Deck 7: The Asset Market, Money, and Prices

Question 1

M1 does not include

A)MMMFs.
B)travelers' checks.
C)currency.
D)demand deposits.

Answer 1

A

Question 2

A disadvantage of the barter system is that

A)no trade occurs.
B)people must produce all their own food,clothing,and shelter.
C)the opportunity to specialize is greatly reduced.
D)gold is the only unit of account.

Answer 2

C

Question 3

Suppose your bank raises its minimum-balance requirement for free checking on checking accounts by $500.You take $500 out of your passbook savings account and put it in your checking account.What is the overall effect on M1 and M2?

A)M1 rises by $500,M2 falls by $500.
B)M1 is unchanged,M2 is unchanged.
C)M1 rises by $500,M2 is unchanged.
D)M1 is unchanged,M2 falls by $500.

Answer 3

C

Question 4

M2 does not include

A)Treasury bonds.
B)passbook savings accounts.
C)small-denomination time deposits.
D)M1.

Question 5

The number of units of one good that trade for one unit of alternative goods can be determined most easily when

A)there is one unit of account.
B)the goods all weigh about the same.
C)the goods are all new.
D)the goods are actively traded through barter.

Question 6

In some countries,prices in stores are listed in terms of U.S.dollars,rather than in units of the local currency.That's most likely because

A)the country's political system is unstable.
B)interest rates are higher using U.S.dollars than using the local currency.
C)there is no other store of value.
D)the country has experienced high rates of inflation.

Question 7

Over half of U.S.currency is

A)held abroad.
B)used in the underground economy.
C)held by banks as reserves.
D)held by businesses,especially retailers,for making transactions.

Question 8

Which of the following measures is the best measure of money as a medium of exchange?

A)M1
B)M2
C)M3
D)None of the above

Question 9

Money's primary role in the economy comes from the benefits of lowering transactions costs and allowing specialization.This function of money is called

A)store of value.
B)medium of exchange.
C)standard of deferred payment.
D)unit of account.

Question 10

People in other countries want to hold U.S.dollars as a

A)medium of exchange.
B)store of value.
C)unit of account.
D)standard of deferred payment.

Question 11

Which of the following is not part of M1?

A)Demand deposits
B)Checking accounts
C)Time deposits
D)Traveler's checks

Question 12

M2 includes

A)large-denomination time deposits.
B)institutional MMMFs.
C)commercial paper.
D)M1.

Question 13

One of money's primary roles in the economy comes from the use of money to transfer purchasing power to the future.This role of money is called

A)store of value.
B)unit of account.
C)medium of exchange.
D)standard of deferred payment.

Question 14

Why do people keep currency in their pockets when bank deposits pay interest?

A)Because banks might steal your money.
B)Because currency is more liquid.
C)Because bank deposits lose value due to inflation.
D)Because bank deposits lose value due to changes in interest rates.

Question 15

For something to satisfy the medium-of-exchange function of money,it must be

A)backed by gold.
B)readily exchangeable for other goods.
C)issued by a central bank.
D)an inherently valuable commodity.

Question 16

The use of money is more efficient than barter because the introduction of money

A)reduces the need for economic specialization.
B)reduces the need to exchange goods.
C)reduces the need for other stores of value.
D)reduces transaction costs.

Question 17

Which of the following statements about M1 and M2 is true?

A)Demand deposits are not part of M1.
B)M2 is more liquid than M1.
C)M1 is larger than M2.
D)Savings deposits are part of M2.

Question 18

In economics,money refers to

A)income.
B)wealth.
C)assets used and accepted as payment.
D)currency.

Question 19

A good that is used as a medium of exchange as well as being a consumption good is called

A)a barter money.
B)a commodity money.
C)a legal tender.
D)a debased money.

Question 20

We shouldn't be concerned about U.S.currency held abroad because

A)the currency will never return to the United States.
B)foreigners use it to buy U.S.bonds.
C)it represents an interest-free loan to the United States.
D)foreigners can't spend it in their own countries.

