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Quiz Sample 3 PLEASE NOTE--I MADE NO EFFORT TO SORT THIS TO MATCH WHAT WE'VE COVERED IN CLASS. IF WE DIDN'T COVER IT, IT WON'T SHOW UP ON MONDAY'S QUIZ. I JUST PULLED STRAIGHT FROM THE TEST BANK. Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 1. Money a. is more efficient than barter. b. makes trades easier. c. allows greater specialization. d. All of the above are correct. 2. Which of the following best illustrates the unit of account function of money? a. You list prices for candy sold on your Web site, www.sweettooth.com, in dollars. b. You pay for your WNBA tickets with dollars. c. You keep $10 in your backpack for emergencies. d. None of the above is correct. 3. Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate? a. store of value b. medium of exchange c. unit of account d. None of the above is correct. 4. Which of the following functions of money is also a common function of most other financial assets? a. a unit of account b. a store of value c. medium of exchange d. None of the above is correct. 5. Which of the following defer payments? a. credit cards and debit cards b. neither credit cards or debit cards c. credit cards but not debit cards d. debit cards but not credit cards 6. When the Fed conducts open-market purchases, a. it buys Treasury securities, which increases the money supply. b. it buys Treasury securities, which decreases the money supply. c. banks buy Treasury securities from Fed, which increases the money supply. d. banks buy Treasury securities from the Fed, which decreases the money supply. 7. There is a a. short-run tradeoff between inflation and unemployment. b. short-run tradeoff between an increase in the money supply and inflation. c. long-run tradeoff between inflation and unemployment. d. long-run tradeoff between an increase in the money supply and inflation. 8. Suppose that the reserve ratio is 10 percent and that a bank has $2,000 in deposits. Its reserves are a. $20. b. $200. c. $1,880. ____ ____ ____ ____ ____ ____ ____ d. $1,800. ____ 9. Suppose a bank has a 10 percent reserve requirement, $5,000 in deposits, and has loaned out all it can given the reserve requirement. a. It has $50 in reserves and $4,950 in loans. b. It has $500 in reserves and $4,500 in loans. c. It has $555 in reserves and $4,445 in loans. d. None of the above is correct. ____ 10. Suppose a bank has $200,000 in deposits and $190,000 in loans. It has loaned out all it can. It has a reserve ratio of a. 2.5 percent. b. 5 percent. c. 9.5 percent. d. 10 percent. Use the balance sheet for the following questions. Table 29-3 Assets Reserves Loans Last Bank of Cedar Bend Liabilities $25,000 Deposits $125,000 $150,000 ____ 11. Refer to Table 29-3. If the reserve requirement is 10 percent, then this bank a. is in a position to make a new loan of $15,000. b. has less reserves than required. c. has excess reserves of less than $15,000. d. None of the above is correct. ____ 12. Refer to Table 29-3. If the reserve requirement is 20 percent, this bank a. has $10,000 of excess reserves. b. needs $10,000 more reserves to meet its reserve requirements. c. needs $5,000 more reserves to meet its reserve requirements. d. just meets its reserve requirement. Table 29-5 Bank of Springfield Liabilities $12,000 Deposits $228,000 Assets Reserves Loans $240,000 ____ 13. Refer to Figure 29-5. If all banks hold only the required 4 percent of deposits as reserves, then what is the money multiplier? a. 4 b. 16 c. 20 d. 25 ____ 14. If a bank uses $100 of excess reserves to make a new loan when the reserve ratio is 20 percent, this action by itself initially makes the money supply a. and wealth increase by $100. ____ 15. ____ 16. ____ 17. ____ 18. ____ 19. ____ 20. ____ 21. ____ 22. ____ 23. b. and wealth decrease by $100. c. increase by $100 while wealth does not change. d. decrease by $100 while wealth decreases by $100. As the reserve ratio increases, the money multiplier a. increases. b. does not change. c. decreases. d. could do any of the above. If the central bank in some country lowered the reserve ratio, the money multiplier a. would increase. b. would not change. c. would decrease. d. could do any of the above. If the reserve ratio is 5 percent, $1,000 of additional reserves can create a. $200 of new money. b. $2,000 of new money. c. $20,000 of new money. d. None of the above