Test Questions & Answers Money And Inflation Chapter 10 v8.0 - Principles of Macroeconomics -Complete Test Bank by Taylor. DOCX document preview.
Chapter 10
Money and Inflation
Multiple Choice
1. Which of the following monetary terms, which originally meant one-third of an ounce of silver, was invented thousands of years ago?
a. | Peso |
b. | Dollar |
c. | Shekel |
d. | Euro |
e. | Yen |
OBJ: factual
TOP: Money; Origins of Money
MSC: Bloom's: Knowledge | AACSB: Analytic
2. Which of the following is not ?
a. | Historians trace the origins of money to cities such as Babylon, more than 5,000 years ago. |
b. | After World War I, the government of Germany printed too much money and correspondingly made the price of everything rise by millions of percentage points. |
c. | In 2009, high inflation occurred in Zimbabwe as a result of its government printing too little money. |
d. | In 2008 and 2009, the government of the United States dealt with a financial crisis by raising the supply of money. |
e. | All of these are true. |
OBJ: factual
SEC: 0. Money and Inflation
TOP: Money
MSC: Bloom's: Analysis | AACSB: Analytic
/
3. One of the most important principles of macroeconomics is that excessive decreases in the supply of money cause inflation.
Basic
OBJ: conceptual
SEC: 0. Money and Inflation
TOP: Money and Inflation
MSC: Bloom's: Knowledge
4. Historians trace the origins of money to the very origins of civilization.
Basic
OBJ: factual
SEC: 0. Money and Inflation
TOP: Origins of Money
MSC: Bloom's: Knowledge
Multiple Choice
5. The functions of money do not include
a. | a unit of account. |
b. | a medium of exchange.. |
c. | a store of value. |
d. | an exchange of purchasing power. |
e. | any of these. |
OBJ: factual
SEC: 1. What is Money?
TOP: Functions of Money
MSC: Bloom's: Knowledge
a. | means the same thing as income. |
b. | functions as a medium of exchange. |
c. | means the same thing as wealth. |
d. | All of these |
e. | means the same thing as earnings. |
OBJ: factual
SEC: 1. What is Money?
TOP: Money
MSC: Bloom's: Knowledge
/
7. An individual who claims she is making a lot of money is using the word money according to the definition of the word used in economics.
Basic
OBJ: factual
SEC: 1. What is Money?
TOP: Money
MSC: Bloom's: Knowledge
8. Money is the fraction of wealth used for transaction purposes.
Basic
OBJ: factual
SEC: 1. What is Money?
TOP: Money
MSC: Bloom's: Knowledge
Multiple Choice
9. Under a barter system,
a. | there is a single medium of exchange. |
b. | an efficient banking system is necessary. |
c. | money is exchanged for goods after reaching an agreed-upon price. |
d. | any good can be used as a medium of exchange. |
e. | the coincidence of wants is not a major problem. |
OBJ: factual
SEC: 1. What is Money?
TOP: Barter System
MSC: Bloom's: Knowledge
10. Suppose that transactions are conducted in pesos and prices are quoted in dollars. In this case the peso is used primarily as
a. | medium of exchange and unit of account. |
b. | unit of account. |
c. | medium of exchange. |
d. | unit of account and store of value. |
e. | store of value. |
OBJ: conceptual
SEC: 1. What is Money?
TOP: Medium of Exchange
MSC: Bloom's: Knowledge
11. Which of the following is about barter?
a. | Barter is more efficient than using coins. |
b. | The disadvantage of barter is that it requires a rare double coincidence of wants. |
c. | Barter is the main form of exchange in most developed countries today. |
d. | All of the above |
e. | None of the above |
OBJ: conceptual
SEC: 1. What is Money?
TOP: Barter System
MSC: Bloom's: Knowledge | AACSB: Analytic
12. When you put your spare change into your child's piggy bank, money is serving as
a. | store of value. |
b. | unit of account and store of value. |
c. | medium of exchange and unit of account. |
d. | medium of exchange. |
e. | unit of account. |
OBJ: factual
SEC: 1. What is Money?
TOP: Store of Value
MSC: Bloom's: Knowledge
13. When something is generally accepted as a means of payment, such as grain in many traditional societies, we say that this represents
a. | money as a medium of exchange. |
b. | money as a store of value. |
c. | money as a unit of wealth. |
d. | an inflationary danger. |
e. | a government opportunity for social control. |
OBJ: conceptual
SEC: 1. What is Money?
TOP: Money as Medium of Exchange
MSC: Bloom's: Knowledge
14. Suppose that transactions are conducted in euros and prices are quoted in dollars. In this case the dollar functions primarily as
a. | store of value. |
b. | unit of account and store of value. |
c. | medium of exchange. |
d. | unit of account. |
e. | medium of exchange and store of value. |
OBJ: conceptual
SEC: 1. What is Money?
TOP: Unit of Account
MSC: Bloom's: Analysis | AACSB: Analytic
15. Before you buy your new car, you visit four local auto dealerships and collect information on the prices and features of the cars. In this case, you are using money as
a. | unit of account. |
b. | store of value and unit of account. |
c. | store of value and medium of exchange. |
d. | store of value. |
e. | medium of exchange. |
OBJ: conceptual
SEC: 1. What is Money?
TOP: Unit of Account
MSC: Bloom's: Analysis | AACSB: Analytic
/
16. Barter represents a great technological improvement over coins.
Basic
OBJ: conceptual
SEC: 1. What is Money?
TOP: Money as Medium of Exchange
MSC: Bloom's: Knowledge
17. Only money can serve as a store of value.
Moderate
OBJ: conceptual
SEC: 1. What is Money?
TOP: Store of Value
MSC: Bloom's: Knowledge | AACSB: Analytic
18. If inflation is high, the local currency may not be the most efficient unit of account.
Moderate
OBJ: factual
SEC: 1. What is Money?
TOP: Unit of Account and Store of Value
MSC: Bloom's: Analysis | AACSB: Analytic
19. Money is always a good store of value.
Moderate
OBJ: factual
SEC: 1. What is Money?
TOP: Store of Value
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
20. If gold is being used for money, an increase in the supply of gold will cause
a. | a decrease in the money supply. |
b. | the price of all other goods to fall. |
c. | the price of gold to increase. |
d. | an increase in the price of all other goods. |
e. | nothing to happen to inflation. |
OBJ: conceptual
SEC: 1. What is Money?
