Econ 522 KU Exam 1 part 2

One possible benefit of moderate inflation is: A) a reduction in boredom attributable to the changing prices. B) the elimination of menu costs. C) better functioning labor markets. D) increased certainty about the future.

better functioning labor markets.

If the Fed announces that it will raise the money supply in the future but does not change the money supply today, A) both the nominal interest rate and the current price level will decrease. B) the nominal interest rate will increase and the current price level will decrease. C) the nominal interest rate will decrease and the current price level will increase. D) both the nominal interest rate and the current price level will increase.

both the nominal interest rate and the current price level will increase.

The inflation tax is paid: A) only by the central bank. B) by all holders of money. C) only by government bond holders. D) equally by every household.

by all holders of money

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the monetary base equals: A) $50 billion. B) $100 billion. C) $150 billion. D) $600 billion.

$150 billion.

63. Assume that a tire company sells 4 tires to an automobile company for $400, another company sells a compact disc player for $500, and the automobile company puts all of these items in or on a car that it sells for $20,000. In this case, the amount from these transactions that should be counted in GDP is: A) $20,000. B) $20,000 less the automobile company's profit on the car. C) $20,900. D) $20,900 less the profits of all three companies on the items that they sold.

$20,000.

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals: A) $100 billion. B) $150 billion. C) $600 billion. D) $650 billion.

$600 billion.

If many banks fail, this is likely to: A) cause surviving banks to lower their ratios of reserves to deposits. B) cause surviving banks to raise their ratios of reserves to deposits. C) have no effect on the ratio of reserves to deposits in surviving banks. D) cause surviving banks to hold less currency.

cause surviving banks to raise their ratios of reserves to deposits.

According to the Fisher effect, the nominal interest rate moves one-for-one with changes in the: A) inflation rate. B) expected inflation rate. C) ex ante real interest rate. D) ex post real interest rate.

expected inflation rate.

The ex ante real interest rate is based on _____ inflation, while the ex post real interest rate is based on _____ inflation. A) expected; actual B) core; actual C) actual; expected D) expected; core

expected; actual

Assume that a bakery hires more workers and pays them wages and that the workers produce more bread. GDP increases in all of the following cases except when the bread: A) is sold to households. B) is stored away for later sale. C) grows stale and is thrown away. D) is sold to other firms.

grows stale and is thrown away.

The classical dichotomy: A) cannot hold if money is "neutral." B) is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money. C) fully describes the world in which we live, especially in the short run. D) arises because money depends on the nominal interest rate.

is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money.

Between August 1929 and March 1933, the money supply fell 28 percent. At that time the monetary base ______ and the currency-deposit and reserve-deposit ratios both ______. A) fell; fell B) fell; rose C) rose; fell D) rose; rose

rose; rose

When the demand for money parameter, k, is large, the velocity of money is ______ and money is changing hands ______ A) large; frequently B) large; infrequently C) small; frequently D) small; infrequently

small; infrequently

The size of monetary base is determined by: A) the Federal Reserve. B) the Federal Reserve and banks. C) preferences of households about the form of money they wish to hold. D) business policies of banks and the laws regulating banks.

the Federal Reserve.

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then: A) it cannot be determined whether the money supply increases or decreases. B) the money supply increases. C) the money supply decreases. D) the money supply does not change.

the money supply decreases.

If the quantity of real money balances is kY, where k is a constant, then velocity is: A) k. B) 1/k. C) kP. D) P/k.

1/k.

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals: A) 0.6. B) 1.67. C) 2.0. D) 2.5.

2.5.

If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200,000, then real balances in the economy equal: A) 10. B) 20,000. C) 200,000. D) 2,000,000.

20,000.

