Economics ch14

Total Word Count: 2631
   Send article as PDF   

Your roommate argues that he can think of no better situation than living in a deflationary
economy, as prices of goods and services would continuously fall. You disagree and argue that
during a deflation, people can be made worse off because
A) the purchasing power of people’ʹs incomes would increase.
B) the purchasing power of the currency would decrease.
C) the value of the real interest rate will drop below the nominal interest rate.
D) borrowers will have to pay increasing amounts in real terms over time.

d

In economics, money is defined as
A) the total value of one’ʹs assets in current prices.
B) the total value of one’ʹs assets minus the total value of one’ʹs debts, in current prices.
C) the total amount of salary, interest, and rental income earned during a year.
D) any asset people generally accept in exchange for goods and services.

d

Economies where goods and services are traded directly for other goods and services are called
________ economies.
A) trade
B) barter
C) direct
D) seigniorage

b

The major shortcoming of a barter economy is
A) the requirement of a double coincidence of wants.
B) the requirement of specialization and exchange.
C) that goods and services are not traded.
D) that money loses value from inflation

a

Commodity money
A) has value independent of its use as money.
B) has little to no value independent of its use as money.
C) is backed by a valuable commodity such as gold.
D) can be used to purchase commodities, but not services.

a

Silver is an example of a
A) commodity money.
B) barter money.
C) fiat money.
D) representative money.

a

Which of the following is one of the most important benefits of money in an economy?
A) Money allows for the exchange of goods and services.
B) Money allows for the accumulation of wealth.
C) Money makes exchange easier, leading to more specialization and higher productivity.
D) Money encourages people to produce all of their own goods (self-‐‑sufficiency) and therefore
increases economic stability

c

In an economy with ________, there are more prices than in an economy with ________.
A) barter; money
B) money; barter
C) fiat money; commodity money
D) fiat money; barter

a

Which of the following functions of money would be violated if inflation were high?
A) unit of account
B) store of value
C) certificate of gold
D) medium of exchange

b

Which of the following assets is most liquid?
A) money
B) bond
C) savings account
D) stock

a

Fiat money has
A) little to no intrinsic value but is backed by the quantity of gold held by the central bank.
B) little to no intrinsic value and is authorized by the central bank or governmental body.
C) value, because it can be redeemed for gold by the central bank.
D) a great intrinsic value that is independent of its use as money.

b

Money is
A) an asset that people are willing to accept in exchange for goods and services.
B) a liability that people are willing to accept in exchange for goods and services.
C) the income one earns over a period of time.
D) one’ʹs assets net of one’ʹs liabilities at any point in time.

a

Commodity money is a good
A) used as money that has no secondary use.
B) that is designated as money by law.
C) used as money that also has value independent of its use as money.
D) used as money that has no intrinsic value.

c

The most liquid measure of money supply is
A) M0.
B) M1.
C) M2.
D) M3.

b

The M1 measure of the money supply equals
A) paper money plus coins in circulation.
B) currency plus checking account balances.
C) currency plus checking account balances plus traveler’ʹs checks.
D) currency plus checking account balances plus traveler’ʹs checks plus savings account balances.

c

The Federal Reserve’ʹs narrowest definition of the money supply is
A) M0.
B) M1.
C) M2.
D) M3.

b

The largest proportion of M1 is made up of
A) currency.
B) checking account deposits.
C) traveler’ʹs checks.
D) savings account deposits.
E) time deposits.

a

Economists estimate that ________ of U.S. currency is outside the United States and held
primarily by ________.
A) over half; households and firms in countries where there is little confidence in the local
currency
B) over half; foreign banks and foreign governments
C) less than one quarter; households and firms in countries where there is little confidence in the
local currency
D) less than one quarter; foreign banks and foreign governments

a

Which of the following is not counted in M1?
A) checking account balances
B) credit card balances
C) coins in circulation
D) currency in circulation
E) traveler’ʹs check balances

b

Money’ʹs most narrow definition is based on its function as a
A) store of value.
B) unit of account.
C) standard of deferred payment.
D) medium of exchange.
E) standard of barter.

d

The M2 measure of the money supply equals
A) savings account balances plus small-‐‑denomination time deposits plus traveler’ʹs checks.
B) savings account balances plus small-‐‑denomination time deposits plus noninstitutional money
market fund shares.
C) M1 plus savings account balances plus small-‐‑denomination time deposits.
D) M1 plus savings account balances plus small-‐‑denomination time deposits plus
noninstitutional money market fund shares.