Question 21

Time to maturity refers to the amount of time until

A)an asset repays the principal to an investor.
B)an asset pays interest for the first time.
C)a bond can be sold on the secondary market.
D)the yield curve shows an upward slope.

Question 22

The least liquid asset on this list is

A)money.
B)bonds.
C)houses.
D)stocks.

Question 23

Compared with money,bonds have

A)less risk and less liquidity.
B)less risk and more liquidity.
C)more risk and less liquidity.
D)more risk and more liquidity.

Question 24

The interest rate on long-term bonds is somewhat higher than suggested by the expectations theory because

A)the expectations theory doesn't account for taxes.
B)a risk premium exists.
C)an inflation premium must be added to long-term bonds.
D)the Fed can only control short-term interest rates.

Question 25

What happens to M1 and M2 due to each of the following changes?
(a)You take $500 out of your checking account and put it into a passbook savings account.
(b)You take $1000 out of your checking account and buy traveler's checks.
(c)You take $1500 out of your money-market mutual fund and deposit into your checking account.
(d)You cash in $2000 in savings bonds and invest the money in a certificate of deposit.

Question 26

Suppose that you could buy a one-year bond today,which has an interest rate of 3%.If you wait a year and buy a one-year bond then,the interest rate will be 4%.Two years from now,a one-year bond is expected to offer an interest rate of 5%.According to the expectations theory of the term structure of interest rates,what is the interest rate on a two-year bond today? What is the interest rate on a three-year bond today?

Question 27

The financial crisis occurred in 2008 in large part because of losses on securities consisting of bundles of mortgage loans known as

A)home loan loss reserves.
B)credit default swaps.
C)mortgage-backed securities.
D)naked put options.

Question 28

What function is money playing in each of these situations:
(a)You walk into a store in Germany and see that all the prices are in euros.
(b)You buy a candy bar for $1.25.
(c)Your Aunt Jane keeps $100 bills tucked into many books in her house.

Question 29

A one-year bond has an interest rate of 5% today.Investors expect that in one year,a one year bond will have an interest rate equal to 7%.According to the expectations theory of the term structure of interest rates,in equilibrium,a two-year bond today will have an interest rate equal to

A)3.0%.
B)5.0%.
C)5.5%.
D)6.0%.

Question 30

The set of assets that a holder of wealth chooses to own is called

A)an asset assortment.
B)a wealth strategy.
C)a portfolio.
D)an investment envelope.

Question 31

In the early 2000s,lenders began issuing mortgage loans to people who would normally not be qualified to take out loans because they did not meet lending standards.Those borrowers are known as

A)alternative borrowers.
B)weak borrowers.
C)subprime borrowers.
D)credit risks.

Question 32

AAA Company stock has a higher expected rate of return than ZZZ Company stock.All else being equal,you would expect that relative to ZZZ,AAA company stock provides

A)less risk and less liquidity.
B)less risk and more liquidity.
C)more risk and less liquidity.
D)more risk and more liquidity.

Question 33

The ease and quickness with which an asset can be exchanged for goods,services,or other assets is its

A)risk.
B)time to maturity.
C)velocity.
D)liquidity.

Question 34

The uncertainty about the return an asset will earn is

A)liquidity.
B)risk.
C)time to maturity.
D)stochastic dominance.

Question 35

Why is per-capita U.S.currency demand so large? Who is holding large amounts of U.S.currency and why are they doing so? Should U.S.policymakers be concerned about this? Why?

Question 36

A developing country does not have enough taxes to cover its expenditures and is unable to borrow.This government would be most likely to cover its deficit by

A)purchasing government bonds from the public.
B)selling government bonds to the public.
C)selling newly issued government bonds directly to the central bank.
D)buying newly issued government bonds directly from the central bank.

