of money demanded.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

91) In the above figure, a movement from point B to point C represents

A) an increase in the quantity of money demanded.

B) a decrease in the quantity of money demanded.

C) an increase in the demand for money that might be the result of a fall in the price level.

D) a decrease in the demand for money that might be the result of an increase in real GDP.

E) an increase in the demand for money that might be the result of an increase in real GDP.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

92) In the demand and supply model of the money market, the

i. supply of money curve is a vertical straight line.

ii. supply of money is the quantity that must be held by households and firms.

iii. quantity of money is determined by the Reserve Bank's actions.

A) i only

B) ii only

C) iii only

D) ii and iii

E) i, ii and iii

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

93) In the money market, if the nominal interest rate is below the equilibrium level,

A) the quantity of money demanded exceeds the quantity of money supplied.

B) the supply of money curve will shift leftward.

C) asset prices will rise.

D) the demand for money curve will shift leftward.

E) the quantity of money supplied exceeds the quantity of money demanded.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

94) Suppose that the equilibrium nominal interest rate is 5 per cent and the equilibrium quantity of money is $1 billion. At any interest rate below 5 per cent,

A) there will be a surplus of money and bond prices will fall.

B) the interest rate will rise and bond prices will fall.

C) the supply of money will decrease.

D) the interest rate will fall and bond prices will fall.

E) there will be a surplus of money and bond prices will increase.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

95) If the nominal interest rate is less than the equilibrium nominal interest rate determined in the money market then, in the short run, households and firms

A) lower the price level.

B) increase real GDP.

C) raise the price level.

D) buy financial assets.

E) sell financial assets.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

96) In the money market, if the quantity of money supplied exceeds the quantity of money demanded, the nominal interest rate will ________ and the prices of assets will ________.

A) rise; increase

B) fall; decrease

C) rise; decrease

D) fall; increase

E) fall; not change

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

97) When the Reserve Bank changes the quantity of money, there is an immediate effect on

A) the price level and the inflation rate.

B) the nominal interest rate.

C) the inflation rate but not the price level.

D) real GDP.

E) the price level but not the inflation rate.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

98) If the Reserve Bank is worried about inflation and wants to raise the interest rate, in the short run it can

A) increase the quantity of money.

B) decrease the demand for money.

C) decrease the quantity of money.

D) increase the demand for money.

E) directly raise the interest rate without affecting either the demand for money or the supply of money.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

99) In the money market, in the short run in order to decrease the nominal interest rate, the Reserve Bank must

A) decrease the demand for money.

B) directly lower the interest rate and not change either the demand for money or the supply of money.

C) increase the discount rate.

D) increase the quantity of money.

E) decrease the quantity of money.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

100) In the money market, if real GDP increases, then the demand for money ________ and the equilibrium nominal interest rate ________.

A) decreases; rises

B) increases; does not change

C) decreases; falls

D) increases; falls

E) increases; rises

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

101) A change in financial technology that reduces the need to hold cash balances ________ the demand for money and ________ the equilibrium nominal interest rate.

A) decreases; lowers

B) increases; lowers

C) increases; raises

D) decreases; raises

E) decreases; does not change

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

102) In the above figure, if the interest rate is 8 per cent per year, the quantity of money demanded is

A) greater than the quantity of money supplied, and the demand curve for money will shift.

B) less than the quantity of money supplied, and the interest rate will change.

C) greater than the quantity of money supplied, and the supply curve of money will shift.

D) less than the quantity of money supplied, and the demand curve for money will shift.

E) greater than the quantity of money supplied, and the interest rate will change.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

103) In the above figure, the equilibrium interest rate is ________ and the equilibrium quantity of money is ________ trillion.

A) 0 per cent; $1.2

B) 8 per cent; $0.6

C) 8 per cent; $1.2

D) 4 per cent; $1.2

E) 4 per cent; $0.6

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

104) In the above figure, if the interest rate is 2 per cent per year, the quantity of money demanded is

A) less than the quantity of money supplied, and the demand for money curve will shift.

B) greater than the quantity of money supplied, and the interest rate will change.

C) less than the quantity of money supplied, and the interest rate will change.

D) greater than the quantity of money supplied, and the demand for money curve will shift.

E) greater than the quantity of money supplied, and the supply of money curve will shift.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

105) In the long run, a 3 per cent increase in the quantity of money leads to a 3 per cent

A) increase in the price level.

B) increase in the real interest rate.

C) increase in real GDP.

D) decrease in the real interest rate.

E) decrease in the price level.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

106) In the long run, when the Reserve Bank increases the quantity of money, the

A) price level falls.

B) real interest rate rises.

C) nominal interest rate falls.

D) demand for money decreases.

E) price level rises.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking

107) In the long run, an increase in the quantity of money, other things remaining the same,

A) decreases the price level.

B) has no effect on the price level or real GDP.

C) decreases real GDP.

D) increases real GDP.

E) increases the price level.

Difficulty: Basic

A-Head: 5.2 Measuring Australian GDP

AACSB: Analytical thinking