Deck 17: Money, Inflation, and Banking

Question 1

The current monetary system in the United States is

A) a mix of fiat money and exchange using transactions deposits at banks.
B) a commodity money system.
C) a gold standard.
D) a commodity-backed fiat money system.

Answer 1

a mix of fiat money and exchange using transactions deposits at banks.

Question 2

There is a double coincidence of wants when

A) person 1 has what person 2 wants, who in turn wants what person 3 has.
B) person 1 has what person 2 wants, and person 2 has money.
C) person 1 has what person 2 wants, and person 2 has what person 1 wants.
D) person 1 has money, and person 2 has what person 1 wants.

Answer 2

person 1 has what person 2 wants, and person 2 has what person 1 wants.

Question 3

The double coincidence of wants problem is solved by

A) credit markets.
B) government intervention.
C) the use of money.
D) specialization.

Answer 3

the use of money.

Question 4

Most transactions between large financial institutions in the United States are handled by

A) check.
B) Fedwire.
C) currency.
D) ACH.

Question 5

The Federal Reserve System has a network of how many Federal Reserve Banks?

A) 12
B) 36
C) 50
D) 84

Question 6

In the contemporary U.S. economy,the best example of fiat money would be

A) coins issued by the U.S. Treasury.
B) deposits at all depository institutions.
C) deposits at commercial banks, but not deposits at other depository institutions.
D) Federal Reserve Notes.

Question 7

The major disadvantage of commodity money is that

A) anybody can issue it and walk away.
B) its value fluctuates with the scarcity of the commodity.
C) it is subject to dollarization.
D) the central bank cannot be prevented from issuing too much of it.

Question 8

Which characteristic does money currently not have?

A) It is issued by a government or central bank.
B) It is considered valuable.
C) It is backed by gold.
D) It is a durable good.

Question 9

Salt,for example,as it is used in part of Ethiopia,is an example of

A) commodity money.
B) commodity-backed paper currency.
C) barter currency.
D) fiat money.

Question 10

In U.S. history,use of a commodity-backed paper currency is associated with the

A) Free Banking Era.
B) Confederacy during the Civil War.
C) gold standard.
D) Bretton Woods Agreement.

Question 11

The optimal trade-off between future consumption goods and current leisure is expressed as

A) MRS?,C' =
B) MRS?,C' =
C) MRS?,C' =
D) MRS?,C' =

Question 12

The gold standard is an example of

A) commodity money.
B) commodity-backed paper currency.
C) barter currency.
D) fiat money.

Question 13

The causal link between money growth and inflation is most closely associated with

A) Jevons.
B) Kiyotaki and Wright.
C) Friedman and Schwartz.
D) Diamond and Dybvig.

Question 14

The real return of money is

A) 0.
B) -r.
C) -R.
D) -i.

Question 15

Circulating private bank notes

A) have never been used in the United States.
B) were widely used in the Free Banking Era.
C) were widely used in the United States during the Great Depression.
D) are still currently in use in Canada.

Question 16

Some early forms of money,like commodity money,did not survive because

A) they were outlawed.
B) quality control was difficult.
C) people disagreed on which good to use.
D) paper quality was poor.

Question 17

Which of the following properties must a good have to be used as money?

A) It should be a durable good.
B) It should be issued by a government of central bank.
C) It should have intrinsic value.
D) It should be shiny.

Question 18

Market exchange is typically an exchange of goods for money,as opposed to goods for goods,because use of money solves the problem of

A) the absence of a coincidence of wants.
B) the absence of a double coincidence of wants.
C) a coincidence of needs.
D) tax evasion.

Question 19

A double coincidence of wants problem can be overcome by

A) commodity money.
B) fiat money.
C) banks.
D) all of the above.

Question 20

The opportunity cost of money is

A) zero.
B) the inflation rate.
C) the real interest rate.
D) the nominal interest rate.

Question 21

The optimal trade-off between current consumption goods and future consumption goods is expressed as

A) MRSC,C' = 1 + R.
B) MRSC,C' = 1 + r.
C) MRSC,C' = .
D) MRSC,C' = 1 + i.

Question 22

The Friedman Rule is optimal because

A) households would be able to buy more as prices decrease.
B) the central bank has better control of the money supply.
C) money is neutral.
D) households are indifferent between holding bonds and money.

Question 23

In the monetary intertemporal model,the long-run effects of an increase in the level of money include

A) an increase in employment.
B) lower output.
C) higher real wages.
D) higher nominal wages.

Question 24

If an increase in the growth rate of the money supply results in an equal increase in the rate of inflation with no effect on any real variables,we say that

A) the classical dichotomy fails.
B) money is neutral.
C) money is superneutral.
D) money is the most preferred store of value.

Question 25

Which of the following is not a property of assets?

A) risk
B) inflation.
C) liquidity
D) maturity

Question 26

According to a study by Thomas Cooley and Gary Hansen,the cost in lost consumption of a 10% per annum rate of inflation is

A) negative.
B) approximately 0.001%.
C) approximately 0.5%.
D) approximately 5.0%.