Question 37

The idea that investors today compare the returns on bonds with differing times to maturity to see which is expected to give them the highest return is the underlying principle behind the ________ of the term structure of interest rates.

A)expectations theory
B)investors' viewpoint analysis
C)segmented-markets theory
D)yield comparison theory

Question 38

People's best guesses about returns on assets are called

A)expected returns.
B)liquidity.
C)risk.
D)the term structure of returns.

Question 39

What's the most common way for a central bank to reduce the money supply?

A)Collect higher taxes
B)Sell bonds to the public
C)Buy bonds from the government
D)Buy bonds from the public

Question 40

By spreading her investments out over many different assets,an investor achieves

A)a higher expected return.
B)increased risk.
C)diversification.
D)greater liquidity.

Question 41

Suppose velocity is 3,real output is 9000,and the price level is 1.5.What is the level of real money demand in this economy?

A)2000
B)3000
C)6000
D)30,000

Question 42

If real GDP is $4 billion,the price level is 1.25,and the nominal money stock is $500 million,then velocity is

A)0.1.
B)1.
C)10.
D)100.

Question 43

A 10% decrease in real income usually leads to ________ in money demand.

A)an increase
B)no change
C)a decrease of less than 10%
D)a decrease of 10%

Question 44

Velocity is defined as

A)nominal money stock/nominal GDP.
B)nominal GDP/nominal money stock.
C)real money stock/real GDP.
D)mc².

Question 45

Money demand is given by M^d/P = 1000 + .2Y - 1000i.
Given that P = 200,Y = 2000,and i = .10,real money demand is equal to

A)1,300.
B)1,500.
C)260,000.
D)300,000.

Question 46

An increase in expected inflation is likely to cause

A)a decline in the demand for real balances.
B)an increase in the demand for real balances.
C)no change in the demand for real balances.
D)no change in the demand for real balances only if the income elasticity of real money demand is zero.

Question 47

Which of the following is most likely to lead to an increase of 1% in the nominal demand for money?

A)An increase in real income of 0.5%
B)A decrease in real income of 0.5%
C)A decline of 1% in the price level
D)An increase of 1% in the price level

Question 48

Money demand is given by M^d/P = 1000 + .2Y - 1000i.
Given that P = 200,Y = 2000,and i = .10,velocity is equal to

A)0.65.
B)0.75.
C)1.33.
D)1.54.

Question 49

If the interest elasticity of money demand is -0.1,by what percent does money demand change if the nominal interest rate rises from 2% to 3%?

A)-0.1%
B)5%
C)0%
D)-5%

Question 50

Suppose that:
1)The interest on a one-year bond today is 3%;
2)The interest on a one-year bond starting one year from now is expected to be 4% per year;
3)The interest on a one-year bond starting two years from now is expected to be 5% per year;
4)The risk premium on a two-year bond is 0.5%; and
5)The risk premium on a three-year bond is 1.0%.
Use that information to answer the following questions.
(a)According to the expectations theory,what is the interest rate today on a two-year bond? Show your work.
(b)According to the expectations theory,what is the interest rate today on a three-year bond? Show your work.
(c)Plot the yield curve.

Question 51

If the income elasticity of money demand is 3/4 and the interest elasticity of money demand is -1/4,by what percent does money demand rise if income rises 10% and the nominal interest rate rises from 4% to 5%?

A)7.50%
B)6.25%
C)5.00%
D)1.25%

Question 52

If there is a financial panic and increased uncertainty about the returns in the stock market and bond market,what is the likely effect on money demand?

A)Money demand declines first,then rises when inflation increases.
B)Money demand rises.
C)The overall effect is ambiguous.
D)Money demand declines.

Question 53

Suppose a new law imposes a tax on all trades of bonds and stock.What is the likely effect on money demand?

A)Money demand declines first,then rises when inflation increases.
B)Money demand rises.
C)The overall effect is ambiguous.
D)Money demand declines.

Question 54

Which of the following is most likely to lead to a decrease of 10% in the nominal demand for money?