is correct. If the reserve ratio is 10 percent, $1,000 of additional reserves can create a. $100 of new money. b. $1,000 of new money. c. $10,000 of new money. d. None of the above is correct. In Smallville, the money supply is $8 million and reserves are $1 million. Assuming that people hold only deposits and no currency, and that banks hold only required reserves, the required reserve ratio is a. 14% b. 12.5% c. 8% d. None of the above is correct. Which of the following lists two things that both decrease the money supply? a. raise the discount rate, make open market purchases b. raise the discount rate, make open market sales c. lower the discount rate, make open market purchases d. lower the discount rate, make open market sales Which of the following actions would have the combined effect of raising the money supply and raising the money multiplier? a. The Fed sells bonds and raises the reserve requirement ratio. b. The Fed sells bonds and lowers the reserve requirement ratio. c. The Fed buys bonds and raises the reserve requirement ratio. d. The Fed buys bonds and lowers the reserve requirement ratio. If the Fed makes open market purchases of bonds, a. the money supply increases by more than the amount of bonds purchased. b. the money supply increases by less than the amount of bonds purchased. c. the money supply decreases by more than the amount of bonds purchased. d. the money supply decreases by less than the amount of bonds purchased. Reserve requirements are regulations concerning a. the amount banks are allowed to borrow from the Fed. b. the amount of reserves banks must hold against deposits. c. reserves banks must hold based on the number and type of loans they make. ____ 24. ____ 25. ____ 26. ____ 27. ____ 28. ____ 29. ____ 30. ____ 31. ____ 32. d. the interest rate at which banks can borrow from the Fed. If the discount rate is lowered, banks choose to borrow a. less from the Fed so reserves increase. b. less from the Fed so reserves decrease. c. more from the Fed so reserves increase. d. more from the Fed so reserves decrease. When the Fed decreases the discount rate, banks will a. borrow more from the Fed and lend more to the public. The money supply increases. b. borrow more from the Fed and lend less to the public. The money supply decreases. c. borrow less from the Fed and lend more to the public. The money supply increases. d. borrow less from the Fed and lend less to the public. The money supply decreases. Which of the following is correct? a. The Fed can control the money supply precisely. b. The amount of money in the economy does not depend on the behavior of depositors. c. The amount of money in the economy depends in part on the behavior of banks. d. None of the above is correct. The money supply would fall if a. households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively more excess reserves and make fewer loans. b. households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively fewer excess reserves and make more loans. c. households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively more excess reserves and make fewer loans. d. households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves and make more loans. The Federal Deposit Insurance Corporation a. protects depositors in the event of bank failures. b. has become insolvent in recent years due to a large number of bank failures. c. is part of the Federal Reserve System. d. in practice has seldom been of much use. Deflation a. increases the ability to pay debts and raises the value of money. b. increases the ability to pay debts and lowers the value of money. c. reduces the ability to pay debts and raises the value of money. d. reduces the ability to pay debts and lowers the value of money. Which of the following concerning the history of U.S. inflation is not correct? a. Prices rose at an average annual rate of about 4 percent over the last 70 years. b. There was about a 16-fold increase in the price level over the last 70 years. c. Inflation in the 1970s was below the average over the last 70 years. d. During it's history the United States has experienced periods of deflation. When the price level rises, the number of dollars needed to buy a representative basket of goods a. increases, and so the value of money rises. b. increases, and so the value of money falls. c. decreases, and so the value of money