Deck 11: The Monetary System

Question 1

________ money refers to something that is used as money but is otherwise worthless and typically has the backing of the government or a central bank.

A) Commodity
B) Fiat
C) Representative
D) Federal

Answer 1

Fiat

Question 2

Daniel lives in Fiji.He learns that the Fijian dollar is an example of fiat money.This means that the Fijian dollar ________.

A) is worth exactly 1 U.S. dollar
B) fluctuates in value against other countries' currencies
C) can be exchanged at a fixed rate for a physical commodity like gold or silver
D) is not backed by a physical commodity like gold or silver

Answer 2

is not backed by a physical commodity like gold or silver

Question 3

Anna,Barry,and Clara grew up together in Michigan.After college,they each went overseas to countries that had different currencies.They had a group chat in which they were comparing costs of living.So that they could understand one another,they each converted their costs into U.S.dollars.What purpose did the U.S.dollar serve in their conversation?

A) Medium of exchange
B) Store of value
C) Unit of account
D) Loanable fund

Answer 3

Unit of account

Question 4

What is the main difference between the type of money that was used before the invention of the printing press and today?

Question 5

In theory,any object ________ could play the role of fiat money.

A) that has an unlimited demand
B) for which demand is limited
C) in unlimited supply
D) in limited supply

Question 6

When an asset is used as a universal yardstick for expressing the worth of different goods and services,it serves the function of a ________.

A) store of value
B) unit of account
C) medium of exchange
D) loanable fund

Question 7

What makes a U.S.$100 bill valuable?

A) People are likely to accept a $100 bill as payment.
B) It is expensive to produce a $100 bill.
C) A $100 bill can be exchanged on demand for a given amount of gold.
D) A $100 bill is pretty to look at.

Question 8

Betsy enters a roadside cafeteria and orders a medium-sized cappuccino and a chicken burger.She hands over $5 at the cash counter and collects the food.In this example,money serves the function of ________.

A) a medium of exchange
B) a store of value
C) a measure of inflation
D) a means of deferred payment

Question 9

Which of the following is true of fiat money?

A) Fiat money is not backed by a physical commodity.
B) Fiat money is illegal and difficult to counterfeit.
C) The technology required to produce fiat money is not widely available.
D) The raw materials required for the production of fiat money are available only in a few countries.

Question 10

When an asset enables people to transfer purchasing power into the future,it serves the function of a ________.

A) store of value
B) unit of account
C) medium of exchange
D) measure of inflation

Question 11

Is there any risk involved in using fiat money? How can it be minimized?

Question 12

Ryan saved $50,000 last year so that he could buy a car this year.In this case,money served the function of a ________.

A) medium of exchange
B) store of value
C) unit of account
D) measure of inflation

Question 13

Sheena gets her paycheck on the first day of every month and spends it over the month to purchase various goods and services.What are the functions that money is performing in this case?

Question 14

The paper currency used by the United States at the beginning of the Civil War was referred to as a demand note because ________.

A) it was used to create the demand for various goods and services
B) demand for the currency was kept constant over the entire period of Civil War
C) the currency could be exchanged for gold as and when demanded
D) it was limited in supply and there was always an excess demand for the currency in the country

Question 15

The paper currency that is currently used in the United States is an example of ________ money.

A) hard
B) fiat
C) commodity
D) price-indexed

Question 16

Which of the following statements is true of money?

A) Paper money was invented around 1000 AD in China.
B) Fiat money was used in the barter system of exchange.
C) Paper money was the first form of money to be invented.
D) One of the limitations of paper money is that it does not function as a store of value.

Question 17

Which of the following statements is true?

A) One of the limitations of using money is that it does not allow for the transfer of purchasing power into the future.
B) The necessary condition required for money to function as a medium of exchange is that it also needs to be a store of value.
C) The hours of labor that go into producing a product are a better unit of account than paper money.
D) When money is used as a yardstick to describe the price of various goods and services, it serves as a store of value.

Question 18

Jane got paid in cash for a programming job.Jane didn't need to buy anything that week,but put the money in her purse to use when she needed it.Jane was using the money as a ________.

A) medium of exchange
B) store of value
C) unit of account
D) loanable fund

Question 19

When an asset is traded for goods and services,it serves the function of a ________.