TOP: Commodity Money
MSC: Bloom's: Analysis | AACSB: Analytic
21. Throughout history, the most common form of commodity money has been
a. | cattle. |
b. | salt. |
c. | metallic coins. |
d. | shells. |
e. | stones. |
OBJ: factual
SEC: 1. What is Money?
TOP: Metallic Money
MSC: Bloom's: Knowledge | AACSB: Analytic
/
22. An economy that uses commodity money will not experience inflation.
Moderate
OBJ: conceptual
SEC: 1. What is Money?
TOP: Commodity Money and Inflation
MSC: Bloom's: Analysis | AACSB: Analytic
23. Throughout history, metallic coins have been the most common form of commodity money.
Moderate
OBJ: factual
SEC: 1. What is Money?
TOP: Metallic Coins
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
24. Paper money
a. | is a less efficient form of money than checking deposits. |
b. | is as efficient a form of money as coins. |
c. | is the most efficient form of money. |
d. | must be linked by law to the supply of gold. |
e. | is an efficient form of money only if it is backed by a precious commodity. |
OBJ: factual
SEC: 1. What is Money?
TOP: Paper Money
MSC: Bloom's: Knowledge
25. The gold standard
a. | is no longer observed in the United States. |
b. | imposes a limit on the amount of paper money in circulation. |
c. | All of these |
d. | means that the price of gold in terms of paper money is fixed by the government. |
e. | was devised as a means of controlling inflation. |
OBJ: factual
SEC: 1. What is Money?
TOP: Gold Standard
MSC: Bloom's: Knowledge
26. Currency includes only
a. | coins and paper money. |
b. | coins, paper money, and checking deposits. |
c. | paper money. |
d. | greenbacks. |
e. | coins. |
OBJ: factual
SEC: 1. What is Money?
TOP: Currency
MSC: Bloom's: Knowledge
27. Governments supply virtually all the coin and paper money that is used as a medium of exchange in an economy. Economists refer to coin and paper money together as
a. | currency. |
b. | convertible cash. |
c. | total checking deposits. |
d. | base money. |
e. | None of these |
OBJ: conceptual
SEC: 1. What is Money?
TOP: Currency
MSC: Bloom's: Knowledge | AACSB: Analytic
28. Which of the following is the most common form of money?
a. | Commodity money |
b. | Currency |
c. | Paper money |
d. | Coins |
e. | Checking deposits |
OBJ: factual
SEC: 1. What is Money?
TOP: Checking Deposits
MSC: Bloom's: Knowledge | AACSB: Analytic
29. Which of the following is money?
a. | All of these |
b. | Checks in the checkbook |
c. | Checking deposits |
d. | ATM cards |
e. | Credit cards |
OBJ: factual
SEC: 1. What is Money?
TOP: Paper Money
MSC: Bloom's: Knowledge
/
30. The U.S. dollar is not backed by any precious metal or commodity.
Basic
OBJ: factual
SEC: 1. What is Money?
TOP: Paper Money
MSC: Bloom's: Knowledge
31. Starting in the mid-twentieth century, paper money began to be used widely and supplemented or replaced coins as a form of money.
Basic
OBJ: factual
SEC: 1. What is Money?
TOP: Paper Money
MSC: Bloom's: Knowledge
32. The United States has never been on a gold standard.
Moderate
OBJ: factual
SEC: 1. What is Money?
TOP: Gold Standard
MSC: Bloom's: Knowledge | AACSB: Analytic
33. The most efficient form of money is checking accounts.
Moderate
OBJ: factual
SEC: 1. What is Money?
TOP: Checking Accounts
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
34. The sum of all currency (coin and paper money) coupled with all bank deposits is known by economists as
a. | convertible currency. |
b. | foreign exchange. |
c. | the money supply. |
d. | cash and marketable securities. |
e. | None of these |
OBJ: conceptual
SEC: 1. What is Money?
TOP: Money Supply
MSC: Bloom's: Knowledge | AACSB: Analytic
35. M1 consists of
a. | paper money only. |
b. | currency plus checking deposits only. |
c. | currency plus checking deposits plus travelers' checks plus savings deposits only. |
d. | currency only. |
e. | currency plus checking deposits plus travelers' checks only. |
OBJ: factual
SEC: 1. What is Money?
TOP: M1 MSC: Bloom's: Knowledge
36. Which of the following would not be counted as part of M1?
a. | Paper money |
b. | Demand deposits |
c. | Savings deposits |
d. | Travelers' checks |
e. | Currency |
OBJ: factual
SEC: 1. What is Money?
TOP: M1
MSC: Bloom's: Knowledge
37. As a measure of money, M1 emphasizes the use of money as
a. | an illiquid asset. |
b. | a unit of account. |
c. | a standard of deferred payment. |
d. | a medium of exchange. |
e. | a store of value. |
OBJ: factual
SEC: 1. What is Money?
TOP: M1
MSC: Bloom's: Analysis | AACSB: Analytic
38. M2 includes
a. | M1 plus government bonds. |
b. | M1 plus U.S. government securities. |
c. | M1 plus savings accounts and small time deposits. |
d. | M1 plus term Eurodollar deposits. |
e. | M1 minus savings accounts. |
OBJ: factual
SEC: 1. What is Money?
TOP: M2
MSC: Bloom's: Knowledge | AACSB: Analytic
39. About what percentage of M2 is currency?
a. | 50 percent |
b. | 30 percent |
c. | 10 percent |
d. | 100 percent |
e. | 75 percent |
OBJ: factual
SEC: 1. What is Money?
TOP: M1
MSC: Bloom's: Knowledge | AACSB: Analytic
40. About what percentage of M1 is currency?
a. | 50 percent |
b. | 10 percent |
c. | 75 percent |
d. | 100 percent |
e. | 30 percent |
OBJ: factual
SEC: 1. What is Money?
TOP: M1
MSC: Bloom's: Knowledge
41. Although there has been a reported increase in counterfeit money, it is estimated to currently account for
a. | less than 1 percent of genuine currency. |
b. | between 1 and 2 percent of genuine currency. |
c. | between 2 and 5 percent of genuine currency. |
d. | between 5 and 10 percent of genuine currency. |
e. | more than 10 percent of genuine currency, but less than 50 percent. |
OBJ: factual
SEC: 1. What is Money?
TOP: Counterfeit Money
MSC: Bloom's: Analysis | AACSB: Analytic
/
42. The money supply is the sum of the currency in circulation.
Basic
OBJ: factual
SEC: 1. What is Money?
TOP: Money Supply
MSC: Bloom's: Knowledge
43. Time deposits require the depositor to keep the money at the bank for a certain amount of time or else lose interest. They are therefore not as liquid as checking deposits, but it is normally possible to withdraw funds from them.
