AP Macro: Edge Ex: Money and the Money Market
M2
-money market funds -small savings accounts -small time deposits
M1
-traveler checks -currency and coins in circulation -checking accounts
Which of the following is NOT a function of money?
A source of intrinsic value
If market interest rates fall, what will likely occur?
Bond prices will rise
Quantity of money demanded moves to the left, what has most likely occurred?
Households or individuals reduced their holdings of money.
Which of the following is an example of using money as a store of value?
Keeping $200 on hand for an emergency
Which of the following is the strictest, and thereby most liquid, monetary aggregate (that is, definition of the money supply)?
M1
Which of the following measures of the money supply is largest?
M2
The United States economy is currently in a natural rate of growth. The money market is currently in equilibrium with an interest rate of 10%. At this interest rate, a quantity of $400 billion is demanded. Assume the Federal Reserve undertakes expansionary monetary policy. What effect will this have on the nominal interest rate in the graph below?
Ms moves to the right
A surplus of money in the money market will be eliminated how?
People buy bonds to reduce cash holdings, bidding up their price and pushing interest rates down
If the demand for money increases in the money market, what will happen to the nominal interest rate, the quantity of money and the price of bonds?
The nominal interest rate increases, the quantity of money remains the same and the price of bonds decreases
When interest rates increase, how is the price of existing bonds affected?
The price decreases.
How do we correctly describe the relationship between bond prices and interest rates?
The price of a bond varies inversely with market interest rates
Which of the following statements correctly describes the relationship between bond prices and interest rates?
The price of a bond varies inversely with market interest rates.
At higher interest rates, people hold less money as an asset. Based on the animation presented, which of the following statements best describes this event?
The quantity of money demanded has decreased from $400 billion to $200 billion
A financial instrument through which a borrower is contracted to pay the principal at a specified interest rate at a specified date in the future is called:
a bond
In the secondary bond market where already issued bonds are exchanged, an increase in the interest rate will lead to:
a decrease in the price of these already issued bonds
Economists illustrate a decrease in the money supply as:
a leftward shift of the vertical money supply curve
When supply and demand are put together on a graph, the point of intersection is called equilibrium. At the equilibrium quantity, the quantity demanded by consumers equals the quantity supplied by producers. If the quantity supplied is greater than the quantity demanded:
a surplus exists.
People's attitudes about the trade-off between risk and return affect how much of their wealth people hold as money. Heightened fear will lead to:
an increase in the demand for money.
Money is:
any asset that can easily be used to purchase goods and services
The supply curve is upward sloping because:
as the price increases, suppliers can earn higher levels of profit or justify higher marginal costs to produce more
In the short run, when the Fed decreases the quantity of money:
bond prices fall and the interest rate rises
In the short run, when the Fed increases the quantity of money:
bond prices rise and the interest rate falls
Gold coins used in the area that is now Turkey around 550 BCE
commodity money
Salt used in Africa in the Middle Ages
commodity money
Wampum (shells) used in the early American colonies
commodity money
If the money supply decreases, how do the following econcomic factors change? Bond Prices
decrease
If the money supply decreases, how do the following econcomic factors change? Q of money demanded
decrease
If the money supply increases, how do the following econcomic factors change? Interest rate
decrease
When banks make loans to each other, they charge the:
federal funds rate
Non-redeemable Greenbacks used during the Civil War in the United States
fiat money
United States Federal Reserve Notes
fiat money
Which of the following is not included in M2?
gold
All of the following are components of the money supply in the United States EXCEPT:
gold bullion
If the money supply decreases, how do the following econcomic factors change? Interest rate
increase
If the money supply increases, how do the following econcomic factors change? Bond prices
increase
If the money supply increases, how do the following econcomic factors change? Q of money demanded
increase
As the price level decreases, the value of money:
increases, so people want to hold less of it.
According to the law of demand, a(n) ______ relationship exists between the price of a good and the quantity demanded of that good. As the price of a good goes up, buyers demand ______ of that good.
inverse; less
With a constant money supply, if the demand for money decreases, the equilibrium interest rate and quantity of money will change in which of the following ways?
ir - decrease qm - no change
The major difference between real and nominal gross domestic product (GDP) is that real GDP:
is adjusted for price-level changes using a price index.
Nominal interest rates are determined in the money market, and real interest rates in the:
loanable funds market.
The money market will be in equilibrium when:
quantity of money demanded is equal to quantity of money supplied
Credit Notes used in Stockholm Sweden in the 17th century that were redeemable for silver
representative money
Paper Currency used in Szechuan China in the 11th century that was redeemable for silver
representative money
United States Gold Certificates issued from 1863-1933
representative money
When the quantity of money demanded is greater than the quantity of money supplied, people will most likely ________ bonds while the interest rate will ________.
sell; rise
As a unit of account, money is used to:
state prices of all goods and services.
Assume the economy is operating at full employment. If the economy enters a sudden economic expansion, the quantity of money available in the economy will:
stay the same.
The money supply curve is vertical no matter what the interest rate is because:
the Federal Reserve controls the supply of money
The opportunity cost of holding money is equal to:
the interest rate.
The opportunity cost of holding money refers to:
the interest that could have been earned if the money balances had been changed into an interest-bearing asset.
The interaction between institutions through which money is supplied to individuals, firms, and other institutions is referred to by economists as:
the money market
The money demand curve illustrates the relationship between the interest rate and:
the quantity of money demanded
What are the main components of money demand?
transaction and asset demand
People hold money in order to buy goods and services. Economists call this:
transactions demand.
The speculative demand for money:
varies inversely with the interest rate.
Opportunity cost, most broadly defined, is:
what we forgo, or give up, when we make a choice or a decision.
Economists consider a number to be "real":
when it has been adjusted for inflation.