A) store of value
B) unit of account
C) loanable fund
D) medium of exchange

Question 20

When Tara visited Canada recently,she made sure she had some Canadian currency on hand in order to buy things.In this sense,she was using the currency as a ________.

A) medium of exchange
B) store of value
C) unit of account
D) loanable fund

Question 21

U.S.currency is not currently convertible into gold.What does this mean?

A) It is impossible/illegal to buy gold with U.S. currency.
B) The government is not obliged to exchange U.S. currency for gold.
C) The price of gold in U.S. currency does not change from day to day.
D) The price of gold in U.S. currency fluctuates from day to day.

Question 22

Which of the following equations is correct?

A) Growth rate of nominal GDP = Inflation ‒ Growth rate of real GDP.
B) Growth rate of nominal GDP = Inflation + Growth rate of real GDP.
C) Growth rate of nominal GDP = Inflation ÷ Growth rate of interest rates.
D) Growth rate of nominal GDP = Growth rate of interest rates ÷ Inflation.

Question 23

Scenario: An economy produces only cell phones. In 2015, the economy manufactured 275 cell phones, and each cell phone sold for $200. In 2016, the economy manufactured 280 cell phones, but the price of each cell phone fell to $180.
Refer to the scenario above.What is the nominal GDP of the economy in 2015?

A) $47,000
B) $49,500
C) $55,000
D) $56,000

Question 24

Scenario: An economy produces only cell phones. In 2015, the economy manufactured 275 cell phones, and each cell phone sold for $200. In 2016, the economy manufactured 280 cell phones, but the price of each cell phone fell to $180.
Refer to the scenario above.Using 2015 as the base year,what was the real GDP of the economy in 2015?

A) $45,000
B) $55,000
C) $57,500
D) $75,000

Question 25

Scenario: An economy produces only cell phones. In 2015, the economy manufactured 275 cell phones, and each cell phone sold for $200. In 2016, the economy manufactured 280 cell phones, but the price of each cell phone fell to $180.
Refer to the scenario above.Using 2016 as the base year,what was the real GDP of the economy in 2015?

A) $40,500
B) $49,500
C) $50,000
D) $52,500

Question 26

Scenario: An economy produces only cell phones. In 2015, the economy manufactured 275 cell phones, and each cell phone sold for $200. In 2016, the economy manufactured 280 cell phones, but the price of each cell phone fell to $180.
Refer to the scenario above.What is the nominal GDP of the economy in 2016?

A) $47,000
B) $50,000
C) $50,400
D) $55,000

Question 27

Consider an economy that only produces wooden chairs.In 2012,the economy produced 100 wooden chairs priced at $10 each.The nominal GDP of the economy for the year 2012 is ________.

A) $10
B) $100
C) $1,000
D) $10,000

Question 28

M2 adds together ________.

A) currency in circulation, savings accounts, and currency held by foreigners
B) currency in circulation, checking accounts, savings accounts, travelers' checks, and money market accounts
C) currency in circulation, checking accounts, savings accounts, travelers' checks, and currency held by foreigners
D) currency in circulation and currency held by foreigners

Question 29

When did the U.S.dollar change most recently from being convertible to non-convertible?

A) Before 1850
B) Between 1850 and 1900
C) Between 1900 and 1950
D) Since 1950

Question 30

Scenario: An economy produces only cell phones. In 2015, the economy manufactured 275 cell phones, and each cell phone sold for $200. In 2016, the economy manufactured 280 cell phones, but the price of each cell phone fell to $180.
Refer to the scenario above.Using 2015 as the base year,what was the real GDP of the economy in 2016?

A) $47,000
B) $49,500
C) $55,000
D) $56,000

Question 31

Bitcoin is a cryptocurrency (a virtual currency that is protected from counterfeiting and theft by computer code).Is Bitcoin an example of a fiat money?

A) No, because Bitcoin cannot be converted into gold on demand.
B) No, because Bitcoin can be converted into gold on demand.
C) Yes, because Bitcoin cannot be converted into gold on demand.
D) Yes, because Bitcoin can be converted into gold on demand.

Question 32

Which of the following statements correctly highlights a difference between real GDP and nominal GDP?

A) Real GDP includes the value of goods and services produced by foreign firms, while nominal GDP does not include the value of goods and services produced by foreign firms.
B) Real GDP includes the value of goods and services produced by domestic firms in foreign countries, while nominal GDP does not include the value of goods and services produced by domestic firms in foreign countries.
C) Real GDP strips out the effect of changing prices on the value of goods and services produced, while nominal GDP does not strip out the effect of changing prices on the value of goods and services produced.
D) Real GDP does not take into account the value of goods and services provided, while nominal GDP takes these into account.