Moderate
OBJ: conceptual
SEC: 1. What is Money?
TOP: M2; Liquidity
MSC: Bloom's: Analysis | AACSB: Analytic
44. Items in M1 are more liquid than items in M2.
Basic
OBJ: factual
SEC: 1. What is Money?
TOP: M1
MSC: Bloom's: Knowledge
45. One of the main reasons the U.S. Treasury is redesigning dollar bills (such as the $10, $20, and $50 denominated bills) is so that they are more difficult to counterfeit.
Moderate
OBJ: factual
SEC: 1. What is Money?
TOP: Counterfeit Money
MSC: Bloom's: Knowledge | AACSB: Analytic
Short Answer
46. Is money the same as income? Explain.
OBJ: factual
SEC: 1. What is Money?
TOP: Money and Income
MSC: Bloom's: Knowledge
47. If a country's currency is on a gold standard, does that mean there can be no inflation? Explain.
OBJ: conceptual
SEC: 1. What is Money?
TOP: Gold Standard
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
48. The "Fed" is the nickname for
a. | Congress. |
b. | the presidency. |
c. | the Federal Reserve System. |
d. | the federal government. |
e. | the United States Treasury. |
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Federal Reserve System
MSC: Bloom's: Knowledge
49. The central bank of the United States is known as the
a. | Bundesbank. |
b. | Fed. |
c. | Bank of America. |
d. | First National Bank. |
e. | Department of the Treasury. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Fed
MSC: Bloom's: Knowledge
50. A commercial bank is
a. | a Federal Reserve bank. |
b. | part of the federal government. |
c. | part of the U.S. Treasury. |
d. | a financial intermediary. |
e. | a nonprofit organization. |
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Financial Intermediaries
MSC: Bloom's: Knowledge
51. Which of the following is ?
a. | None of these |
b. | Commercial banks are the only legal type of financial intermediary. |
c. | Banks are prohibited by law from earning a profit. |
d. | It is customary to pay a higher interest rate on a loan than you would receive on your savings account from the same bank. |
e. | A bank earns a profit by lending at a lower rate than it pays its depositors. |
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Commercial Banks
MSC: Bloom's: Knowledge
52. Financial intermediaries exist primarily because
a. | they are part of the U.S. Treasury. |
b. | they are part of the Federal Reserve System. |
c. | of historical accident. |
d. | they can make a profit. |
e. | of federal mandates. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Financial Intermediaries
MSC: Bloom's: Knowledge | AACSB: Analytic
53. Banks are referred to as intermediaries because they
a. | are part of the money supply process. |
b. | earn a profit. |
c. | charge interest on a loan. |
d. | channel funds from depositors to borrowers. |
e. | provide a way for people to save their money. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Financial Intermediaries
MSC: Bloom's: Knowledge | AACSB: Analytic
/
54. The central bank of the United States of America is commonly known as the Fed.
Basic
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Fed
MSC: Bloom's: Knowledge
55. For a bank to make a profit, the interest rate on its deposit liabilities must be higher than the interest rate on its loan receipts.
Moderate
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Depository Institutions' Profit
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
56. The Federal Reserve
a. | controls the supply of money according to the gold standard. |
b. | exists primarily to be the bank of the federal government. |
c. | is another name for the U.S. Treasury. |
d. | serves as a bank to other banks. |
e. | exists only to control the supply of currency in the economy. |
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Federal Reserve
MSC: Bloom's: Knowledge
57. The Federal Reserve System was established in
a. | 1886. |
b. | 1913. |
c. | 1929. |
d. | 1776. |
e. | 1933. |
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Federal Reserve
MSC: Bloom's: Knowledge
58. The Board of Governors of the Federal Reserve is
a. | appointed by the president and confirmed by the Senate, and each governor serves a 14-year term. |
b. | elected by Congress, and each governor serves a 10-year term. |
c. | elected by Congress, and each governor serves a 4-year term. |
d. | elected by Congress, and each governor serves a 7-year term. |
e. | appointed by the president and confirmed by the Senate, and each governor serves a 7-year term. |
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Board of Governors of the Federal Reserve
MSC: Bloom's: Knowledge | AACSB: Analytic
59. The chair of the Board of Governors of the Federal Reserve is
a. | appointed by the president and confirmed by the Senate, the appointment can be renewed for additional terms. |
b. | appointed by the president and confirmed by the Senate, and the appointment cannot be renewed for additional terms. |
c. | elected by Congress and serves a 7-year term. |
d. | elected by Congress and serves a 4-year term. |
e. | elected by Congress and serves a 10-year term. |
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Board of Governors of the Federal Reserve
MSC: Bloom's: Knowledge | AACSB: Analytic
60. The chair of the Board of Governors of the Federal Reserve since 2014 is
a. | Paul O'Neal. |
b. | Irving Fisher. |
c. | Ben Bernanke. |
d. | Janet Yellen. |
e. | Paul Volcker. |
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Federal Reserve Chair
MSC: Bloom's: Knowledge
61. The Federal Reserve System is divided into how many districts?
a. | 12 |
b. | 7 |
c. | 50 |
d. | 2 |
e. | 6 |
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: District Federal Reserve Banks
MSC: Bloom's: Knowledge
62. The voting members of the FOMC are
a. | the governors of the Federal Reserve Board and the president of the United States. |
b. | the governors of the Federal Reserve Board and the president of the New York Fed. |
c. | the governors of the Federal Reserve Board and 5 of the 12 Federal Reserve district bank presidents. |
d. | the governors of the Federal Reserve Board and the 12 Federal Reserve district bank presidents. |
e. | the governors of the Federal Reserve Board, 5 of the 12 Federal Reserve district bank presidents, and the secretary of the Treasury. |
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: FOMC
MSC: Bloom's: Knowledge | AACSB: Analytic
/
63. The Federal Reserve serves as a financial intermediary only for other financial intermediaries.
Moderate
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Federal Reserve
MSC: Bloom's: Knowledge | AACSB: Analytic
64. The Federal Reserve System is divided into 52 districts, 1 for each state, plus 1 for Washington, D.C., and 1 for Puerto Rico.
