Deck 17: Money in the Open Economy

Question 1

Widespread use of deposit banking and the use of cheques in transactions in Canada

A)dates back to the 19th century.
B)has slowly developed, and the volume of transactions by cheques has surpassed the volume of transactions by cash only since the early 1980s.
C)first occurred shortly after World War II.
D)first occurred in the early 20th century.
E)first occurred shortly after World War I.

Answer 1

A

Question 2

In the Lagos-Wright model, if money growth decreases, then

A)consumption of buyers falls, consumption of sellers rises, and the nominal interest rate falls.
B)consumption of buyers falls, consumption of sellers falls, and the nominal interest rate rises.
C)consumption of buyers rises, consumption of sellers rises, and the nominal interest rate falls.
D)consumption of buyers falls, consumption of sellers falls, and the nominal interest rate falls.
E)consumption of buyers rises, consumption of sellers rises, and the nominal interest rate rises.

Answer 2

C

Question 3

In the Lagos-Wright model, when a buyer meets a seller in the DM

A)they interact in a competitive market.
B)the buyer makes the seller a take-it-or-leave-it offer.
C)the buyer offers the seller a credit contract.
D)the buyer and seller play a prisoners' dilemma game.
E)the seller makes the buyer a take-it-or-leave-it offer.

Answer 3

B

Question 4

In the Lagos-Wright model, an increase in the money growth rate

A)increases welfare.
B)gets the economy closer to the Friedman rule.
C)reduces the nominal interest rate.
D)increases the nominal interest rate one-for-one.
E)reduces the real interest rate.

Question 5

A deflationary black hole

A)has been observed in Japan since 1995.
B)occurred during the financial crisis in the United States.
C)occurs when inflation is 2%.
D)has no empirical or theoretical support.
E)occurs when the central bank adheres to the Friedman rule.

Question 6

In the Lagos-Wright model, inflation rises when

A)there is a level increase in the money supply.
B)unemployment falls.
C)the bargaining power of buyers declines.
D)aggregate output rises.
E)money growth increases.

Question 7

In the Lagos-Wright model, there is no welfare loss from inflation if

A)inflation is equal to the nominal interest rate.
B)inflation is zero.
C)inflation is positive.
D)the nominal interest rate is negative.
E)the nominal interest rate is zero.

Question 8

In the contemporary Canadian economy, the best example of fiat money would be

A)coins issued by the Bank of Canada.
B)the stock of notes issued by the Bank of Canada.
C)deposits at all depository institutions.
D)the stock of notes in the foreign exchange market.
E)deposits at chartered banks, but not deposits at other depository institutions.

Question 9

In Canadian history, use of a commodity-backed paper currency is associated with the

A)Bretton Woods agreement.
B)Great Depression.
C)free banking era.
D)gold standard.
E)Second World War.

Question 10

The costs of anticipated inflation, as typically measured

A)are largest when the central bank adheres to a Friedman rule.
B)are small at inflation rates of around 10%.
C)fall over time, if the inflation persists.
D)are large as long as inflation is positive.
E)are small even when there is a hyperinflation.

Question 11

Circulating private bank notes

A)are still currently in use in Canada.
B)were only widely used in Canada after World War II.
C)have never been used in Canada.
D)were only widely used in Canada during the Great Depression.
E)were widely used in Canada prior to 1935.

Question 12

The double coincidence of wants problem is solved by

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

Question 13

In the Lagos-Wright model, a Pareto optimal allocation has the property that

A)the marginal utility of consumption for the buyer is one.
B)it is inefficient.
C)consumption is equal for buyers and sellers.
D)sellers get all the consumption goods.
E)buyers get all the consumption goods.

Question 14

Question 15

A system that uses commodity-based paper currency was used in Canada

A)only after World War II.
B)only during the 1960s and 1970s.
C)only during World War II.
D)only during the Great Depression.
E)before 1929.

Question 16

A system that uses commodity-backed paper currency is most like a system that

A)uses fiat money.
B)primarily relied on financial intermediaries.
C)uses circulating private bank notes.
D)uses commodity money.
E)primarily relies on transaction deposits at banks.

Question 17

In equilibrium in the Lagos-Wright model

A)the inflation rate is equal to the money growth rate.
B)the inflation rate is less than the money growth rate.
C)the inflation rate is greater than the nominal interest rate.
D)the inflation rate is always zero.
E)the inflation rate is always negative.

Question 18

In the Lagos-Wright model

A)the buyer consumes in the CM and produces in the DM.
B)the buyer consumes in the DM and produces in the CM.
C)the buyer produces and consumer in both the CM and the DM.
D)the seller produces and consumes in both the CM and the DM.
E)the seller consumes in the DM and produces in the CM.

Question 19

Problems with the use of commodity money include all of the following EXCEPT

A)there is an opportunity of fraud in the production of commodity money.
B)there are several good substitutes.
C)it carries a high opportunity cost because the commodity could not be diverted from other uses.
D)it is expensive to produce.
E)bits could be clipped off coins and melted down without detection.

Question 20

The cheque-clearing system is

A)includes debit card transactions.
B)only found in the United States.
C)one mechanism by which banks carry out exchanges with each other.
D)slowly being replaced by credit cards.
E)one mechanism by which consumers carry out exchanges.

Question 21

In the Lagos-Wright model, in the DM

A)buyers use credit.
B)buyers use money.
C)sellers buy goods with credit.
D)buyers use money and credit.
E)sellers buy goods with money.

Question 22

The Lagos-Wright model exhibits

A)bargaining in the centralized market (CM).
B)a Phillips curve.
C)neutrality of money growth.
D)a backward-bending labour supply curve.
E)the Fisher relation.

Question 23

Money neutrality refers to

A)the long run effects of a change in the level of the money supply.
B)monetary uncertainty.
C)the effects of money growth.
D)the short run effects of a change in the money supply.
E)the long run effects of money growth.

Question 24

In the Lagos-Wright model, limited commitment means that

A)the buyer can abscond on his or her debt.
B)trade will not occur.
C)the seller cannot commit to produce.
D)the buyer cannot commit to consume.
E)the seller will not produce for the buyer.

Question 25

Credit cards should not be considered a form of money because

A)credit cards are not universally accepted.
B)a credit card can only be used by the cardholder.
C)they are not a good medium of exchange.
D)money and credit are fundamentally different.
E)they are too susceptible to fraud.

Question 26

The relationship between money growth and inflation was documented by

A)John Maynard Keynes.
B)Milton Friedman and Anna Schwartz.
C)Steve Poloz.
D)Paul Samuelson.
E)Thomas Friedman.

Question 27

What are the costs of inflation?

Question 28

When the central bank adopts a Friedman rule

A)the nominal interest rate is zero.
B)money is neutral.
C)money growth is zero.
D)inflation is zero.
E)prices are stable.

Question 29

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)tax evasion.
B)a coincidence of needs.
C)the need for government intervention.
D)the absence of a coincidence of wants.
E)the absence of a double coincidence of wants.

Question 30

Fiat money

A)consists of coins issued by the Bank of Canada.
B)consists of pieces of paper that are essentially worthless.
C)consists of pieces of paper that are essentially worth more than the paper it is printed on.
D)is not accepted in the exchange for goods.
E)is not accepted in the foreign exchange market.