d

If you liquidate $3,000 of your mutual fund and transfer the funds to your checking account,
then initially, M1 will ________ and M2 will ________.
A) not change; decrease
B) increase; decrease
C) increase; not change
D) not change; not change

c

Credit card balances are
A) part of M1.
B) part of M2.
C) part of M3.
D) not part of the money supply.

d

The major assets on a bank’ʹs balance sheet are its
A) checking and savings account deposits.
B) loans, and checking and savings account deposits.
C) reserves, loans, and holdings of securities.
D) reserves, checking and savings account deposits.
E) reserves, loans, and checking account deposits.

c

The largest liability on the balance sheet of most banks is its
A) loans.
B) holdings of securities.
C) deposits with the Federal Reserve.
D) checking account and savings account deposits of its customers.
E) vault cash.

d

A bank will consider a car loan to a customer ________ and a customer’ʹs checking account to
be ________.
A) a liability; an asset
B) an asset; a liability
C) a liability; a liability
D) an asset; an asset
E) an asset; net worth

b

Bank reserves include
A) vault cash and deposits with the Federal Reserve.
B) loans to bank customers and deposits with the Federal Reserve.
C) vault cash and loans to bank customers.
D) customer checking accounts and vault cash.
E) deposits with the Federal Reserve and holdings of securities.

a

The required reserves of a bank equal its ________ the required reserve ratio.
A) deposits divided by
B) deposits multiplied by
C) loans divided by
D) loans multiplied by

b

Banks can make additional loans when required reserves are
A) greater than total reserves.
B) less than total reserves.
C) less than total deposits.
D) less than total loans.

b

Suppose the required reserve ratio is 20 percent. If banks are conservative and choose not to
loan all of their excess reserves, the real-‐‑world deposit multiplier is
A) less than 5.
B) equal to 5.
C) greater than 5.
D) equal to 20.

a

Which of the following best describes how banks create money?
A) Banks charge higher interest rates on loans than they pay on deposits.
B) Banks charge fees for providing financial advice.
C) Banks create checking account deposits when making loans from excess reserves.
D) Banks make loans from reserves.

c

The more excess reserves banks choose to keep,
A) the larger the deposit multiplier.
B) the smaller the deposit multiplier.
C) the higher the required reserve ratio.
D) the lower the required reserve ratio.

b

A bank’ʹs liabilities are
A) things owned by or owed to the bank.
B) things the bank owes to someone else.
C) a measure of the bank’ʹs net losses.
D) included as part of the bank’ʹs reserves.

b

Suppose there is a bank panic. Which of the following would not be a consequence of this bank
panic?
A) Bank total reserves would decrease.
B) Required reserves would increase.
C) Bank checking account balances would decrease.
D) Individual banks would have to shrink the value of loans they made.
E) The economy would likely enter into a recession

b

Banks keep ________ of checking deposits as reserves because on a typical day withdrawals
________ deposits.
A) more than 100%; are much greater than
B) exactly 100%; are about the same as
C) less than 100%; are about the same as
D) exactly 100%; are much greater than
E) less than 100%; are much greater than

c

The Federal Reserve was established in 1913 to
A) prevent inflation by decreasing the money supply.
B) stimulate the economy by increasing bank reserves.
C) stop bank panics by acting as a lender of last resort.
D) prevent bad loans by requiring banks to hold reserves.

c

If the central bank can act as a lender of last resort during a banking panic, banks can
A) call in their loans to their customers and eventually restore the public’ʹs faith in the banking
system.
B) satisfy customer withdrawal needs and eventually restore the public’ʹs faith in the banking
system.
C) borrow more and more money from the central bank, and this will lower its reserves and
decrease the public’ʹs faith in the banking system.
D) encourage the public to borrow directly from the central bank, and this will worsen the
banking panic.

b

The seven members of the Board of Governors of the Federal Reserve are appointed by
A) Congress.
B) the President.
C) the Governors of the States.
D) leaders in the banking industry.
E) the Treasury Department.