Basic
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Fed
MSC: Bloom's: Knowledge
65. All members of the Federal Reserve Board of Governors are appointed by the president and confirmed by the Senate.
Basic
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Board of Governors of the Federal Reserve
MSC: Bloom's: Knowledge
66. The FOMC implements monetary policy after obtaining the approval of the president.
Moderate
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: FOMC
MSC: Bloom's: Knowledge | AACSB: Analytic
67. The Federal Reserve System is a government agency.
Challenging
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Federal Reserve
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
68. Which of the following are a liability for a bank?
a. | Reserves |
b. | Bonds |
c. | Loans |
d. | Deposits |
e. | Treasury securities |
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Bank Liabilities
MSC: Bloom's: Knowledge
Exhibit 22-1
69. The data in Exhibit 22-1 shows the balance sheet (in millions of dollars) for Bank INF. Assuming the bank's reserves are what is required by law, the required reserve ratio is
a. | 85 percent. |
b. | 15 percent. |
c. | 70 percent. |
d. | 30 percent. |
e. | 5 percent. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Required Reserve Ratio
MSC: Bloom's: Analysis | AACSB: Analytic
70. According to the data in Exhibit 22-1, the amount of deposits Bank INF holds at the Fed equals
a. | $150 million. |
b. | $1000 million. |
c. | $850 million. |
d. | $50 million. |
e. | $25 million. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Federal Reserve Deposits
MSC: Bloom's: Application | AACSB: Analytic
71. Suppose a bank's deposit liabilities increase by $10 million. If the required reserve ratio is 20 percent, bank reserves will increase by
a. | Not enough information is given. |
b. | $2 million. |
c. | $8 million. |
d. | $1 million. |
e. | $10 million. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Loans and Bonds
MSC: Bloom's: Analysis | AACSB: Analytic
72. The buying and selling of government bonds by the central bank is known as
a. | government bond barter. |
b. | fiscal policy. |
c. | open market operations. |
d. | banking equivalency. |
e. | None of these |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Open Market Operation
MSC: Bloom's: Knowledge
73. If the Fed attempts to decrease the amount of deposits that banks hold, it can
a. | buy government bonds in an open market operation. |
b. | sell government bonds in an open market operation. |
c. | force banks by decree to do so. |
d. | sell domestic deposits to foreign investors. |
e. | None of these |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Open Market Operation
MSC: Bloom's: Analysis | AACSB: Analytic
/
74. Reserves are another name for commercial bank deposits at the Fed.
Basic
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Banks Reserves
MSC: Bloom's: Knowledge
75. Deposits are an asset for the bank because the bank can use the deposits to generate a profit.
Moderate
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Bank Assets
MSC: Bloom's: Knowledge | AACSB: Analytic
76. Open market operations refer to the buying or selling of bonds by the central bank.
Basic
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Open Market Operation
MSC: Bloom's: Knowledge
77. The reserve ratio can be larger or smaller than the required reserve ratio.
Moderate
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Reserve Ratio
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
78. If the Fed's actions cause a bank's reserves to increase, we know the bank will have an incentive to convert the new reserves into loans and bonds because
a. | of government regulation. |
b. | reserves are taxed by the federal government. |
c. | of moral suasion. |
d. | reserves don't earn interest. |
e. | the Fed will take the reserves back if they are not used. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Profit-Making Behavior of Banks
MSC: Bloom's: Analysis | AACSB: Analytic
79. If the Fed purchases $15 million worth of government bonds from Bank X, initially
a. | the amount of Bank X's deposits at the Fed will decrease by $15 million. |
b. | the amount of Bank X's deposits at the Fed will increase by $15 million. |
c. | nothing will happen to Bank X's balance sheet. |
d. | the amount of funds deposited at Bank X will increase by $15 million. |
e. | the amount of funds deposited at Bank X will decrease by $15 million. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Bond Purchases by the Fed
MSC: Bloom's: Analysis | AACSB: Analytic
80. If the Fed sells $15 million worth of government bonds to Bank A, then initially
a. | the amount of deposits held by Bank A will increase by $15 million. |
b. | the amount of reserves held by Bank A will decrease by $15 million. |
c. | the amount of bonds held by Bank A will decrease by $15 million. |
d. | the amount of deposits held by Bank A will decrease by $15 million. |
e. | the amount of reserves held by Bank A will increase by $15 million. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Fed Sells Bonds
MSC: Bloom's: Application | AACSB: Analytic
81. To increase bank reserves, the Fed will
a. | sell bonds to banks. |
b. | buy bonds from banks. |
c. | sell bonds to the government. |
d. | buy bonds from the government. |
e. | sell bonds to the public. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Increasing Bank Reserves MSC: Bloom's: Knowledge | AACSB: Analytic
82. The buying and selling of bonds by the Fed to change bank reserves is referred to as
a. | financial intermediation. |
b. | reserve accounting. |
c. | speculation. |
d. | open market operations. |
e. | asset and liability management. |
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Open Market Operation
MSC: Bloom's: Knowledge
83. The formula that shows the relationship between reserves and deposits is
a. | deposits = reserve ratio reserves. |
b. |
|
c. |
|
d. |
|
e. |
|
.
.
.
.OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Formula for Linking Reserves and Deposits
MSC: Bloom's: Knowledge | AACSB: Analytic
84. Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If an individual withdraws $20 million from Bank Y, then the amount of reserves held by Bank Y will
a. | decrease by $20 million. |
b. | decrease by $2 million. |
c. | increase by $2 million. |
d. | increase by $20 million. |
e. | not change. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Deposit Expansion
MSC: Bloom's: Analysis | AACSB: Analytic
85. Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If an individual withdraws $20 million from Bank Zip,
a. | the amount of loans or bonds must decrease by $18 million. |
b. | the amount of loans must increase by $20 million. |
c. | the amount of loans or bonds must decrease by $20 million. |
d. | the amount of loans or bonds must increase by $18 million. |
e. | the amount of loans must decease by $20 million. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Deposit Contraction
MSC: Bloom's: Analysis | AACSB: Analytic
86. Suppose banks desire to keep 5 percent of their deposits on reserve. If the Fed purchases $20 million worth of government bonds from Bank B, the amount of bonds and loans Bank B holds will
a. | decrease by $15 million. |
b. | decrease by $20 million. |
c. | increase by $15 million. |
d. | remain unchanged. |
e. | increase by $20 million. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Deposit Expansion
MSC: Bloom's: Analysis | AACSB: Analytic
87. Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If the Fed purchases $10 million worth of government bonds from Bank INF, the amount of reserves held by Bank INF will
a. | not change. |
b. | increase by $1 million. |
c. | decrease by $10 million. |
d. | decrease by $1 million. |
e. | increase by $10 million. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Fed Buys Bonds
MSC: Bloom's: Analysis | AACSB: Analytic
88. Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If the Fed purchases $10 million worth of government bonds from Bank C, the amount of loans held by Bank C will
a. | increase by $10 million. |
b. | decrease by $100 million. |
c. | increase by $100 million. |
d. | decrease by $10 million. |
e. | not change. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Fed Buys Bonds
MSC: Bloom's: Application | AACSB: Analytic
89. Suppose the required reserve ratio is 10 percent, and banks hold no excess reserves. If the Fed purchases $10 million worth of government bonds from Bank INF, the amount of deposits held by the entire banking system will ultimately
a. | increase by $100 million. |
b. | decrease by $10 million. |
c. | decrease by $100 million. |
d. | not change. |
e. | increase by $10 million. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Fed Buys Bonds