A)An increase in real income of 5%
B)A decrease in real income of 5%
C)A decline of 10% in the price level
D)An increase of 10% in the price level

Question 55

If real income rises 4%,prices rise 1%,and nominal money demand rises 4%,what is the income elasticity of real money demand?

A)3/4
B)4/5
C)5/6
D)1

Question 56

Mr.Pierpont has wealth of $200,000.He wants to keep at least $80,000 in bonds at all times,and will shift $10,000 into bonds from his checking account for each percentage point that the interest rate on bonds exceeds the interest rate on his checking account.If the interest rate on checking accounts is 4% and the interest rate on bonds is 9%,how much does Mr.Pierpont keep in his checking account?

A)$50,000
B)$70,000
C)$130,000
D)$150,000

Question 57

Mr.Pierpont has wealth of $200,000.He wants to keep at least $80,000 in bonds at all times,and will shift $10,000 into bonds from his checking account for each percentage point that the interest rate on bonds exceeds the interest rate on his checking account.Currently,he keeps $100,000 in bonds,which pay him 7%.What is the current interest rate on checking accounts?

A)5%
B)7%
C)9%
D)10%

Question 58

An increase in the real interest rate would cause an increase in the real demand for money

A)no matter what the change in expected inflation.
B)if expected inflation fell by less than the rise in the real interest rate.
C)if expected inflation fell by the same amount as the rise in the real interest rate.
D)if expected inflation fell by more than the rise in the real interest rate.

Question 59

Over time,the wealth of society increases and payments technologies get more efficient.What is the effect on money demand of these two changes?

A)Money demand rises proportionately to the rise in wealth.
B)Money demand rises,but less than proportionately to the rise in wealth.
C)The overall effect is ambiguous.
D)Money demand declines.

Question 60

The opportunity cost of holding currency decreases when

A)income decreases.
B)the interest rate on bonds decreases.
C)the interest rate on money decreases.
D)wealth decreases.

Question 61

When the real quantity of money supplied equals the real quantity of money demanded,there is said to be

A)goods market equilibrium.
B)asset market equilibrium.
C)monetary neutrality.
D)money illusion.

Question 62

Assume that prices and wages adjust rapidly so that the markets for labor,goods,and assets are always in equilibrium.What are the effects of each of the following on output,the expected real interest rate,and the current price level?
(a)a temporary increase in taxes
(b)a reduction in the effective tax rate on capital
(c)an increase in expected inflation

Question 63

Suppose the real money demand function is M^d/P = 2400 + 0.2 Y - 10,000 (r + π^e).
Assume M = 5000,π^e = .03,and Y = 5000.If the price level were to decrease from 2.5 to 2.0,then the real interest rate would decrease by how many percentage points (assuming M^d,π^e,and Y are unchanged)?

A)4
B)5
C)9
D)14

Question 64

Suppose real money demand is L = 0.8 Y - 100,000 (r + π^e).
If the nominal money supply is 12,000,real output is 15,000,the real interest rate is .02,and the expected inflation rate is .01,then the price level is

A)3/4
B)1
C)4/3
D)3

Question 65

Suppose the real money demand function is M^d/P = 2400 + 0.2 Y - 10,000 (r + π^e).
Assume M = 5000,P = 2.0,and π^e = .03.If Y were to increase from 4000 to 5000,then the real interest rate would increase by how many percentage points?

A)2
B)4
C)5
D)7

Question 66

If the nominal money supply grows 5%,real income falls 2%,and the income elasticity of money demand is 0.8,then the inflation rate is

A)3.0%.
B)3.4%.
C)6.6%.
D)7.0%.

Question 67

If the nominal money supply doubles while real money demand is unchanged,what happens to the price level?

A)The price level increases by a factor of four.
B)The price level doubles.
C)The price level is unchanged.
D)The price level falls by one-half.

