Unit 5 Quiz

If the price level increased from 120 to 130, then what was the inflation rate? 1.1 percent. 7.7 percent. 10.0 percent. 8.3 percent.

8.3 percent. Feedback: The inflation rate = (130-120)/120 * 100 = 10/120*100 = 8.333%

An associate professor of physics gets a $200 a month raise. She figures that with her new monthly salary she can buy more goods and services than she could buy last year. Her real and nominal salary have risen. Her real and nominal salary have fallen. Her real salary has risen and her nominal salary has fallen. Her real salary has fallen and her nominal salary has risen.

Her real and nominal salary have risen. Feedback: Nominal salary is the number of dollars one is paid. This has increased by $200. Real salary is the purchasing power of one's pay. If the professor can buy more goods and services, her purchasing power and, by extension, her real salary has increased.

A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can given the reserve requirement. It has $80 in reserves and $9,920 in loans. It has $800 in reserves and $9,200 in loans. It has $1,250 in reserves and $8,750 in loans. None of the above is correct.

It has $800 in reserves and $9,200 in loans. Feedback: If the bank is only holding excess reserves, it is holding 8% of its deposits. 8% of $10,000 = (0.08)*10,000 = $800 They loan out the rest: $10,000 - $800 = $9200

Katarina puts money into an account. One year later she sees that she has 6 percent more dollars and that her money will buy 4 percent more goods. The nominal interest rate was 10 percent and the inflation rate was 6 percent. The nominal interest rate was 6 percent and the inflation rate was 2 percent. The nominal interest rate was 4 percent and the inflation rate was 2 percent. The nominal interest rate was 10 percent and the inflation rate was 4 percent.

The nominal interest rate was 6 percent and the inflation rate was 2 percent. Feedback: The nominal interest rate is the percent increase in the listed value of funds. The real interest rate is the increased purchasing power. The inflation rate = nominal interest rate - real interest rate.

Which of the following best illustrates the unit of account function of money? You list prices for candy sold on your Web site in dollars. You pay for your theater tickets with dollars. You hold currency even though you don't intend to spend it right away. None of the above is correct.

You list prices for candy sold on your Web site in dollars. Feedback: (A) - A unit of account refers to using prices to measure worth. This is correct. (B) Buying something is the medium of exchange function. (C) Saving up money is the store of value function.

The federal funds rate is the interest rate the Federal Reserve charges for loans it makes to the federal government. the Federal Reserve charges banks for short-term loans. banks charge each other for short-term loans of reserves. on newly issued one-year Treasury bonds.

banks charge each other for short-term loans of reserves. Feedback: (A) The Fed does not make direct loans to the Federal government. It returns profit to the Treasury department and buys bonds. (B) This is the discount rate. (C) Correct (D) There is not a particular term for this interest rate.

According to the quantity theory of money, a 3 percent increase in the money supply causes the price level to rise by 3 percent. causes the price level to rise by less than 3 percent. leaves the price level unchanged. causes the price level to fall by 3 percent.

causes the price level to rise by 3 percent. Feedback: The quantity theory of money states that an increase in the money supply causes an identical change in prices.

If the public decides to hold less currency and more deposits in banks, bank reserves decrease and the money supply eventually decreases. decrease but the money supply does not change. increase and the money supply eventually increases. increase but the money supply does not change.

increase and the money supply eventually increases. Feedback: By depositing more money in the bank, the bank's reserves will increase (they will need to keep more required reserves as their deposits increase). An increase in bank reserves increases the money supply. This is because of the money multiplier effect.

When the Fed conducts open-market sales, it sells Treasury securities, which increases the money supply. it sells Treasury securities, which decreases the money supply. it auctions term loans, which increases the money supply. it auctions term loans, which decreases the money supply.

it sells Treasury securities, which decreases the money supply. Feedback: Open market operations refers to Treasury bond purchases or sales. When the Fed sells bonds, it collects money from buyers. This is pulled out of the money supply.

If people had been expecting prices to rise but in fact prices fell, then who among the following would benefit? lenders and people holding a lot of currency lenders but not people holding a lot of currency people holding a lot of currency but not lenders neither lenders nor people holding a lot of currency

lenders and people holding a lot of currency Feedback: If prices fall, that is deflation. Deflation results in money increasing in value. This benefits lenders, because the money repaid to them is greater in value. It benefits holders of currency because their currency holding also gain value.

When there is a reserve requirement, banks must hold exactly the required quantity of reserves. may hold more than, but not less than, the required quantity of reserves. may hold less than, but not more than, the required quantity of reserves. must seek the Fed's permission whenever they wish to expand or contract their loans to customers.

may hold more than, but not less than, the required quantity of reserves. Feedback: The reserve requirement is a minimum, not a maximum. Although the reserve requirement is a tool of monetary policy, it is primarily a means of ensuring that banks are stable and solvent. Therefore, it has to force banks to hold enough money in reserve to be safe. However, banks are free to hold excess reserves if they wish. Banks typically do this to protect against risk.