b

The seven members of the Board of Governors of the Federal Reserve are appointed by
A) Congress.
B) the President.
C) the Governors of the States.
D) leaders in the banking industry.
E) the Treasury Department

b

Which of the following is not a function of the Federal Reserve System, or the "ʺFed"ʺ?
A) acting as a lender of last resort
B) acting as a banker’ʹs bank
C) performing check clearing services
D) insuring deposits in the banking system
E) taking actions to control the money supply

d

In response to the destructive bank panics of the Great Depression, future bank panics are
designed to be prevented by
A) the Federal Reserve System acting as a lender of last resort.
B) the Federal Reserve System conducting open market operations.
C) the establishment of the Federal Deposit Insurance Corporation.
D) establishing a fractional reserve system of banking.
E) increasing the required reserve ratio to 100%.

c

If people speculate that a run on one bank will cause a run on all banks in the financial system,
and this speculation proves accurate, then the financial system would experience what is known
as a
A) commodity crisis.
B) securitization meltdown.
C) bank panic.
D) institutional death spiral.

c

A central bank like the Federal Reserve in the United States can help banks survive a bank run
by
A) printing money.
B) acting as a lender of last resort.
C) raising the discount rate.
D) increasing the required reserve ratio.

b

The three main monetary policy tools used by the Federal Reserve to manage the money
supply are
A) interest rates, tax rates, and government spending.
B) tax rates, government purchases, and government transfer payments.
C) open market operations, discount policy, and reserve requirements.
D) open market operations, the exchange rate of the dollar against foreign currencies, and
government purchases.

c

The main tool that the Federal Reserve uses to conduct monetary policy is
A) open market operations.
B) discount policy.
C) setting reserve requirements.
D) acting as the lender of last resort.
E) check clearing.

a

The purchase of Treasury securities by the Federal Reserve will, in general,
A) not change the money supply.
B) not change the quantity of reserves held by banks.
C) increase the quantity of reserves held by banks.
D) decrease the quantity of reserves held by banks.

c

The quantity equation states that the
A) money supply divided by the velocity of money equals the price level divided by real output.
B) money supply times the velocity of money equals the price level times real output.
C) money supply times the price level equals real output divided by the velocity of money.
D) money supply times the price level equals real output times the velocity of money.

b

Using the quantity equation, if the velocity of money grows at 5 percent, the money supply
grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be
A) 19 percent.
B) 15 percent.
C) 11 percent.
D) 6 percent.

c

The quantity theory of money predicts that, in the long run, inflation results from the
A) velocity of money growing at a faster rate than real GDP.
B) velocity of money growing at a lower rate than real GDP.
C) money supply growing at a lower rate than real GDP.
D) money supply growing at a faster rate than real GDP.

d

The quantity theory of money was derived from the quantity equation by asserting that
A) real output was fixed.
B) the money supply was fixed.
C) the velocity of money was fixed.
D) the velocity of money was zero.

c

According to the quantity theory of money, the inflation rate equals
A) the money supply minus real output.
B) the growth rate of the money supply minus the growth rate of real output.
C) real output minus the money supply.
D) the growth rate of real output minus the growth rate of the money supply.

b

According to the quantity theory of money, if the money supply grows at 20 percent and real
GDP grows at 5 percent, then the inflation rate will be
A) 15 percent.
B) 20 percent.
C) 25 percent.
D) 100 percent.

a

According to the quantity theory of money, deflation will occur if the
A) money supply is less than real GDP.
B) money supply is more than real GDP.
C) money supply grows at a slower rate than real GDP.
D) money supply grows at a faster rate than real GDP.

c

Hyperinflation can be caused by
A) the government selling bonds to the central bank.
B) the central bank selling bonds to the public.
C) the government selling bonds to the public.
D) the central bank selling bonds to the government.

a

In 1980, one Zimbabwean dollar was worth 1.47 U.S. dollars. By the end of 2008, the exchange
rate was one U.S. dollar to 2 billion Zimbabwean dollars. When an economy experiences rapid
increases in the price level such as what occurred in Zimbabwe, the economy is said to experience
A) stagflation.
B) deflation.
C) inflation.
D) hyperinflation.

d

There is a strong link between changes in the money supply and inflation
A) in both the short run and the long run.
B) in neither the short run nor the long run.
C) in the short run, but not in the long run.
D) in the long run, but not in the short run.

d

The quantity theory of money seeks to explain the connection between money and
A) interest rates.
B) unemployment.
C) output.
D) prices.

d

The quantity equation states that
A) the money supply (M) divided by the velocity of money (V) equals the price level (P) divided
by real output (Y), i.e., M/V = P/Y.
B) M × V = P × Y.
C) M + V = P + Y.
D) M -‐‑ V = P -‐‑ Y.

b

Scroll to Top