MSC: Bloom's: Application | AACSB: Analytic
90. Which of the following statements is when the Fed increases reserves by buying a government bond from a bank?
a. | The amount of reserves in the banking system will increase by an amount greater than the amount of the bond purchase. |
b. | The amount of loans made by the banking system will increase by the amount of the bond purchase. |
c. | The amount of loans made by that bank will be greater than the increase in reserves. |
d. | The amount of deposits made by the banking system will increase by the amount of the bond purchase. |
e. | The amount of reserves in the banking system will increase by the amount of the bond purchase. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Deposit Expansion
MSC: Bloom's: Analysis | AACSB: Analytic
91. Suppose banks desire to keep 5 percent of all deposits on reserve, and the Fed sells $10 billion of government securities to Bank A. As a result,
a. | the maximum amount that deposits in the economy can increase is $10 million. |
b. | the maximum amount that deposits in the economy can decrease is $10 million. |
c. | the maximum amount that deposits in the economy can decrease is $200 million. |
d. | the amount of deposits in the economy cannot change. |
e. | the maximum amount that deposits in the economy can increase is $200 million. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Reserves and Deposits
MSC: Bloom's: Application | AACSB: Analytic
92. Suppose banks desire to keep 5 percent of all deposits on reserve, and the Fed purchases $10 million of government securities from a private securities dealer. Then,
a. | there cannot be any change in bank deposits. |
b. | the maximum amount that deposits in the economy can decrease will be $10 million. |
c. | the maximum amount that deposits can decrease will be $200 million. |
d. | the maximum amount that deposits in the economy can increase will be $10 million. |
e. | the maximum amount that deposits can increase will be $200 million. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Fed Purchases Securities from a Securities Dealer
MSC: Bloom's: Application | AACSB: Analytic
/
93. An increase in reserves leads to an even larger increase in deposits because banks have an incentive to lend their excess reserves.
Moderate
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Deposit Expansion
MSC: Bloom's: Analysis | AACSB: Analytic
94. If the Fed purchases $20 million worth of government bonds from Bank Zip, Bank Zip will be able to increase its loans as a result of the bond purchase.
Moderate
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Loan Expansion
MSC: Bloom's: Analysis | AACSB: Analytic
95. When the Fed sells government bonds to banks, reserves increase.
Moderate
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Decreasing Reserves
MSC: Bloom's: Analysis | AACSB: Analytic
96. To affect bank reserves and deposits, the Fed has to buy securities directly from a bank.
Moderate
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Affecting Bank Reserves
MSC: Bloom's: Analysis | AACSB: Analytic
97. If the Fed sells $1 million of government bonds to a bank, it has the same effect on deposits and reserves as if the Fed sold $1 million of government bonds to the general public.
Moderate
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Fed Sells Bonds
MSC: Bloom's: Analysis | AACSB: Analytic
Short Answer
98. What do commercial banks have in common with all other firms in a market economy?
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Behavior of Commercial Banks
MSC: Bloom's: Knowledge | AACSB: Analytic
99. Is the Federal Reserve System a federal government agency? Explain.
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: District Federal Reserve Banks
MSC: Bloom's: Analysis | AACSB: Analytic
100. For an individual bank, does it make a difference in terms of loan creation whether the Fed buys the government bond directly from the bank or from a private bond dealer who deposits the proceeds in the bank?
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Loan Creation
MSC: Bloom's: Analysis | AACSB: Analytic
101. Suppose the Fed purchases $100 million worth of government bonds from a bond dealer who then deposits the proceeds at Bank ABC.
(A) | If the required reserve ratio is 10 percent, what is the maximum amount of loans that Bank INF can make? |
(B) | What is the maximum amount of deposits that the banking system as a whole can create? What is the maximum amount of loans that can be created? |
(A) | Since Bank ABC needs to keep 10 percent of the $100 million on reserve, the most Bank INF can lend out is $90 million. |
(B) | The maximum amount of deposits that will be created under these circumstances will be = |
Since 10 percent of these deposits have to be kept for reserves, $900 million will be the maximum amount of loans created. |
.OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Deposit and Loan Creation
MSC: Bloom's: Analysis | AACSB: Analytic
102. Suppose Joe is digging around in his basement and he finds $1,000 hidden behind a wall. Assume that Joe takes the $1,000 and deposits it in his bank. Assume also that banks hold no excess reserves, people hold no currency, and the required reserve ratio is 5 percent.
(A) | When Joe deposits the $1,000 in his bank, what happens to the balance sheet? |
(B) | How many loans can the bank create? |
(C) | Suppose Joe's bank makes a loan to Sally, and she deposits the money in her bank. How many loans can Sally's bank make? |
(D) | If banks continue to make loans, what is the total change in deposits? |
(A) | Deposits and reserves increase by $1,000. |
(B) | The bank can lend 95 percent of the $1,000, or $950. |
(C) | Sally's bank can lend 95 percent of $950, or $902.50. |
(D) | The total change in deposits is $1,000 (1/0.05) = $20,000. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Deposit Expansion
MSC: Bloom's: Analysis | AACSB: Analytic
103. Suppose the required reserve ratio is 20 percent. The balance sheet for Bank AAA is given below (figures are in billions).