According to the quantity theory a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation a 5 percent increase in the rate of inflation increases the nominal interest rate by _____. A) 1; 5 B) 5; 1 C) 1; 1 D) 5; 5

5; 5

Banks create money in: A) a 100-percent-reserve banking system but not in a fractional-reserve banking system. B) a fractional-reserve banking system but not in a 100-percent-reserve banking system. C) both a 100-percent-reserve banking system and a fractional-reserve banking system. D) neither a 100-percent-reserve banking system nor a fractional-reserve banking system.

a fractional-reserve banking system but not in a 100-percent-reserve banking system.

The quantitative easing policy conducted by the Federal Reserve between 2007 and 2011 resulted in a large increase in the monetary base that was partially offset by: A) a significant increase in the reserve-deposit ratio. B) a significant decrease in the reserve-deposit ratio. C) open-market purchases. D) open-market sales.

a significant increase in the reserve-deposit ratio.

Assume that the monetary base (B) is $100 billion, the reserve-deposit ratio (rr) is 0.1, and the currency-deposit ratio (cr) is 0.1. a. What is the money supply? b. If rr changes to 0.2, but cr is 0.1 and B is unchanged, what is the money supply? c. If rr is 0.1 and cr is 0.2, but B is unchanged, what is the money supply?

a) $550 billion b) $366.67 billion c) $400 billion

In the case of an unanticipated inflation: A) creditors with an unindexed contract are hurt because they get less than they expected in real terms. B) creditors with an indexed contract gain because they get more than they contracted for in nominal terms. C) debtors with an unindexed contract do not gain because they pay exactly what they contracted for in nominal terms. D) debtors with an indexed contract are hurt because they pay more than they contracted for in nominal terms.

creditors with an unindexed contract are hurt because they get less than they expected in real terms

When the Fed makes an open-market sale, it: A) increases the money multiplier (m). B) increases the currency-deposit ratio (cr). C) increases the monetary base (B). D) decreases the monetary base (B).

decreases the monetary base (B).

When the Fed decreases the interest rate paid on reserves, it: A) increases the reserve-deposit ratio (rr). B) decreases the reserve-deposit ratio (rr). C) increases the monetary base (B). D) decreases the monetary base (B).

decreases the reserve-deposit ratio (rr).

The transactions velocity of money indicates the _____ in a given period, while the income velocity of money indicates the _____ in a given period. A) number of transactions; amount of income earned B) quantity of money used for transactions; quantity of money paid as income C) number of times a dollar bill changes hands; number of times a dollar bill enters someone's income D) volume of transactions; flow of income

number of times a dollar bill changes hands; number of times a dollar bill enters someone's income

For borrowing from the discount window, the Fed sets the _____ of borrowing, compared to borrowing using the Term Auction Facility, where the Fed sets the _____ of borrowing. A) maximum quantity; minimum quantity B) minimum price; maximum price C) quantity; price D) price; quantity

price; quantity

In practice, in order to stop a hyperinflation, in addition to stopping monetary growth, the government must: A) lower taxes and raise government spending. B) raise taxes and reduce government spending. C) change from one kind of currency to another. D) call for a new election.

raise taxes and reduce government spending.

Variables expressed in terms of physical units or quantities are called ______ variables. A) real B) nominal C) endogenous D) Exogenous

real

The amount of capital that banks are required to hold depends on the: A) amount of deposits held at a bank. B) riskiness of the bank's assets. C) reserve requirements set by the Fed. D) level of deposit insurance coverage.

riskiness of the bank's assets.

In the classical model, according to the quantity theory and the Fisher equation, an increase in money growth increases: A) output. B) velocity C) the nominal interest rate. D) the real interest rate.

the nominal interest rate.

In the long run, according to the quantity theory of money and the classical macroeconomic theory, if velocity is constant, then ______ determines real GDP and ______ determines nominal GDP. A) the productive capability of the economy; the money supply B) the money supply; the productive capability of the economy C) velocity; the money supply D) the money supply; velocity

the productive capability of the economy; the money supply

In the United States, bank reserves consist of: A) currency and demand deposits. B) vault cash and deposits at the Federal Reserve. C) gold deposits at the Federal Reserve. D) the money supply.

vault cash and deposits at the Federal Reserve.