Question

Question Points

1. The inflation rate is measured as the percentage change in a price index.

a. True

b. False

2. If the Fed were to unexpectedly increase the money supply, creditors would gain at the expense of debtors.

a. True

b. False

3. Members of the Board of Governors are appointed by the President of the U.S. and confirmed by the U.S. Senate.

a. True

b. False

4. The evidence from hyperinflations indicates that money growth and inflation:

a. are positively related, which is consistent with the quantity theory of money.

b. are positively related, which is not consistent with the quantity theory of money.

c. are not related in a discernible fashion, which is consistent with the quantity theory of money.

d. are not related in a discernible fashion, which is not consistent with the quantity theory of money.

5. The quantity theory of money implies that if output and velocity are constant, then a 50 percent increase in the money supply would lead to less than a 50 percent increase in the price level.

a. True

b. False

6. According to the classical dichotomy, which of the following increases when the money supply increases?

a. The real interest rate

b. Real GDP

c. The real wage

d. None of the choices apply.

7. When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of money:

a. increases, so the quantity of money demanded increases.

b. increases, so the quantity of money demanded decreases.

c. decreases, so the quantity of money demanded decreases.

d. decreases, so the quantity of money demanded increases.

8. 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 of 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.

9. The Federal Reserve:

a. was created in 1913.

b. has more than one specific job to perform.

c. is an example of a central bank.

d. All of the choices apply.

10. Which of the following statements is correct?

a. All items that are included in M1 are included also in M2.

b. All items that are included in M2 are included also in M1.

c. Credit cards are included in both M1 and M2.

d. Savings deposits are included in both M1 and M2.

11. Which of the following is not implied by the quantity equation?

a. If velocity is stable, an increase in the money supply creates a proportional increase in nominal output.

b. If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in the price level.

c. With constant money supply and output, an increase in velocity creates an increase in the price level.

d. With constant money supply and velocity, an increase in output creates a proportional increase in the price level.

12. Assume that banks desire to continue holding the same ratio of excess reserves to deposits. What is the reserve requirement and the reserve ratio for Tazian Banks?

a. 5 percent, 8 percent

b. 4 percent, 8 percent

c. 4 percent, 5 percent

d. None of the choices apply.

13. In a system of 100-percent-reserve banking:

a. banks do not accept deposits.

b. banks do not influence the supply of money.

c. loans are the only asset item for banks.

d. All of the choices apply.

14. In December 1999, people feared that banks might be affected by computer problems as the century changed. Consequently, people wanted to hold relatively more in currency and relatively less in deposits. In anticipation, banks raised their reserve ratios to have enough cash on hand to meet depositors’ demands. These actions by the public:

a. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have sold bonds.

b. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds.

c. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have sold bonds.

d. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds.

15. Inflation induces people to spend more resources maintaining lower money holdings. The costs of doing this are called shoe-leather costs.

a. True

b. False

16. Given a nominal interest rate of 5 percent, in which of the following cases would you earn the highest after-tax real rate of interest?

a. Inflation is 3 percent; the tax rate is 20 percent

b. Inflation is 2 percent; the tax rate is 40 percent

c. Inflation is 1 percent; the tax rate is 60 percent

d. The after-tax real interest rate is the same for all

17. Suppose that banks desire to hold no excess reserves, the reserve requirement is 5 percent, and a bank receives a new deposit of \$1,000. This bank:

a. will increase its required reserve by \$50.

b. will initially see its total reserve increase by \$1,000.

c. will be able to make a new loan of \$950.

d. All of the choices apply.

18. The money supply decreases if the Fed:

a. sells Treasury bonds. The larger the reserve requirement, the larger the decrease will be.

b. sell Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.

c. buys Treasury bonds. The large the reserve requirement, the larger the decrease will be.

d. buys Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.

19. Inflation is costly only if it is unanticipated.

a. True

b. False

20. When prices are falling, economists say that there is:

a. disinflation.

b. deflation.

c. a contraction.

d. an inverted inflation.

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