(A) | How many new loans can Bank AAA make? |
(B) | If it is not possible to change the amount of bonds, what would have to happen to the reserves, loans, and deposits for this bank? |
(C) | If it is possible to change the amount of bonds, how would this change your answer to part (B)? |
(D) | If it is not possible to change the amount of bonds, what would have to happen to the deposits in the entire banking system? |
(A) | The bank can make zero new loans because they are not meeting their minimum reserve requirements of $200 billion. |
(B) | Reserves need to increase by $50 billion, so loans or bond holdings must fall by $50 billion. |
(C) | The bank could instead sell some bonds. |
(D) | The change in reserves needs to be $50 billion. As loans fall, deposits are destroyed. The total change in deposits is 50 (1/.2) = $250 billion. Deposits will fall by $250 billion. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Deposit Expansion
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
104. The supply of money is defined in the text as
a. | currency plus reserves plus deposits. |
b. | currency plus deposits. |
c. | currency minus reserves. |
d. | reserves plus deposits. |
e. | currency plus reserves. |
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Money Supply
MSC: Bloom's: Knowledge
105. Suppose people are holding $100 million of currency, total deposits in the banking system are $2,000 million, and bank reserves are $400 million. In this case,
a. | the supply of money is $2,100 million. |
b. | the supply of money is $2,400 million. |
c. | the supply of money is $2,500 million. |
d. | the supply of money is $2,000 million. |
e. | we do not have enough information to determine the money supply. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Money Supply
MSC: Bloom's: Analysis | AACSB: Analytic
106. Which of the following would increase the value of the money supply?
a. | An increase in the quantity of excess reserves held by banks |
b. | An increase in the quantity of bonds held by the banking system |
c. | An increase in the fear of crime |
d. | A decrease in the fear of crime |
e. | A decrease in the number of businesses that will accept a personal check |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Money Supply
MSC: Bloom's: Analysis | AACSB: Analytic
107. If the Fed increases reserves in the banking system,
a. | deposit holdings will decrease, and currency holdings will increase. |
b. | deposit holdings will increase, and currency holdings will fall. |
c. | deposit and currency holdings will decrease. |
d. | both deposit and currency holdings will increase. |
e. | deposits will increase, and currency holdings by the public will not be affected. |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Currency Holdings
MSC: Bloom's: Analysis | AACSB: Analytic
108. Which of the following will cause an increase in the money supply?
a. | An increase in the required reserve ratio |
b. | An increase in crime |
c. | Increased interest rates on credit cards |
d. | A tax on credit card purchases |
e. | A decrease in crime |
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Determinants of the Money Supply
MSC: Bloom's: Analysis | AACSB: Analytic
/
109. The money supply is defined as the total currency available in the country minus the total bank deposits.
Basic
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Money Supply
MSC: Bloom's: Knowledge
110. The reserve ratio was nearly constant for several years but then increased sharply in the fall of 2008.
Moderate
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Reserves
MSC: Bloom's: Analysis | AACSB: Analytic
111. When the Fed buys bonds in an open market operation, it can predict what will happen to deposits and currency holdings.
Basic
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Money Supply
MSC: Bloom's: Knowledge
Short Answer
112. Does the Federal Reserve have complete control over the money supply at all times? Why or why not?
OBJ: conceptual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Fed Control of the Money Supply
MSC: Bloom's: Analysis | AACSB: Analytic
113. Why did the reserve ratio increase sharply in the fall of 2008?
OBJ: factual
SEC: 2. The Fed, the Banks, and the Link from Reserves to Deposits
TOP: Reserve Explosion
MSC: Bloom's: Knowledge
Multiple Choice
114. The volume of transactions
a. | increases only with the price of an item. |
b. | has nothing to do with the supply of money. |
c. | increases only with the number of items purchased. |
d. | is measured in real terms. |
e. | increases when the number of items purchased increases or when the price of an item increases. |
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Volume of Transactions
MSC: Bloom's: Knowledge
/
115. Nominal GDP increases only if the price level rises.
Basic
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Nominal GDP
MSC: Bloom's: Knowledge
Multiple Choice
116. The relationship between money and nominal GDP in the economy is summarized by
a. | the money multiplier. |
b. | the quantity equation of money. |
c. | the money supply equation. |
d. | the budget constraint. |
e. | the Phillips curve. |
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Quantity Equation
MSC: Bloom's: Knowledge
117. The quantity equation is written as
a. | MP = YV. |
b. | MY = PV. |
c. | MV = PY. |
d. | M = PYV. |
e. | MPY = V. |
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Quantity Equation
MSC: Bloom's: Knowledge
118. Velocity, V, measures
a. | the percent of income held in the form of money. |
b. | real GDP. |
c. | nominal GDP. |
d. | how frequently money is used. |
e. | currency as a percentage of GDP. |
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Velocity
MSC: Bloom's: Knowledge | AACSB: Analytic
119. Which of the following will cause velocity to increase?
a. | An increase in the activity of the "underground" economy |
b. | A reduction in credit card interest rates |
c. | An increase in the unreliability of automatic teller machines |
d. | A surcharge on all credit card purchases |
e. | A decrease in crime rates |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: Changes in Velocity
MSC: Bloom's: Analysis | AACSB: Analytic
120. Velocity will decline if
a. | the public becomes more confident about the economy's future. |
b. | there is an increase in the use of credit cards. |
c. | automatic teller machines become more accessible. |
d. | the crime rate increases. |
e. | banks increase the interest rate paid on checking deposits. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
0TOP: Changes in Velocity
MSC: Bloom's: Analysis | AACSB: Analytic
121. The major factor determining velocity is
a. | how efficiently money is used. |
b. | Federal Reserve policy. |
c. | nominal GDP. |
d. | the supply of money. |
e. | real GDP. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: Determinants of Velocity
MSC: Bloom's: Knowledge | AACSB: Analytic
122. In the long run, an increase in the money supply
a. | is expected to lead to a decrease in velocity. |
b. | has no predictable effect on nominal GDP. |
c. | is expected to lead to an increase in velocity. |
d. | is expected to lead to a decrease in nominal GDP. |
e. | is expected to lead to an increase in nominal GDP. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: Money Supply and Nominal GDP
MSC: Bloom's: Knowledge
123. In the long run, a decrease in the money supply
a. | is expected to lead to a decrease in nominal GDP. |
b. | is expected to lead to a decrease in velocity. |
c. | is expected to lead to an increase in nominal GDP. |
d. | is expected to lead to an increase in velocity. |
e. | has no predictable effect on nominal GDP. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: Money Supply and Nominal GDP
MSC: Bloom's: Knowledge
124. If real GDP depends only on capital, labor, and technology, an increase in the money supply will lead to