rises. d. decreases, and so the value of money falls Which of the following is correct? a. If the Fed purchases bonds in the open market, then the money supply curve shifts right. A change in the price level does not shift the money supply curve. b. If the Fed sells bonds in the open market, then the money supply curve shifts right. A change in the price level does not shift the money supply curve. c. If the Fed purchases bonds, then the money supply curve shifts right. An increase in the price level shifts the money supply curve right. d. If the Fed sells bonds, then the money supply curve shifts right. A decrease in the price level shifts the money supply curve right. ____ 33. Consider the money market drawn with the value of money on the vertical axis. If money demand is unchanged and the price level rises, then a. the money supply must have increased, perhaps because the Fed bought bonds. b. the money supply must have increased, perhaps because the Fed sold bonds. c. the money supply must have decreased, perhaps because the Fed bought bonds. d. the money supply must have decreased, perhaps because the Fed sold bonds. Use the figure below for the following questions. Figure 30-1 ____ 34. Refer to Figure 30-1. If the current money supply is located at MS1, a. there is no excess supply or excess demand if the value of money is 2. b. the equilibrium is at point C. c. there is an excess supply of money if the value of money is 1. d. None of the above is correct. ____ 35. You put money in the bank. The increase in the dollar value of your savings a. and the change in the number of goods you can buy with your savings are both nominal variables. b. and the change in the number of goods you can buy with your savings are both real variables. c. is a nominal variable, but the change in the number goods you can buy with your savings is a real variable. d. is a real variable, but the change in the number of goods you buy with your savings is a nominal variable. ____ 36. According to the classical dichotomy, the when money supply doubles, which of the following also double? a. the price level and nominal wages b. the price level, but not the nominal wage c. the nominal wage, but not the price level d. neither the nominal wage nor the price level ____ 37. The principle of monetary neutrality implies that an increase in the money supply will a. increase real GDP and the price level. b. increase real GDP, but not the price level. ____ 38. ____ 39. ____ 40. ____ 41. ____ 42. ____ 43. ____ 44. ____ 45. ____ 46. c. increase the price level, but not real GDP. d. increase neither the price level nor real GDP. According to the assumptions of quantity theory, if the money supply increases 5% then a. nominal and real GDP would rise by 5%. b. nominal GDP would rise by 5%; real GDP would be unchanged. c. nominal GDP would be unchanged; real GDP would rise by 5%. d. neither nominal GDP nor real GDP would change. If real output in an economy is 1000 goods per year, the money supply is $300, and each dollar is spent an average of 3 times per year, then according to the quantity equation, the average price of goods is a. $0.90. b. $1.00. c. $1.11. d. $1.33. Printing money to finance government expenditures a. causes the value of money to rise. b. imposes a tax on everyone who holds money. c. is the principle method by which the U.S. government finances its expenditures. d. None of the above is correct. Suppose that the United States unexpectedly decided to pay off its debt by printing new money. Which of the following would happen? a. People who held money would feel poorer. b. Prices would rise. c. People who had lent money at a fixed interest rate would feel poorer. d. All of the above are correct. If the nominal interest rate is 5 percent and there is a deflation rate of 2 percent, what is the real interest rate? a. 7 percent b. 5 percent c. 3 percent d. 3/5 percent If the real interest rate is 8 percent and there is a deflation rate of 4 percent, what is the nominal interest rate? a. 1/2 percent b. 2 percent c. 4 percent d. 8 percent Whitney puts money in a savings account at her bank earning 3.5 percent. One year later she takes her money out and notes that while her money was earning interest, prices rose 1.5 percent. Whitney earned a nominal interest rate of a. 3.5 percent and a real interest rate of 5 percent. b. 3.5 percent and a real interest