Question 33

When an economist describes the "money supply," she is referring to ________.

A) Many forms of assets that can be immediately drawn on to purchase goods and services
B) Only the physical currency in circulation that can be immediately drawn on to purchase goods and services
C) Only the bank account assets that can be immediately drawn on to purchase goods and services
D) The physical currency held by banks to pay off depositors

Question 34

In the United States,the money supply is most commonly referred to as ________.

A) M1
B) M2
C) M3
D) M4

Question 35

The "gold standard" is a system in which ________.

A) paper currency is backed by gold
B) people use gold as a medium of exchange
C) gold mining firms own the right to print currency
D) gold is imported into the United States in exchange for paper currency

Question 36

Which of the following statements is true?

A) The currency in circulation in any economy is likely to be equal to the total money supply in the economy.
B) The currency in circulation in any economy is likely to be less than the total money supply in the economy.
C) In the United States, currency in circulation accounts for more than 50 percent of the total money supply.
D) In the United States, currency in circulation accounts for less than 1 percent of the money supply.

Question 37

If the growth rates of nominal GDP and real GDP in an economy are 6 percent and 2 percent,respectively,the inflation rate in the economy must be ________.

A) 2 percent
B) 3 percent
C) 4 percent
D) 8 percent

Question 38

A researcher finds that,for an economy,the nominal GDP in the year 2015 equaled the nominal GDP in the year 2016.She also finds that the output of the economy was the same over the two years.A situation like this is possible only if ________.

A) the annual inflation rate in the economy is negative
B) the annual inflation rate in the economy is 0 percent
C) the annual interest rate in the economy is negative
D) the annual interest rate in the economy is 0 percent

Question 39

In an economy,if the money supply is $100,000,currency in circulation is $50,000,amount in savings accounts is $18,000,amount in travelers' checks is $12,000,and the amount in money market accounts is $9,000,then what is the amount held in checking accounts in the economy?

Question 40

Physical currency in circulation makes up approximately what percentage of the U.S.money supply (as measured by M2)?

A) ~5 percent
B) ~10 percent
C) ~25 percent
D) ~50 percent

Question 41

If the growth rate of real GDP and the rate of inflation in an economy are 2 percent and 1 percent,respectively,the growth rate of nominal GDP in the economy must be ________.

A) 1 percent
B) 2 percent
C) 3 percent
D) 5 percent

Question 42

Scenario: Bookland is a country that produces only books. In 1990, Bookland produced 10,000 books at a market price of $10 each. In 1991, Bookland produced 11,000 books at a market price of $12 each.
Refer to the scenario above.Nominal GDP growth in Bookland from 1990 to 1991 was closest to ________.

A) 10 percent
B) 20 percent
C) 30 percent
D) 40 percent

Question 43

If the quantity theory of money holds,then in an economy,then ________.

A) Inflation = Growth rate of money supply + Growth rate of real GDP
B) Inflation = Growth rate of money supply ‒ Growth rate of real GDP
C) Inflation = Growth rate of money supply + Growth rate of nominal GDP
D) Inflation = Growth rate of money supply ‒ Growth rate of nominal GDP

Question 44

Why is real GDP a more accurate measure of the level of production in an economy than nominal GDP? Explain with an example.

Question 45

The quantity theory of money implies that the growth rate of ________.

A) money demand is equal to the growth rate of money supply
B) money supply is equal to the growth rate of nominal GDP
C) money supply is equal to the growth rate of real GDP
D) currency in circulation is equal to the growth rate of the price level

Question 46

Scenario: Bookland is a country that produces only books. In 1990, Bookland produced 10,000 books at a market price of $10 each. In 1991, Bookland produced 11,000 books at a market price of $12 each.
Refer to the scenario above.Real GDP growth in Bookland from 1990 to 1991 was closest to ________.

A) 10 percent
B) 20 percent
C) 30 percent
D) 40 percent

Question 47

In Swaziland,the nominal GDP growth rate is 5 percent and the inflation rate is 7 percent.The real GDP growth rate in Swaziland is approximately ________.

