Deck 4: The Market Forces of Supply and Demand

Question 1

To reduce the money supply, the Federal Reserve:

A)buys government bonds.
B)sells government bonds.
C)creates demand deposits.
D)destroys demand deposits.

Answer 1

B

Question 2

All of the following are considered major functions of money except as a:

A)medium of exchange.
B)way to display wealth.
C)unit of account.
D)store of value.

Answer 2

B

Question 3

The use of fei as money on the island of Yap illustrates the idea of money as a social convention because:

A)only fei physically in the possession of the owner is accepted in transactions.
B)legal claim to a fei never seen by current generations was accepted in transactions.
C)the central bank of Yap accepts fei in exchange for paper certificates.
D)the government of Yap verifies the authenticity of fei used for transactions.

Answer 3

B

Question 4

The quantity of money in the United States is essentially controlled by the:

A)president of the United States.
B)Department of the Treasury.
C)Federal Reserve.
D)system of commercial banks.

Question 5

Macroeconomists call assets used to make transactions:

A)real income.
B)nominal income.
C)money.
D)consumption.

Question 6

To make a trade in a barter economy requires:

A)currency.
B)a check.
C)scrip.
D)a double coincidence of wants.

Question 7

People use money as a unit of account when they:

A)hold money to transfer purchasing power into the future.
B)use money as a measure of economic transactions.
C)use money to buy goods and services.
D)hold money to gain power and esteem.

Question 8

A country that is on a gold standard primarily uses:

A)commodity money.
B) fiat money.
C)credit money.
D)the barter system.

Question 9

People use money as a medium of exchange when they:

A)hold money to transfer purchasing power into the future.
B)use money as a measure of economic transactions.
C)use money to buy goods and services.
D)hold money to gain power and esteem.

Question 10

When a pizza maker lists the price of a pizza as $10, this is an example of using money as a:

A)store of value.
B)unit of account.
C)medium of exchange.
D)flow of value.

Question 11

People use money as a store of value when they:

A)hold money to transfer purchasing power into the future.
B)use money as a measure of economic transactions.
C)use money to buy goods and services.
D)hold money to gain power and esteem.

Question 12

To increase the money supply, the Federal Reserve:

A)buys government bonds.
B)sells government bonds.
C)buys corporate stocks.
D)sells corporate stocks.

Question 13

In a country on a gold standard, the quantity of money is determined by the:

A)government.
B)central bank.
C)amount of gold.
D)buying and selling of government securities.

Question 14

The central bank in the United States is the:

A)Bank of America.
B)U.S. Treasury.
C)U.S. National Bank.
D)Federal Reserve.

Question 15

Economists use the term money to refer to:

A)income.
B)profits.
C)assets used for transactions.
D)earnings from labor.

Question 16

An important factor in the evolution of commodity money to fiat money is:

A)a desire to reduce transaction costs.
B)a desire to increase transaction costs.
C)the fact that gold is no longer highly
D)valued. a desire to use gold for jewelry.

Question 17

In prisoner of war camps during World War II, the "currency" used was:

A)chocolates.
B)cigarettes.
C)gold.
D)IOUs.

Question 18

Money that has no value other than as money is called money.

A)fiat
B)intrinsic
C)commodity
D)government

Question 19

In the United States, monetary policy is controlled by the:

A)president.
B)Congress.
C)Federal Reserve.
D)Treasury Department.

Question 20

The rate of inflation is the:

A)median level of prices.
B)average level of prices.
C)percentage change in the level of prices.
D)measure of the overall level of prices.

Question 21

Checking account balances that are linked to debit cards are included in:

A)M1.
B)M2 only.
C)both M1 and M2.
D)neither M1 nor M2.

Question 22

The definition of the transactions velocity of money is:

A)money multiplied by prices divided by transactions.
B)transactions divided by prices multiplied by money.
C)money divided by prices multiplied by transactions.
D)prices multiplied by transactions divided by money.

Question 23

Money market mutual fund shares are included in:

A)M1only.
B)M2 only.
C)both M1 and M2.
D)neither M1 nor M2.

Question 24

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is times per year.

A)0.2
B)2
C)5
D)10

Question 25

Credit card balances are included in:

A)M1 only.
B)M2 only.
C)both M1 and M2.
D)neither M1 nor M2.

Question 26

The demand for real money balances is generally assumed to:

A)be exogenous.
B)be constant.
C)increase as real income increases.
D)decrease as real income increases.

Question 27

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.

