Question 1

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

Accepted Answer

A) the purchasing power of people's 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.

Question 2

Economies where goods and services are traded directly for other goods and services are called ________ economies.

Accepted Answer

A) trade 
B) barter 
C) direct 
D) seigniorage

Question 3

The purchase of Treasury securities by the Federal Reserve will,in general

Accepted Answer

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.

Question 4

If the required reserve ratio is 5 percent,then the simple deposit multiplier is

Accepted Answer

A) 2. 
B) 5. 
C) 10. 
D) 20.

Question 5

During the German hyperinflation of the 1920s,the large increases in the money supply were generated by the German government

Accepted Answer

A) significantly lowering the required reserve ratio to enable German businesses to obtain loans. 
B) significantly raising the required reserve ratio to reduce business loans. 
C) printing large quantities of German marks. 
D) selling large quantities of government bonds to the central bank,the Reichsbank.

Question 6

An increase in the purchasing power of money would not,on average,result in an increase in the purchasing power of people's income because a ________ price level would likely mean ________ wages and salaries.

Accepted Answer

A) rising;falling 
B) rising;rising 
C) falling;falling 
D) falling;rising

Question 7

There is a strong link between changes in the money supply and inflation

Accepted Answer

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.

Question 8

The German Hyperinflation of the early 1920s was caused by

Accepted Answer

A) the German government raising funds for expenditures by selling bonds to the central bank. 
B) an overly aggressive monetary policy implemented to combat a severe recession. 
C) rising oil prices after World War I caused a severe stagflation and hyperinflation. 
D) large deficits resulting from the high levels of war spending and falling taxes.

Question 9

The Federal Open Market Committee consists of the seven members of the ________,the president of the Federal Reserve Bank of New York,and ________.

Accepted Answer

A) Federal Reserve's Board of Governors;four members of the Council of Economic Advisors 
B) Federal Reserve's Board of Governors;four presidents from the other 11 Federal Reserve banks 
C) Council of Economic Advisors;four presidents from the 11 Federal Reserve banks 
D) Council of Economic Advisors;four members of the U.S.Banking Committee

Question 10

If the required reserve ratio (RR)is 20 percent,the simple deposit multiplier is

Accepted Answer

A) 2. 
B) 5. 
C) 10. 
D) 20.

Question 11

An increase in the purchasing power of money need not lead to an increase in the purchasing power of income because the falling price level would likely mean falling wages and salaries.

Accepted Answer

A) True 
 B)False

Question 12

Suppose a transaction changes the balance sheet of Wells Fargo bank as indicated in the following T-account. $$\begin{array} { | c | c | } 
\hline \text { Assets } & \text { Liabilities } \
\hline \text { Reserves } + \$ 1,000 & \text { Deposits } + \$ 1,000 \
\hline
\end{array}$$ At this point,what percentage of the new deposits does Wells Fargo hold in reserves?

Accepted Answer

A) 100 percent 
B) 10 percent 
C) 5 percent 
D) 1 percent

Question 13

The quantity theory of money seeks to explain the connection between money and

Accepted Answer

A) interest rates. 
B) unemployment. 
C) output. 
D) prices.

Question 14

M2 includes M1 plus

Accepted Answer

A) currency in circulation,checking account deposits in banks,and holdings of traveler's checks. 
B) savings account balances,money market deposit accounts in banks,small-denomination time deposits,and noninstitutional money market fund shares. 
C) checking account deposits,large-denomination time deposits,and noninstitutional money market fund shares. 
D) currency in circulation,savings account balances,and small-denomination time deposits.

Question 15

The quantity equation states that

Accepted Answer

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.

Question 16

Fiat money is generally issued by

Accepted Answer

A) private banks. 
B) central banks. 
C) brokerage firms. 
D) major multinational corporations.

Question 17

By making exchange ________,money allows for ________ and higher ________.

Accepted Answer

A) harder;specialization;costs 
B) easier;specialization;productivity 
C) harder;generalization;productivity 
D) easier;specialization;costs

Question 18

Which of the following is a function that money serves?

Accepted Answer

A) medium of exchange 
B) unit of account 
C) store of value 
D) All of the above are correct.

Question 19

To increase the money supply,the Federal Reserve could

Accepted Answer

A) raise the discount rate. 
B) decrease income taxes. 
C) raise the required reserve ratio. 
D) conduct an open market purchase of Treasury securities. 
E) lower transfer payments.

Question 20

Money is

Accepted Answer

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's assets net of one's liabilities at any point in time.

Exam 25: Money,banks,and the Federal Reserve System