Homework 11 & 12

An increase in the reserve requirement increases reserves and decreases the money supply.

True

Money a. is a perfect store of value. Correct! b. is the most liquid asset. c. has intrinsic value, regardless of which form it takes. d. All of the above are correct.

is the most liquid asset

Based on the quantity equation, if M = 8,000, P = 3, and Y = 12,000, then V = a. 0.33. b. 2.0. c. 4.5. d. 0.5.

4.5

Most economists believe that monetary neutrality provides a. a good description of both the long run and the short run. b. a good description of neither the long run nor the short run. c. a good description of the short run, but not the long run. d. a good description of the long run, but not the short run.

d. a good description of the long run, but not the short run

If P denotes the price of goods and services measured in terms of money, then a. 1/P represents the value of money measured in terms of goods and services. b. P can be regarded as the "overall price level." c. an increase in the value of money is associated with a decrease in P. d. All of the above are correct.

d. all of the above are correct

Refer to the table above. if all banks in the economy have the same reserve ration as this bank, then the value of the economy's money multiplier is... a. 9.33. b. 1.09. c. 10.76. d. 11.76.

11.76

A bank's reserve ratio is 8 percent and the bank has $1,000 in deposits. Its reserves amount to a. $8. b. $80. c. $92. d. $920.

80

The classical theory of inflation a. is also known as the quantity theory of money. b. was developed by some of the earliest economic thinkers. c. is used by most modern economists to explain the long-run determinants of the inflation rate. d. All of the above are correct.

All of the above

Federal Reserve governors are given long terms to insulate them from politics.

True

Money allows people to specialize in what they do best, thereby raising everyone's standard of living.

True

The classical dichotomy is useful for analyzing the economy because in the long run nominal variables are heavily influenced by developments in the monetary system, and real variables are not.

True

The price level is determined by the supply of, and demand for money.

True

When prices are falling, economists say that there is a. disinflation b. deflation c. a contraction. d. an inverted inflation.

a deflation

You receive money as payment for babysitting your neighbors' children. This best illustrates which function of money? a. medium of exchange b. unit of account c. store of value d. liquidity

a. Mediumm of exchange

Economists call an institution designed to oversee the banking system and regulate the quantity of money in the economy a. a central bank. b. a charter bank. c. a national bank. d. a state bank.

a. a central bank

According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then a. both the price level and nominal GDP would rise by 5 percent. b. the price level would rise by 5 percent and nominal GDP would be unchanged. c. the price level would be unchanged and nominal GDP would rise by 5 percent. d. both the price level and nominal GDP would be unchanged.

a. both the price level and nominal gdp would rise by 5%

The legal tender requirement means that a. people are more likely to accept the dollar as a medium of exchange. b. the government must hold enough gold to redeem all currency. c. people may not make trades with anything else. d. All of the above are correct.

a. people are more likely to accept the dollar as a medium of exchange

To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the a. quantity theory of money. b. price-index theory of money. c. theory of hyperinflation. d. disequilibrium theory of money and inflation.

a. the quantity theory of money

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 theater tickets with dollars. c. You hold currency even though you don't intend to spend it right away. d. None of the above is correct.

a. you list prices for candy sold on your web site, wwwwww.com, in dollars

If traveler's checks were $1000 higher and saving deposits were $500 higher, M1 would be a. $500 higher and M2 would be $1,500 higher. b. $1,000 higher and M2 would be $1,500 higher. c. M2 and M1 would be $1,500 higher. d. $1,000 high and M2 would be $500 higher.

b. $1,000 higher and M2 would be $1,500 higher

When the money market is drawn with the value of money on the vertical axis, as the price level decreases the quantity of money a. demanded increases. b. demanded decreases. c. supplied increases. d. supplied decreases

b. demanded decreases

Suppose monetary neutrality holds and velocity is constant. A 4 percent increase in the money supply a. increases the price level by more than 4 percent. b. increases the price level by 4 percent. c. increases the price level by less than 4 percent. d. increases real GDP by 4 percent.

b. increases the price level by 4%

According to the assumptions of the quantity theory of money, if the money supply increases by 5 percent, then a. nominal and real GDP would rise by 5 percent. b. nominal GDP would rise by 5 percent; real GDP would be unchanged. c. nominal GDP would be unchanged; real GDP would rise by 5 percent. d. neither nominal GDP nor real GDP would change

b. nominal gdp would rise by 5%; real gdp would be unchanged

The Fed has the power to increase or decrease the number of dollars in the economy through the decisions of a. the Board of Governors. b. the FOMC. c. the regional Federal Reserve Bank presidents. d. the U.S. Treasury.