rate of 2 percent. c. 5 percent and a real interest rate of 3.5 percent d. 5 percent and a real interest rate of 2 percent Which of the following can a country increase in the long run by increasing its money growth rate? a. the nominal wage divided by the price level b. real output c. real interest rates d. None of the above is correct. You buy a stock and its price rises less than the price level. Before taxes you made a. a nominal and real gain, and you pay taxes on the nominal gain. b. a nominal gain and a real loss, and you don't have to pay taxes since you gained less than ____ 47. ____ 48. ____ 49. ____ 50. the change in the price level. c. a nominal and a real gain, and you pay taxes on the real gain. d. a nominal gain and a real loss, and you pay taxes on the nominal gain. Given a nominal interest rate of 6 percent, in which case would you earn the lowest after-tax real rate of interest? a. Inflation is 4 percent; the tax rate is 25 percent. b. Inflation is 3 percent; the tax rate is 20 percent. c. Inflation is 2 percent; the tax rate is 15 percent. d. The after-tax real interest rate is the same for all of the above. Marta lends money at a fixed interest rate and then inflation rises more than expected. The real interest rate she earns is a. higher than she'd expected, and the real value of the loan rises. b. higher than she'd expected, and the real value of the loan falls. c. lower than she'd expected, and the real value of the loan rises. d. lower then she'd expected, and the real value of the loan falls. Between 1880 and 1886 prices that were a. lower than expected transferred wealth from creditors to debtors. b. lower than expected transferred wealth from debtors to creditors. c. higher than expected transferred wealth from creditors to debtors. d. higher than expected transferred wealth from debtors to creditors. Which of the following is accurate? a. Monetary policy is neutral in both the short run and the long run. b. Though monetary policy is neutral in the long run, it may have effects on real variables in the short run. c. Monetary policy has profound effects on real variables in both the short run and the long run. d. Monetary policy has profound effects on real variables in the long run, but is neutral in the short run. Short Answer 51. What is the difference between money and wealth? 52. Compare the Board of Governors and the Federal Open Market Committee. 53. What makes the New York Federal Reserve regional bank so important? 54. If the reserve ratio is 20 percent, how much money can be created from $100 of reserves? Show your work. 55. What is the inflation tax, and how might it explain the creation of inflation by a central bank? 56. Suppose that velocity and output are constant and that the quantity theory and the Fisher effect both hold. What happens to inflation, real interest rates, and nominal interest rates when the money supply growth rate increases from 5 percent to 10 percent? Sample Quiz 5 Answer Section MULTIPLE CHOICE 1. ANS: MSC: 2. ANS: MSC: 3. ANS: MSC: 4. ANS: MSC: 5. ANS: MSC: 6. ANS: MSC: 7. ANS: MSC: 8. ANS: MSC: 9. ANS: MSC: 10. ANS: MSC: 11. ANS: MSC: 12. ANS: MSC: 13. ANS: MSC: 14. ANS: MSC: 15. ANS: MSC: 16. ANS: MSC: 17. ANS: MSC: 18. ANS: MSC: 19. ANS: MSC: 20. ANS: MSC: 21. ANS: MSC: 22. Register to View AnswerDefinitional A Interpretive A Interpretive B Definitional C Definitional A Definitional A Definitional B Applicative B Applicative B Applicative C Applicative C Applicative D Applicative C Definitional C Applicative A Applicative C Applicative C Applicative B Analytical B Definitional D Analytical A DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 2 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 2 DIF: 2 DIF: 2 DIF: 2 REF: 29-1 REF: 29-1 REF: 29-1 REF: 29-1 REF: 29-1 REF: 29-1 REF: 29-2 REF: 29-3 REF: 29-3 REF: 29-3 REF: 29-3 REF: 29-3 REF: 29-2 REF: 29-3 REF: 29-3 REF: 29-3 REF: 29-3 REF: 29-3 REF: 29-3 REF: 29-3 REF: 29-3 REF: 29-3 TOP: Money TOP: Unit of account TOP: Store of value TOP: Store of value TOP: Credit cards, Debit cards TOP: Open-market operations TOP: Inflation, Unemployment TOP: Reserves TOP: Reserves TOP: Reserves TOP: Reserves TOP: Reserves TOP: Money multiplier TOP: Money multiplier TOP: Money multiplier TOP: Money multiplier TOP: Money multiplier TOP: Money multiplier TOP: Money multiplier TOP: Monetary tools TOP: Monetary tools