A) −2 percent
B) 2 percent
C) 12 percent
D) 35 percent

Question 48

Which of the following equations correctly links the growth rate of nominal GDP,the growth rate of real GDP,and the inflation rate?

A) Growth rate of nominal GDP = Inflation rate + Growth rate of real GDP
B) Growth rate of nominal GDP = Inflation rate - Growth rate of real GDP
C) Growth rate of real GDP = Inflation rate + Growth rate of nominal GDP
D) Growth rate of real GDP = Inflation rate - Growth rate of nominal GDP

Question 49

Scenario: Bookland is a country that produces only books. In 1990, Bookland produced 10,000 books at a market price of $10 each. In 1991, Bookland produced 11,000 books at a market price of $12 each.
Refer to the scenario above.The nominal GDP in Bookland in 1990 was ________.

A) $10,000
B) $100,000
C) $110,000
D) $120,000

Question 50

Scenario: Bookland is a country that produces only books. In 1990, Bookland produced 10,000 books at a market price of $10 each. In 1991, Bookland produced 11,000 books at a market price of $12 each.
Refer to the scenario above.The nominal GDP in Bookland in 1991 was ________.

A) $110,000
B) $120,000
C) $132,000
D) $144,000

Question 51

Consider an economy over the years 2008 and 2009.The output in the economy remained constant over these two years,but the prices of all goods and services halved.In such a situation,________.

A) the nominal GDP of the economy increased over the two years
B) the nominal GDP of the economy remained the same over the two years
C) the real GDP of the economy increased over the two years
D) the real GDP of the economy stayed the same over the two years

Question 52

Scenario: Bookland is a country that produces only books. In 1990, Bookland produced 10,000 books at a market price of $10 each. In 1991, Bookland produced 11,000 books at a market price of $12 each.
Refer to the scenario above.The rate of inflation in Bookland from 1990 to 1991 was closest to ________.

A) 10 percent
B) 20 percent
C) 30 percent
D) 40 percent

Question 53

If the growth rate of nominal GDP and the rate of inflation in an economy are 4 percent and 1 percent,respectively,the growth rate of real GDP in the economy must be ________.

A) 1 percent
B) 3 percent
C) 4 percent
D) 5 percent

Question 54

The quantity theory of money assumes a constant ratio of ________.

A) real GDP to nominal GDP
B) money supply to nominal GDP
C) money supply to real GDP
D) money demand to money supply

Question 55

Which of the following equations correctly links the growth rate of real GDP,the growth rate of nominal GDP,and the inflation rate?

A) Growth rate of real GDP = Growth rate of nominal GDP + Inflation rate.
B) Growth rate of real GDP + Growth rate of nominal GDP = Inflation rate.
C) Growth rate of real GDP - Growth rate of nominal GDP = Inflation rate.
D) Growth rate of real GDP = Growth rate of nominal GDP - Inflation rate.

Question 56

In Swaziland,the nominal GDP growth rate is 7 percent and the inflation rate is 5 percent.The real GDP growth rate in Swaziland is approximately ________.

A) −2 percent
B) 2 percent
C) 12 percent
D) 35 percent

Question 57

Consider an economy where the growth rate of real GDP is 6 percent and the annual rate of inflation is 2 percent.If the quantity theory of money holds,the growth rate of money supply in the economy will be ________.

A) 2 percent
B) 4 percent
C) 6 percent
D) 8 percent

Question 58

If two variables have the same rate of growth over the long run,their ratio will ________.

A) increase over the long run
B) decrease over the long run
C) remain constant over the long run
D) initially decrease and then increase over the long run

Question 59

According to the quantity theory of money,if the growth rate of money supply is 6 percent and the growth rate of real GDP is 9 percent,then the growth rate of nominal GDP in the economy will be ________.

A) 3 percent
B) 6 percent
C) 9 percent
D) 15 percent

Question 60

The quantity theory of money ________.

A) assumes that the ratio of money supply to nominal GDP increases over time
B) assumes that the ratio of money supply to nominal GDP decreases over time
C) is an exact representation of how the economy behaves in the long run
D) is a representation of how a change in the money supply affects the price level in an economy

Question 61

One of the main reasons for hyperinflation episodes is ________.

A) high tax rates
B) large government budget deficits
C) a decrease in real GDP
D) a decrease in the demand for consumer goods

Question 62

The growth rate of a country's money supply in a particular year was 8.5 percent.What was the growth rate of real GDP if the inflation rate in the same year was 4 percent?