b. the FOMC

In the long run, money demand and money supply determine a. the price level and the real interest rate. b. the price level but not the real interest rate. c. the real interest rate but not the price level. d. neither the price level nor the real interest rate.

b. the price level but not the real interest rate

When the Federal Reserve sells assets from its portfolio to the public with the intent of changing the money supply, a. those assets are government bonds and the Fed's reason for selling them is to increase the money supply. b. those assets are government bonds and the Fed's reason for selling them is to decrease the money supply. c. those assets are items that are included in M2 and the Fed's reason for selling them is to increase the money supply. d. those assets are items that are included in M2 and the Fed's reason for selling them is to decrease the money supply.

b. those assets are government bonds and the Fed's reason for selling them is to decrease the money supply

If the reserve ratio is12.5 percent, then $5,600 of money can be generated by a. $64 of new reserves. b. $448 of new reserves. c. $700 of new reserves. d. $800 of new reserves.

c. 700 of new reserves

Interest rates adjusted for the effects of inflation a. and inflation are nominal variables. b. and inflation are real variables. c. are real variables; inflation is a nominal variable. d. are nominal variables; inflation is a real variable.

c. are real variables: inflation is a nominal variable

The Board of Governors a. is chaired by the U.S. Secretary of the Treasury. b. members are elected by the U.S. public. c. has 7 members. d. All of the above are correct.

c. has 7 members

The price level rises if either a. money demand or money supply shifts rightward. b. money demand shifts rightward or money supply shifts leftward. c. money demand shifts leftward or money supply shifts rightward. d. money demand or money supply shifts leftward.

c. money demand shifts leftward or money supply shifts rightward

If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold a. fewer reserves, so the money multiplier will fall. b. fewer reserves, so the money multiplier will rise. c. more reserves, so the money multiplier will fall. d. more reserves, so the money multiplier will rise.

c. more reserves, so the money multiplier will fall

Inflation can be measured by the a. change in the consumer price index. Inflation in the U.S. has averaged about 2.5% over the last 80 years. b. change in the consumer price index. Inflation in the U.S. has averaged about 4% over the last 80 years. c. percentage change in the consumer price index. Inflation in the U.S. has averaged about 3.6% over the last 80 years. d. percentage change in the consumer price index. Inflation in the U.S. has averaged about 4% over the last 80 years.

c. percentage change in the consumer price index. inflation in the U.S. has averaged about 3.6% over the past 80 years

In an economy that relies upon barter, a. trade does not require a double coincidence of wants. b. scarce resources are allocated just as easily as they are in economies that do not rely upon barter. c. there is no item in the economy that is widely accepted in exchange for goods and services. d. All of the above are correct.

c. there is no item in the economy that is widely accepted in exchange for goods and services

M1 equals currency plus demand deposits plus a. nothing else. b. other checkable deposits. c. traveler's checks plus other checkable deposits. d. traveler's checks plus other checkable deposits plus savings deposits.

c. traveler's checks plus other checkable deposits

A decrease in the money supply creates an excess a. supply of money that is eliminated by rising prices. b. supply of money that is eliminated by falling prices. c. demand for money that is eliminated by rising prices. d. demand for money that is eliminated by falling prices.

d. demand for money that is eliminated by falling prices

Reserves are a. the central bank of the U.S. b. deposits that banks hold in excess of the required amount. c. the purchase of bonds by the Federal Open Market Committee. d. deposits that banks have received but have not yet loaned out.

d. deposits that banks have received but have not yet loaned out

Suppose the price level rises, but the number of dollars you are paid per hour stays the same. This means that your a. nominal wage is higher. b. nominal wage is lower. c. real wage is higher. d. real wage is lower.

d. real wage is lower

The rate at which the Fed lends money to banks is a. the prime rate. b. fixed at 4%. c. the federal funds rate. d. the discount rate.

d. the discount rate

An excess supply of money is eliminated by a falling price level

false

refer to the figure above. which of the following events could explain a shift of the money demad cruve from md1 to md2 a. an increase in the value of money b. a decrease in the price level c. an open-market purchase of bonds by the Federal Reserve d. None of the above is correct.

none