Question 68

Suppose the real interest rate is 4% and the expected inflation rate is 3%.If the money supply increases by 10% and output,the real interest rate,and the expected inflation rate are unchanged,then the price level increases by

A)3%.
B)4%.
C)7%.
D)10%.

Question 69

If the income elasticity of money demand is 3/4 and income increases 8%,by about how much does the price level change?

A)Falls by 6%.
B)Unchanged.
C)Rises by 6%.
D)Rises by 8%.

Question 70

Suppose velocity is constant at 4,real output is 10,and the price level is 2.From this initial situation,the government increases the nominal money supply to 6.If velocity and output remain unchanged,by how much will the price level increase?

A)2.4%
B)20%
C)24%
D)50%

Question 71

Suppose the money demand function is given by
M^d/P = 640 + 0.1Y - 5000 (r + π^e).
Suppose the central bank changes the nominal money supply depending on income and inflation:
M^s = 1000 + 0.1Y - 4000π.
(a)If expected inflation equals actual inflation = 0.03,Y = 1000,and r = 0.02,calculate the price level.
(b)If inflation rises to 0.04 while the other variables remain as in part a,calculate the price level.
(c)If expected inflation rises to 0.04 while the other variables remain as in part a,calculate the price level.
(d)If the real interest rate rises to 0.03 while the other variables remain as in part a,calculate the price level.

Question 72

Suppose the money demand function is
M^d/P = 1000 + 0.2Y - 1000 (r + π^e).
(a)Calculate velocity if Y = 2000,r = .06,and π^e = .04.
(b)If the money supply (M^s)is 2600,what is the price level?
(c)Now suppose the real interest rate rises to 0.11,but Y and M^s are unchanged.What happens to velocity and the price level? So if the nominal interest rate were to rise from 0.10 to 0.15 over the course of a year,with Y remaining at 2000,what would the inflation rate be?

Question 73

Suppose the real money demand function is M^d/P = 2400 + 0.2 Y - 10,000 (r + π^e).
Assume M = 4000,P = 2.0,π^e = .03,and Y = 5000.The real interest rate that clears the asset market is

A)3%.
B)6%.
C)11%.
D)14%.

Question 74

Give five examples of factors that could reduce the demand for money.

Question 75

What happens to real money demand (rise,fall,no change)due to a change in each of the following factors?
(a)A tax on stock market transactions is introduced.
(b)Computerized bond trading reduces transactions costs.
(c)People's average level of wealth rises.
(d)The threat of a recession increases the riskiness of stocks and bonds.
(e)The interest rate paid on checking account balances declines.
(f)The price level falls in a one-time jump.

Question 76

If nominal money supply grows 3% and real money demand grows 8%,the inflation rate is

A)-5%.
B)8/3%.
C)5%.
D)11%.

Question 77

If the quantity of money demanded exceeds the quantity of money supplied,then

A)the quantity of nonmonetary assets demanded exceeds the quantity supplied.
B)the quantity of nonmonetary assets supplied exceeds the quantity demanded.
C)the quantity of nonmonetary assets demanded will still equal the quantity supplied,all else being equal.
D)you can make no conclusions about the relative supply and demand of nonmonetary assets.

Question 78

Under a situation of asset market equilibrium,

A)the quantity of money supplied equals the quantity of money demanded.
B)the quantity of money supplied equals the quantity of nonmonetary assets demanded.
C)the quantity of nonmonetary assets supplied equals the quantity of monetary assets demanded.
D)the quantity of money supplied equals the quantity of nonmonetary assets supplied.

Question 79

If real money demand increases 5% and real money supply increases 10%,by about how much does the price level change?

A)Falls by 5%.
B)Unchanged.
C)Rises by 2%.
D)Rises by 5%.

Question 80

If real money demand doubles while the nominal money supply is unchanged,what happens to the price level?

A)The price level increases by a factor of four.
B)The price level doubles.
C)The price level is unchanged.
D)The price level falls by one-half.