Question 63

Which of the following statements best defines hyperinflation?

A) The annual rate of inflation in an economy is negative.
B) The annual rate of inflation in an economy is zero.
C) Inflation in an economy results in prices doubling within 3 years.
D) Inflation in an economy results in prices doubling within 1 year.

Question 64

Consider two countries: Country A and Country B.If the gap between the growth rate of money supply and growth rate of real GDP is larger in Country A than in Country B,then,according to the quantity theory of money,________.

A) the inflation rate will be higher in Country A
B) the inflation rate will be lower in Country A
C) real interest rates will be higher in Country A
D) nominal interest rates will be lower in Country A

Question 65

What does the quantity theory of money imply? If the growth rate of money supply and growth rate of real GDP in an economy are 8 percent and 6 percent,respectively,then what is the inflation rate in the economy?

Question 66

Consider an economy where the growth rate of real GDP is 6 percent and the growth rate of money supply is 8 percent.If the quantity theory of money holds,the inflation rate in the economy will be ________.

A) 2 percent
B) 6 percent
C) 8 percent
D) 14 percent

Question 67

The quantity theory of money assumes that two things grow at the same rate.Which two things?

A) Real GDP and nominal GDP
B) Nominal GDP and prices
C) The money supply and nominal GDP
D) Real GDP and the money supply

Question 68

Suppose that the money supply increases by 10 percent while real GDP increases by 6 percent.What does the quantity theory of money predict the inflation rate will be?

A) 4 percent
B) 6 percent
C) 10 percent
D) 16 percent

Question 69

Suppose that the money supply increases by 20 percent.What does the quantity theory of money tell us must happen to real GDP?

A) It must increase by more than 20 percent.
B) It must increase by less than 20 percent.
C) It must increase by exactly 20 percent.
D) None of the above are correct.

Question 70

According to the quantity theory of money,when the gap between the growth rate of money supply and the growth rate of real GDP widens,________.

A) the inflation rate increases
B) the inflation rate decreases
C) real interest rates increase
D) nominal interest rates decrease

Question 71

Suppose that the money supply increases by 20 percent.If there is no inflation,what does the quantity theory of money tell us must happen to real GDP?

A) It must increase by more than 20 percent.
B) It must increase by less than 20 percent.
C) It must increase by exactly 20 percent.
D) None of the above are correct.

Question 72

Which of the following statements is true of the quantity theory of money?

A) The theory is applicable only in the short run.
B) Predictions of the theory can be verified with data.
C) The theory states that inflation will always be positive.
D) The theory explains the relationship between growth in real GDP and changes in nominal interest rates.

Question 73

The quantity theory of money predicts that the inflation rate will be equal to ________.

A) the growth rate of the money supply
B) the growth rate of real GDP
C) the growth rate of the money supply + the growth rate of real GDP
D) the growth rate of the money supply - the growth rate of real GDP

Question 74

The rate at which a price index decreases is referred to as the ________.

A) deflation rate
B) depreciation rate
C) federal funds rate
D) discount rate

Question 75

Assume that the inflation rate in an economy is measured on the y-axis on a graph,and the annualized growth rate of money supply minus the annualized growth rate of real GDP is measured on the x-axis.If a curve is plotted to establish the relationship between both variables,the curve is likely to be ________.

A) vertical
B) horizontal
C) upward-sloping
D) downward-sloping

Question 76

Consider an economy where the growth rate of money supply is 2 percent and the inflation rate is 2 percent.If the quantity theory of money holds,the growth rate of real GDP in the economy will be ________.

A) 0 percent
B) 1 percent
C) 2 percent
D) 4 percent

Question 77

Hyperinflationary episodes are always related to extremely rapid growth of ________.

A) real GDP
B) interest rates
C) money supply
D) money demand

Question 78

What is likely to happen if the growth rate of money supply doubles in the following year while the growth rate of real output remains unchanged?

Question 79

Which of the following is likely to happen if the annualized growth rate of money supply increases while real GDP remains unchanged?

A) The inflation rate will rise.
B) The inflation rate will fall.
C) Nominal GDP will fall.
D) The unemployment rate will rise.

Question 80

Data confirm that the quantity theory of money ________.

A) holds in the long run
B) holds only in the short run
C) holds both in the long run and the short run
D) does not hold in either the short run or the long run