TOP: Open-market operations MSC: 23. ANS: MSC: 24. ANS: MSC: 25. ANS: MSC: 26. ANS: MSC: 27. ANS: MSC: 28. ANS: TOP: 29. ANS: MSC: 30. ANS: MSC: 31. ANS: MSC: 32. ANS: MSC: 33. ANS: MSC: 34. ANS: MSC: 35. ANS: TOP: 36. ANS: MSC: 37. ANS: MSC: 38. ANS: MSC: 39. ANS: MSC: 40. ANS: MSC: 41. ANS: MSC: 42. ANS: TOP: 43. ANS: TOP: 44. ANS: TOP: 45. ANS: MSC: 46. ANS: Analytical B DIF: 1 REF: 29-3 Definitional C DIF: 1 REF: 29-3 Definitional A DIF: 2 REF: 29-3 Interpretive C DIF: 1 REF: 29-3 Definitional A DIF: 2 REF: 29-3 Analytical A DIF: 1 REF: 29-3 Federal Deposit Insurance Corporation C DIF: 2 REF: 30-1 Interpretive C DIF: 1 REF: 30-1 Definitional B DIF: 1 REF: 30-1 Definitional A DIF: 2 REF: 30-1 Analytical A DIF: 2 REF: 30-1 Analytical A DIF: 1 REF: 30-1 Applicative C DIF: 1 REF: 30-1 Nominal interest rate, Real interest rate A DIF: 1 REF: 30-1 Definitional C DIF: 1 REF: 30-1 Definitional B DIF: 2 REF: 30-1 Interpretive A DIF: 1 REF: 30-1 Applicative B DIF: 1 REF: 30-1 Definitional D DIF: 1 REF: 30-1 Applicative A DIF: 2 REF: 30-1 Nominal interest rate, Real interest rate, Deflation C DIF: 2 REF: 30-1 Nominal interest rate, Real interest rate, Deflation B DIF: 1 REF: 30-1 Nominal interest rate, Real interest rate D DIF: 1 REF: 30-1 Interpretive D DIF: 2 REF: 30-2 TOP: Reserve requirement TOP: Discount rate TOP: Discount rate TOP: Money multiplier TOP: Currency holdings, Excess reserves MSC: Definitional TOP: U.S. inflation TOP: U.S. inflation TOP: Value of money TOP: Money supply TOP: Money market TOP: Money market MSC: Definitional TOP: Classical dichotomy TOP: Monetary neutrality TOP: Quantity theory TOP: Quantity equation TOP: Inflation tax TOP: Inflation costs MSC: Analytical MSC: Analytical MSC: Interpretive TOP: Monetary neutrality TOP: Inflation-induced tax distortions MSC: 47. ANS: MSC: 48. ANS: TOP: 49. ANS: TOP: 50. ANS: MSC: Analytical A DIF: 2 REF: 30-2 Applicative D DIF: 1 REF: 30-2 Redistributional effects of unexpected inflation B DIF: 2 REF: 30-2 Redistributional effects of unexpected inflation B DIF: 1 REF: 30-3 Definitional TOP: After-tax real interest rate MSC: Analytical MSC: Interpretive TOP: Money in the short and long run SHORT ANSWER 51. ANS: Money is defined as the set of assets in the economy that people regularly use to buy goods and services from other people. Wealth includes all assets, both monetary and nonmonetary. DIF: 2 REF: 29-1 TOP: Money, Wealth MSC: Definitional 52. ANS: The Board of Governors runs the Federal Reserve. It has seven members who are appointed by the U.S. president with the advice and consent of the Senate. The voting members of the Federal Open Market Committee include the 7 members of the Board of Governors and 5 of the 12 regional bank presidents, rotated among the 12 regional presidents, but always including the president of the New York Fed. The chair of the BOG also serves as chair of the FOMC. The FOMC meets about every six weeks in Washington, D.C. to discuss the condition of the economy and to consider changes in monetary policy. DIF: 1 REF: 29-2 TOP: Federal Reserve MSC: Definitional 53. ANS: The president of the New York Federal Reserve regional bank is the only regional bank president who is always a voting member of the FOMC, the committee that determines monetary policy. New York is the traditional financial center of the U.S. economy and the New York Federal Reserve Bank conducts all openmarket transactions. DIF: 1 REF: 29-2 MSC: Definitional 54. ANS: (1/.20) $100 = $500. TOP: Federal Reserve DIF: 1 REF: 29-3 TOP: Money multiplier MSC: Applicative 55. ANS: The inflation tax refers to the fact that inflation is a tax on money. When prices rise, the value of money currently held is reduced. Hence, when a government raises revenue by printing money, it obtains resources from households by taxing their money holdings through inflation rather than by sending them a tax bill. In countries where governments are unable or unwilling to raise revenues by raising taxes explicitly, the inflation tax may be an alternative source of revenue. DIF: 1 REF: 30-2 TOP: Inflation tax MSC: Interpretive 56. ANS: Inflation and nominal interest rates each increase by 5 percent points. There is no change in the real interest rate or any other real variable. DIF: 1 REF: 30-1 TOP: Inflation MSC: Analytical ... View Full Document

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