a. | an increase in real GDP. |
b. | an increase in the price level. |
c. | a decline in real GDP. |
d. | a decrease in the price level. |
e. | no predictable change in the price level or real GDP. |
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Money and the Price Level
MSC: Bloom's: Analysis | AACSB: Analytic
125. If real GDP depends only on capital, labor, and technology, a higher growth rate in the money supply will lead to
a. | an increase in velocity. |
b. | an increase in the rate of productivity. |
c. | higher inflation. |
d. | lower inflation. |
e. | a decrease in velocity. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: Money Growth and Inflation
MSC: Bloom's: Analysis | AACSB: Analytic
Exhibit 22-2
Year | Price Level | Real GDP (billions of 2010 dollars) | Money Supply (billions of dollars) |
2016 | 1.1 | 13,248.2 | 1,830.9 |
126. According to the data in Exhibit 22-2, in 2016, velocity equaled about
a. | 10.1. |
b. | 8.0. |
c. | 6.6. |
d. | 2.7. |
e. | 1.5. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: Velocity
MSC: Bloom's: Application | AACSB: Analytic
Exhibit 22-3
Year | Price Level | Real GDP (billions of 2010 dollars) | Money Supply | Velocity |
2013 | 1.06 | 13,228.9 | 1,373.6 | 10.2 |
2014 | 13,228.9 | 1,602.7 | 9.0 | |
2015 | 12,880.6 | 1,693.6 | 8.3 | |
2016 | 13,248.2 | 1,830.9 | 8.0 |
127. According to the data in Exhibit 22-3, the price level in 2013 was
a. | 0.95. |
b. | 1.09. |
c. | 1.11. |
d. | 1.23. |
e. | 1.42 |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: The Price Level
MSC: Bloom's: Application | AACSB: Analytic
128. According to the data in Exhibit 22-3, the rate of inflation between 2013 and 2014 was
a. | 4.3 percent. |
b. | 2.2 percent. |
c. | 1.1 percent. |
d. | 0 percent. |
e. | 3.1 percent. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: Money and Inflation
MSC: Bloom's: Application | AACSB: Analytic
129. According to the data in Exhibit 22-3, the rate of inflation between 2015 and 2016 was about
a. | 2 percent. |
b. | 1 percent. |
c. | 0 percent. |
d. | 1 percent. |
e. | 2 percent. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: Money and Inflation
MSC: Bloom's: Application | AACSB: Analytic
130. The quantity equation tells us that, in the long run, when the economy is at potential GDP, an increase in the growth of the money supply will
a. | always increase inflation by the same amount if velocity is constant. |
b. | increase inflation by a smaller amount if velocity increases. |
c. | increase inflation by a larger amount if velocity decreases. |
d. | always increase inflation. |
e. | have no effect on inflation if velocity is constant. |
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Quantity Equation
MSC: Bloom's: Knowledge
/
131. As the velocity of money rises, the amount of money being held by individuals also rises.
Challenging
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: Quantity Equation
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
132. To look for evidence concerning whether higher money growth leads to higher inflation, one should, according to the quantity equation, examine periods of time when
a. | changes in velocity and real GDP were small compared to changes in inflation and money growth. |
b. | changes in the price level and real GDP were small compared to changes in velocity and money growth. |
c. | changes in the price level and velocity were small compared to changes in velocity and real GDP. |
d. | changes in the price level and money growth were small compared to changes in inflation and money growth. |
e. | changes in velocity were small compared to changes in the price level, money growth, and real GDP. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: Evidence
MSC: Bloom's: Analysis | AACSB: Analytic
133. Over the period 1973 through 1991, for the largest developed economies in the world, there has been
a. | a positive correlation between the growth rate of money and the rate of inflation. |
b. | no correlation between money and the rate of inflation. |
c. | a negative correlation between the growth rate of money and the rate of inflation. |
d. | a negative correlation between the growth rate of money and the growth of velocity. |
e. | a positive correlation between the growth rate of money and real GDP. |
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Money and Inflation
MSC: Bloom's: Analysis | AACSB: Analytic
134. For the largest developed economies during the 1990s,
a. | the quantity equation did not work well in explaining variations in the rate of inflation in spite of the high rates of inflation that occurred in several of these countries. |
b. | the quantity equation worked well in explaining the variation in rates of inflation during this period. |
c. | economic growth was too high for the quantity equation to explain variations in the rate of inflation. |
d. | inflation was too varied for the quantity equation to be of any use. |
e. | there was not enough variation in the rate of inflation to test the quantity equation because inflation was low for all these countries. |
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Money and Inflation
MSC: Bloom's: Analysis | AACSB: Analytic
135. The most recent episode of hyperinflation occurred in
a. | Germany. |
b. | Brazil. |
c. | Chile. |
d. | Zimbabwe. |
e. | Greece. |
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Hyperinflation
MSC: Bloom's: Knowledge
136. When a hyperinflation occurs,
a. | velocity remains constant. |
b. | velocity increases. |
c. | velocity decreases. |
d. | the product of velocity and money declines. |
e. | the product of velocity and money remains constant. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: German Hyperinflation
MSC: Bloom's: Analysis | AACSB: Analytic
137. When the German hyperinflation stabilized at the end of 1923,
a. | prices were 100 times higher than they had been before the hyperinflation. |
b. | prices were 10,000 times higher than they had been before the hyperinflation. |
c. | prices were 100,000 times higher than they had been before the hyperinflation. |
d. | prices were 100 billion times higher than they had been before the hyperinflation |
e. | prices were 100 million times higher than they had been before the hyperinflation. |
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: German Hyperinflation
MSC: Bloom's: Knowledge
138. Suppose a German individual, prior to the hyperinflation of 1923, had a cash holding equivalent to $100 million. At the end of the hyperinflation, this amount of cash would have been worth
a. | $100. |
b. | $10 |
c. | $1. |
d. | $0.01 |
e. | $0.001. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: German Hyperinflation
MSC: Bloom's: Analysis | AACSB: Analytic
/
139. For the period 1973 through 1991 the relationship between money and inflation did not hold for all seven of the largest developed countries.
Basic
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Money and Inflation
MSC: Bloom's: Knowledge
140. During the 1990s the quantity equation was able to explain variations in the rate of inflation for the seven largest developed economies.
Basic
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Money and Inflation
MSC: Bloom's: Knowledge
141. The hyperinflation episodes in Brazil and Chile are evidence of the correlation between money supply and prices.
Basic
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Hyperinflation
MSC: Bloom's: Knowledge
142. Hyperinflation has not occurred since the German hyperinflation of 1923.
Moderate
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Hyperinflation
MSC: Bloom's: Analysis | AACSB: Analytic
Short Answer
143. According to the text, during the 1990s the quantity equation was unable to explain variations in the rate of inflation among the seven largest developed economies. Does this imply that the quantity equation is unable to explain variations in the rate of inflation?