Question 28

Demand deposits are funds held in:

A)currency.
B)certificates of deposit.
C)checking accounts.
D)money markets.

Question 29

The income velocity of money:

A)is defined in the identity MV = PY.
B)is defined in the identity MV = PT.
C)is the same thing as the transactions velocity of money.
D)will be smaller than the transactions velocity of money if the quantity of transactions is greater than income.

Question 30

Open-market operations are:

A)Commerce Department efforts to open foreign markets to international trade.
B)Federal Reserve purchases and sales of government bonds.
C)Securities and Exchange Commission rules requiring open disclosure of market trades.
D)Treasury Department purchases and sales of the U.S. gold stock.

Question 31

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

Question 32

If the transactions velocity of money remains constant while the quantity of money doubles, the:

A)price of the average transaction must double.
B)number of transactions must remain constant.
C)price of the average transaction multiplied by the number of transactions must remain constant.
D)price of the average transaction multiplied by the number of transactions must double.

Question 33

The quantity equation, viewed as an identity, is a definition of the:

A)quantity of money.
B)quantity of transactions.
C)price level.
D)transactions velocity of money.

Question 34

The income velocity of money increases and the money demand parameter k when people want to hold money.

A)increases; more
B)increases; less
C)decreases; more
D)decreases; less

Question 35

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.

Question 36

Consider the money demand function that takes the form (M/P)d = kY, where M is the quantity of money, P is the price level, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the rate of inflation in this country?

A)3 percent
B)7 percent
C)10 percent
D)13 percent

Question 37

All of the following assets are included in M1 except:

A)currency.
B)demand deposits.
C)traveler's checks.
D)money market deposit accounts.

Question 38

If the demand for real money balances is proportional to real income, velocity will:

A)increase as income increases.
B)increase as income decreases.
C)vary directly with the interest rate.
D)remain constant.

Question 39

Currency equals:

A)M1.
B)the sum of funds in checking accounts.
C)the sum of checking accounts and paper money.
D)the sum of coins and paper money.

Question 40

Real money balances equal the:

A)sum of coin, currency, and balances in checking accounts.
B)amount of money expressed in terms of the quantity of goods and services it can purchase.
C)number of dollars used as a medium of exchange.
D)quantity of money created by the Federal Reserve.

Question 41

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must:

A)increase by 2 percent.
B)increase by 1 percent.
C)remain constant.
D)decrease by 1 percent.

Question 42

Devoting resources to avoiding the costs of expected inflation leads to:

A)eliminating the costs of expected inflation.
B)fewer relative price changes.
C)economic inefficiency.
D)a decrease in the transaction velocity of money.

Question 43

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.

Question 44

The quantity equation for money, by itself:

A)may be thought of as a definition for velocity.
B)implies that the velocity of money is constant.
C)implies that the price level is proportional to the money supply.
D)implies that real gross domestic product (GDP) is proportional to the money supply.

Question 45

If income velocity is assumed to be constant, but no other assumptions are made, the level of
Is determined by M.

A)prices
B)income
C)transactions
D)nominal GDP

Question 46

Using average rates of money growth and inflation in the United States over many decades, Friedman and Schwartz found that decades of high money growth tended to have rates of inflation and decades of low money growth tended to have rates of inflation.

A)high; high
B)high; low
C)low; low
D)low; high

Question 47

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

Question 48

According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by:

A)the Organization of Petroleum Exporting Countries (OPEC).
B)the U.S. Treasury.
C)the Federal Reserve.
D)private citizens.

Question 49

Percentage change in P is approximately equal to the percentage change in:

A)M.
B)M minus percentage change in Y.
C)M minus percentage change in Y plus percentage change in velocity.
D)M minus percentage change in Y minus percentage change in velocity.

Question 50

According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be:

A)increasing.
B)decreasing. 7
C)percent.
D)constant.

Question 51

Inflation the variability of relative prices and allocative efficiency.

A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; increases

Question 52

The quantity theory of money assumes that:

A)income is constant.
B)velocity is constant.
C)prices are constant.
D)the money supply is constant.

Question 53

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be percent.

A)3
B)4
C)9
D)11

Question 54

The real interest rate is equal to the:

A)amount of interest that a lender actually receives when making a loan.
B)nominal interest rate plus the inflation rate.
C)nominal interest rate minus the inflation rate.
D) nominal interest rate.

Question 55

"Inflation tax" means that:

A)as the price level rises, taxpayers are pushed into higher tax brackets.
B)as the price level rises, the real value of money held by the public decreases.
C)as taxes increase, the rate of inflation also increases.
D)in a hyperinflation, the chief source of tax revenue is often the printing of money.