Question 27

An increase in the inflation rate shifts the labor

A) supply curve to the right.
B) supply curve to the left.
C) demand curve to the right.
D) demand curve to the left.

Question 28

The Friedman rule works because

A) it maximizes productivity.
B) it eliminates over-consumption.
C) it encourages people to hold the appropriate quantity of money.
D) it can be implemented by the private sector.

Question 29

Some of the most renowned examples of hyperinflation occurred in Austria,Hungary,Germany and Poland shortly after

A) the collapse of the Austro-Hungarian Empire.
B) World War I.
C) World War II.
D) the fall of the Berlin Wall.

Question 30

The money growth rate and the inflation rate

A) are negatively correlated.
B) are positively correlated, but the relationship is noisy.
C) are positively correlated, and the relationship is tight.
D) are uncorrelated.

Question 31

For assessing whether or not and how much of an asset to hold,the important consideration is the asset's amount of

A) diversifiable risk.
B) nondiversifiable risk.
C) relative risk.
D) absolute risk.

Question 32

Financial intermediaries

A) transform assets.
B) include life insurance companies.
C) borrow from one group of people and lend to another.
D) all of the above.

Question 33

If the Friedman rule for long-term monetary policy were implemented,the result would be

A) inflation.
B) neither inflation nor deflation.
C) deflation.
D) hyperinflation.

Question 34

To implement the Friedman rule for long-term monetary policy,the monetary authority would need to set the

A) inflation rate equal to zero.
B) nominal rate of interest equal to zero.
C) real rate of interest equal to zero.
D) money growth rate equal to zero.

Question 35

The optimal trade-off between current leisure and current consumption goods is expressed as

A) MRS?,C =
B) MRS?,C' = w.
C) MRS?,C' =
D) MRS?,C' =

Question 36

The most likely cause of a hyperinflation is

A) central bank incompetence.
B) the inability to finance government spending through taxation or borrowing.
C) an acute shortage of natural resources.
D) over-aggressive labor unions.

Question 37

A key property of a Diamond-Dybvig bank is

A) it is well-diversified.
B) it lends to borrowers.
C) it provides benefits very different from the provision of insurance.
D) it trades with other banks.

Question 38

In the monetary intertemporal model,the long-run effects of an increase in the growth rate of money include

A) an increase in output and an increase in the real wage.
B) an increase in output and a decrease in the real wage.
C) a decrease in output and an increase in the real wage.
D) a decrease in output and a decrease in the real wage.

Question 39

If money is superneutral,

A) a one-time change in the money supply has no real impact.
B) a one-time change in the money supply has a real impact.
C) a change in the money growth rate has no real impact.
D) a change in the money growth rate has a real impact.

Question 40

An asset's liquidity depends upon

A) the absolute size of its value and how long it takes to sell the asset at market value.
B) how long it takes to sell the asset at market value and the costs of selling the asset.
C) the costs of selling the asset and the fraction of its value that can be obtained if it is sold immediately.
D) the fraction of its value that can be obtained if it is sold immediately and the absolute size of its value.

Question 41

Moral hazard is a problem in providing deposit insurance because insured banks are

A) more likely to make bookkeeping errors.
B) overly cautious due to extra regulations adopted by the FDIC.
C) more likely to provide bank managers with lavish perquisites.
D) encouraged to take on more risk.

Question 42

The Diamond-Dybvig model provides a rationale for the phenomenon of

A) undercapitalized banks.
B) banks making overly risky loans.
C) bank runs.
D) deflation.

Question 43

In the United States,the Federal Deposit Insurance Corporation (FDIC)usually insures the value of deposits up to

A) $50,000.
B) $100,000.
C) $500,000.
D) $1,000,000.

Question 44

The phenomenon in which an insured individual takes less care in preventing the event against which she is insured is an example of

A) foolish behavior.
B) adverse selection.
C) moral hazard.
D) double coincidence of wants.

Question 45

Banks in the Diamond-Dybvig model can offer depositors increased liquidity because

A) both individual depositors' liquidity needs and average depositor liquidity needs are predictable.
B) while individual depositors' liquidity needs are unpredictable, average depositor liquidity needs are predictable.
C) while individual depositors' liquidity needs are predictable, average depositor liquidity needs are unpredictable.
D) neither individual depositors' liquidity needs nor average depositor liquidity needs are predictable.

Question 46

The belief that the regulators of the U.S. financial system would not tolerate any losses by depositors at large depository institutions is called

A) the too-big-to-fail doctrine.
B) the regulatory capture hypothesis.
C) the lender of last-resort doctrine.
D) corporate banking system welfare.

Question 47

The founding of the U.S. FDIC was primarily in response to

A) serious inflation after the Civil War.
B) the bank panic of 1907.
C) the Great Depression.
D) the Volker recession in 1981-1982.