If the discount rate is lowered, banks borrow less from the Fed so reserves increase. less from the Fed so reserves decrease. more from the Fed so reserves increase. more from the Fed so reserves decrease.

more from the Fed so reserves increase. Feedback: The discount rate is the rate the Fed charges banks. If it is lower, it is cheaper to borrow from the Fed, and so banks will borrow more. They now have more money on hand, which increases reserves.

The most common method employed by the Fed to increase the money supply is the sale of U.S. government bonds. purchase of U.S. government bonds. sale of gold. increase of the federal debt ceiling.

purchase of U.S. government bonds. Feedback: (A) This would decrease the money supply. (B) Correct. (C) Since we don't use gold as currency, this would actually decrease the money supply. If people were to buy gold from the Fed, they would reduce currency they hold. In addition, the Fed doesn't keep a massive gold stockpile anymore. Its portfolio is now primarily cash and bonds. (D) This is a law that the Fed has no control over. Also, it would not necessarily increase the money supply directly. If Congress raised the debt ceiling, and then issued more bonds, and then the Fed bought those bonds, the money supply would increase. But there are many other actions necessary for that to work.

On a bank's T-account, which are part of the bank's assets? both deposits made by its customers and reserves deposits made by its customers but not reserves reserves but not deposits made by its customers neither deposits made by its customers nor reserves

reserves but not deposits made by its customers Feedback: Reserves are cash held by banks, and are therefore assets. However, deposits are liabilities, since the bank owes that money to the depositor.

A problem that the Fed faces when it attempts to control the money supply is that since the U.S. has a fractional-reserve banking system, the amount of money in the economy depends in part on the behavior of depositors and bankers. the Fed has to get the approval of the U.S. Treasury Department whenever it uses any of its monetary policy tools. while the Fed has the ability to change the money supply by a large amount, it does not have the ability to change it by a small amount. federal legislation in the 1950s stripped the Fed of its power to act as a lender of last resort to banks.

since the U.S. has a fractional-reserve banking system, the amount of money in the economy depends in part on the behavior of depositors and bankers. Feedback: (A) is the only factually true answer. As to why it is correct, the Fed's typical act is to increase banks' reserves. But these reserves will not actually be used in the real economy unless banks lend and people choose to spend.

You saved $500 in currency in your piggy bank to purchase a new laptop. The $500 you kept in your piggy bank illustrates money's function as a _______. The laptop's price is posted as $500. The $500 price illustrates money's function as a _____. You use the $500 to purchase the laptop. This transaction illustrates money's function as a ______. store of value, medium of exchange, unit of account store of value, unit of account, medium of exchange medium of exchange, unit of account, store of value medium of exchange, store of value, unit of account

store of value, unit of account, medium of exchange Feedback: Saving = store of value Pricing = unit of account Spending = medium of exchange

In recent years the Federal Open Market Committee has focused on a target for M1 growth. the federal funds rate. the number of Treasury Securities issued by the federal government. total reserves of banks.

the federal funds rate. Feedback: The Fed uses an estimated relationship between the federal funds rate and bank reserves. The lower the rate, the more banks borrow.

Today, bank runs are uncommon because of the high reserve requirement. uncommon because of FDIC deposit insurance. common because of the low reserve requirement. common because the FDIC is nearly bankrupt.

uncommon because of FDIC deposit insurance. Feedback: Since depositors know that, even in the event of bank failure, they will still receive their deposits from the FDIC, they are more confident and less likely to participate in bank runs. The reserve requirement is low, but this has no real-world effect on the frequency of bank runs.

According to the principle of monetary neutrality, a decrease in the money supply will not change nominal GDP. the price level. unemployment. All of the above are correct.

unemployment Feedback: Money neutrality refers to the idea that changes in the money supply will only affect nominal values (like prices) and not real values. So, nominal GDP will increase because goods and services are more expensive. The price level will increase for the same reason. But real GDP remains unchanged. If real GDP is unchanged, employers will not adjust their hiring, so unemployment will remain the same.

Consider the economy of Burgerland, which only produces hamburgers. ​If the velocity of money is 25, the price of a hamburger is $5, and the quantity of money in the economy is $500, how many hamburgers did Burgerland produce? 2,000 ​2,500 2,750 3,000

​2,500 Feedback: Velocity * Quantity of money = Prices * Output In this case: 25 * 500 = $5*H {where H =hamburgers produced} 12,500 = $5*H 2500 = H