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Money and Inflation
MSC: Bloom's: Analysis | AACSB: Analytic
144. What is the most common reason for hyperinflation?
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Hyperinflation
MSC: Bloom's: Knowledge | AACSB: Analytic
145. Are hyperinflations only the result of large increases in the rate of money growth? Explain.
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Hyperinflation
MSC: Bloom's: Analysis | AACSB: Analytic
Exhibit 22-4
146. According to the data in Exhibit 22-4, what was real GDP in 1978?
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: Quantity Equation
MSC: Bloom's: Analysis | AACSB: Analytic
Exhibit 22-5
147. According to the data in Exhibit 22-5, what was the price level in 1973?
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: Quantity Equation
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
148. Many of the current controversies about money pertain to
a. | the three functions of money. |
b. | the money multiplier. |
c. | the short-run effect the Fed has on real GDP. |
d. | the ability of the Fed to control the monetary base. |
e. | the long-run effect money has on inflation. |
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Controversies about Money
MSC: Bloom's: Knowledge
/
149. In general, there is much disagreement among economists about the technical ability of the central bank to control the money supply.
Basic
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Controversies about Money
MSC: Bloom's: Knowledge
Short Answer
150. What do the current controversies about money pertain to?
OBJ: factual
SEC: 3. Money Growth and Inflation
TOP: Controversies about Money
MSC: Bloom's: Knowledge
151. Which of the following are money, and which are not? Explain.
(A) | A debit card |
(B) | A person's net worth |
(C) | Funds in a savings account |
(D) | A Susan B. Anthony dollar |
(A) | If we limit the definition of money to things included in the monetary aggregates, then a debit card is not money. However, some students may reasonably argue that a debit card account is money because transactions using a debit card draw on a checkable deposit account. |
(B) | This is not money because money and wealth are not the same. |
(C) | This is money because savings accounts are part of the M2 money supply. |
(D) | This is money because a dollar coin is counted as currency. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: What Is Money?
MSC: Bloom's: Analysis | AACSB: Analytic
152. State whether each of the following statements is or Briefly explain your answers.
(A) | The larger the fraction of any deposit a bank can lend out, the smaller the money multiplier. |
(B) | The Federal Reserve increases reserves by buying government bonds. |
(C) | It is possible for one type of money to be a unit of account and another type of money to be a medium of exchange. |
(D) | When commodity money is the only type of money, there can never be inflation. |
(A) | False. The larger the fraction of deposits that can be lent out, the more funds there will be available for financial intermediation. Hence, the money multiplier will be larger. |
(B) | True. The Fed's purchase of government bonds increases bank reserves through the financial intermediation process. |
(C) | True. In countries with high inflation, it is not uncommon for prices to be listed in a stable currency such as dollars or German marks (unit of account) but transactions to occur in the domestic currency (medium of exchange). |
(D) | False. Inflation can occur if there is an increase in the supply of commodity money. For example, the free silver movement in this country was about adopting a bimetallic currency to inflate agricultural prices. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: Creating Money
MSC: Bloom's: Analysis | AACSB: Analytic
153. Answer or and explain.
(A) | Although credit cards are not included in the money supply, credit cards linked to your checking account are included in the money supply because of the link to your checking deposits. |
(B) | Although credit cards are not included in the money supply, the checks the credit card company sends you are included in the money supply, for the same reason that checking deposits are included in the money supply. |
(A) | False. The fact that your credit card doubles as an ATM card does not make it money. The credit card in this case would not count for the same reason that checks in a checkbook do not count as money. The check in your checkbook or the credit card linked to your checking account is just a means of showing that you have funds in the bank that will be turned over to the store when you make your purchase. |
(B) | False. Checks are not counted in the money supply. The checks linked to your credit card are not counted either because credit cards are not part of the money supply. They are a method of deferring payment. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: What Is Money?
MSC: Bloom's: Analysis | AACSB: Analytic
154. Suppose the balance sheet for Bank ABC is as given below, where numbers are in thousands of dollars. Assume that reserves are 10 percent of deposits and that people hold no currency.
(A) | Suppose the Federal Reserve sells $20,000 worth of government bonds to Joe, a private citizen, and Joe writes a check to the Fed from his checking account at Bank ABC. Show how Joe's purchase changes the balance sheet above. |
(B) | Is Bank ABC meeting its reserve requirements? Explain. |
(C) | If bonds are fixed, what has to happen to loans? Explain. |
(D) | What happens to the money supply in the economy as a result of Joe's purchase? |
(A) |
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(B) | No. Reserves need to be 10 percent of deposits, or .10 1,980 = 198. |
(C) | Loans must fall by 18. When loans are paid back, reserves go up. As loans are paid back, deposits somewhere else in the banking system will fall, causing a chain effect. |
(D) | Reserves changed by 20, so the total change in deposits is 20 (1/.1) = 200, or $200,000. The money supply falls by $200,000. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: Financial Intermediation
MSC: Bloom's: Analysis | AACSB: Analytic
155. Fill out the following table using the quantity equation:
Year | Quantity of M2 ($ billions) | Velocity | Real GDP (billions of 2009 $) | Price Level (GDP Deflator, 2009=1.0) |
2006 | 7,035 | 14,614 | 0.95 | |
2007 | 7,436 | 14,874 | 0.97 | |
2008 | 8,157 | 14,830 | 0.99 | |
2009 | 8,461 | 14,419 | 1.00 | |
2010 | 8,767 | 14,784 | 1.01 | |
2011 | 9,630 | 15,021 | 1.03 | |
2012 | 10,426 | 15,355 | 1.05 | |
2013 | 10,994 | 15,612 | 1.07 | |
2014 | 11,648 | 15,982 | 1.09 |
(A) | Calculate the growth rate for each of the four variables between 2006 and 2007. |
(B) | Calculate nominal GDP for 2006 and 2007, and then calculate the growth rate of nominal GDP between 2006 and 2007. Compare this result with the sum of the growth rates of real GDP and the price level between those two years. |
(C) | The quantity equation in growth rates can be written as Growth in M + growth in V = growth in GDP + growth in P. Does the growth-rate form of the quantity equation work for the period from 2006 through 2007? |
(D) | Compare the velocity in 2007 with the velocity in 2008. Is this surprising? Explain. |
(A) |
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(B) |
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From answer (A), the two calculations for the percentage in nominal GDP are the same as 4.5%. | |||||||||||||||||||||||||||||||||||||||||||||||||||
(C) | Yes. | ||||||||||||||||||||||||||||||||||||||||||||||||||
(D) | The decline in velocity is not surprising because a recession began at the end of 2007. |
OBJ: conceptual
SEC: 3. Money Growth and Inflation
TOP: The Quantity Equation
MSC: Bloom's: Application | AACSB: Analytic