Question 56

-During the American Revolution, the price of gold measured in continental dollars increased to more than times its previous level.

A)2
B)10
C)50
D)100

Question 57

The percentage of government revenue raised by printing money has usually accounted for:

A)more than 10 percent of government revenue in the United States.
B)less than 3 percent of government revenue in the United States.
C)less than 3 percent of government revenue in Italy.
D)less than 3 percent of government revenue in Greece.

Question 58

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is:

A)1 percent.
B)6 percent.
C)-4 percent.
D)-5 percent.

Question 59

If velocity is constant and, in addition, the factors of production and the production function determine real GDP, then:

A)the price level is proportional to the money supply.
B)real GDP is proportional to the money supply.
C)the price level is fixed.
D)nominal GDP is fixed.

Question 60

The right of seigniorage is the right to:

A)levy taxes on the public.
B)borrow money from the public.
C)draft citizens into the armed forces.
D)print money.

Question 61

Variables expressed in terms of money are called variables.

A)real
B)nominal
C)endogenous
D)exogenous

Question 62

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.

Question 63

In Zimbabwe in the 1990s, the government resorted to printing money to pay the salaries of government employees because of:

A)its need to avoid price
B)controls. high rates of inflation.
C)declining tax revenues.
D)a need to stimulate the economy.

Question 64

The hyperinflation experienced by interwar Germany illustrates how fiscal policy can be connected to monetary policy when government expenditures are financed by:

A)new taxes.
B)borrowing in the open market.
C)printing large quantities of money.
D)selling gold.

Question 65

If nominal wages cannot be cut, then the only way to cut real wages is by:

A)inflation.
B)unions.
C)legislation.
D)productivity increases.

Question 66

Although hyperinflations ultimately are the result of excessive growth rates of the money supply, the underlying motive for the excessive money growth rates is frequently a government's:

A)desire to increase prices throughout the economy.
B)need to generate tax revenue to pay for spending.
C)responsibility to increase nominal interest rates by increasing expected inflation.
D)inability to conduct open-market operations.

Question 67

In instances of hyperinflation, the delays involved in collecting taxes often result in:

A)decreased real government tax revenue.
B)large capital gains for creditors.
C)higher shoeleather costs of inflation.
D)higher ex ante real interest rates.

Question 68

An example of a nominal variable is the:

A)money supply.
B)quantity of goods produced in a year.
C)relative price of bread.
D)real wage.

Question 69

To end a hyperinflation, a government trying to reduce its reliance on seigniorage would:

A)print more money.
B)raise taxes and cut spending.
C)lower taxes and increase spending.
D)lower interest rates.

Question 70

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.

Question 71

Variables expressed in terms of physical units or quantities are called variables.

A)real
B)nominal
C)endogenous
D)exogenous

Question 72

If inflation is 6 percent and a worker receives a 4 percent wage increase, then the worker's real wage:

A)increased 4 percent.
B)increased 2 percent.
C)decreased 2 percent.
D)decreased 6 percent.

Question 73

A rate of inflation that exceeds 50 percent per month is typically referred to as a(n):

A)inflation.
B)hyperinflation.
C)deflation.
D)disinflation.

Question 74

Which of the following would most likely be called a hyperinflation?

A)Price increases averaged 300 percent per year.
B)The inflation rate was 10 percent per year.
C)Real GDP grew at a rate of 12 percent over a year.
D)A stock market index rose by 1,000 points over a year.

Question 75

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.

Question 76

A variable rate of inflation is undesirable because:

A)debtors and creditors cannot protect themselves by indexing contracts.
B)shoeleather costs are greater under variable inflation than under constant inflation.
C)menu costs are greater under variable inflation than under constant inflation.
D)variable inflation leads to greater uncertainty and risk than under constant inflation.

Question 77

Hyperinflation in Bolivia in the 1980s increased all of the following except:

A)production.
B)crime.
C)the government budget deficit.
D)prices.

Question 78

Compared to periods of lower rates of inflation, during a hyperinflation all of the following occur except:

A)shoeleather costs increase.
B)menu costs become larger.
C)relative prices do a better job of reflecting true scarcity.
D)tax distortions increase.

Question 79

An example of a real variable is the:

A)dollar wage a person earns.
B)quantity of goods produced in a year.
C)price level.
D)nominal interest rate.

Question 80

Which of the following is an example of a relative price?

A)the real interest rate
B)the capital stock
C)the dollar wage per
D)hour the price level