Question 1

Would the maximum loan that a bank can make be different when receiving a discount loan from the Federal Reserve of $1 million versus receiving a checking account deposit of $1 million? Explain why or why not.

Accepted Answer

The answer of Would the maximum loan that a bank...

Question 2

The quantity theory of money was derived from the quantity equation by asserting that

Accepted Answer

The quantity theory of money states that the overall price level in an economy is directly proportional to the money supply and the velocity of money. This is derived from the quantity equation, which states that MV = PQ (where M is the money supply, V is the velocity of money, P is the price level, and Q is the real output). Since Q is not always fixed, and the money supply is not always fixed, the only remaining constant in the equation is the velocity of money. Therefore, the quantity theory of money asserts that the velocity of money is fixed.

Question 3

According to the quantity theory of money,deflation will occur if the

Accepted Answer

The quantity theory of money suggests that deflation, or a decrease in the general price level, occurs when the money supply grows at a slower rate than real GDP. This is because less money chasing the same amount of goods and services leads to a decrease in prices.

Question 4

According to the quantity theory of money,if the money supply grows at 20 percent and real GDP grows at 5 percent,then the inflation rate will be

Accepted Answer

According to the quantity theory of money, inflation is directly related to the growth rate of the money supply relative to the growth rate of real GDP. The equation for the quantity theory of money is: MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real GDP.

Assuming velocity of money remains constant, we can calculate the inflation rate using the equation:

Inflation Rate = (Percentage Change in Money Supply) - (Percentage Change in Real GDP) 
                   = 20% - 5% 
                   = 15%

Therefore, the correct answer is (A) 15 percent.

Question 5

Hyperinflation can be caused by

Accepted Answer

The answer of Hyperinflation can be caused by
...

Question 6

If the required reserve ratio is 100 percent,could the Federal Reserve still change the money supply with open market operations? Explain whether they could or could not.

Accepted Answer

The answer of If the required reserve ratio is 100...

Question 7

There is a strong link between changes in the money supply and inflation

Accepted Answer

In the long run, there is a well-established relationship between changes in the money supply and inflation, as described by the quantity theory of money. This theory suggests that increasing the money supply faster than the growth of real output leads to inflation. In the short run, other factors can influence prices, making the relationship less clear.

Question 8

In 1980,one Zimbabwean dollar was worth 1.47 U.S.dollars.By the end of 2008,the exchange rate was one U.S.dollar to 2 billion Zimbabwean dollars.When an economy experiences rapid increases in the price level such as what occurred in Zimbabwe,the economy is said to experience

Accepted Answer

The rapid increase in the price level in Zimbabwe is a clear indication of hyperinflation. The exchange rate of one U.S. dollar to 2 billion Zimbabwean dollars signifies a massive devaluation of the Zimbabwean currency, which is a typical characteristic of hyperinflation.

Question 9

According to the quantity theory of money,the inflation rate equals

Accepted Answer

The quantity theory of money states that the price level is directly proportional to the quantity of money in circulation, and in the long run, the growth rate of the money supply determines the inflation rate. Therefore, the inflation rate is the difference between the growth rate of the money supply and the growth rate of real output. Choice B is the only option that reflects this relationship.

Question 10

In 2008,the inflation rate in Zimbabwe rose to almost 15 billion percent,and eventually foreigners and local residents refused to accept the Zimbabwean dollar for goods and services.In early 2009,the new ZImbabwean government decided to

Accepted Answer

Abandoning the Zimbabwean dollar and adopting the U.S. dollar as the official currency was seen as the solution to the hyperinflation crisis in Zimbabwe. This helped stabilize the economy and restore confidence in the financial system.

Question 11

The quantity theory of money predicts that,in the long run,inflation results from the

Accepted Answer

The quantity theory of money predicts that in the long run, inflation results from an increase in the money supply growing at a faster rate than real GDP. This is because if the money supply increases faster than the production of goods and services, there will be more money chasing the same amount of goods and services, leading to an increase in prices.

Question 12

In an attempt to bring lenders and borrowers together following the financial crisis of 2008,the Federal Reserve made a large amount of new funds available to financial markets.Any of these new funds that are loaned out by banks would be classified as ________ of the banks.

Accepted Answer

Excess reserves are funds held by banks above and beyond the amount required by regulations. In the scenario described, the new funds made available by the Federal Reserve would be considered excess reserves if they are loaned out by banks.

Question 13

The quantity equation states that the

Accepted Answer

The quantity equation, often represented as MV = PQ, states that the money supply (M) times the velocity of money (V) equals the price level (P) times real output (Q). This equation is a way to understand how these variables interact within an economy.

Question 14

Which of the following is not a consequence of hyperinflation?

Accepted Answer

Hyperinflation does not enhance money's function as a medium of exchange. In fact, it undermines it by causing instability and uncertainty in prices, making trade and investment difficult.

Question 15

If the rate of growth in real GDP exceeds the rate of growth in the money supply,the quantity theory of money predicts a price deflation.

Accepted Answer

According to the quantity theory of money, the price level is directly proportional to the money supply and inversely proportional to real GDP. Therefore, if real GDP growth exceeds the growth in the money supply, there will be a decrease in the price level, resulting in price deflation.

Question 16

Hyperinflations occur because governments want to spend more than they raise in taxes,and they pay for the extra purchases by printing money.

Accepted Answer

This is the main cause of hyperinflation, as the excessive printing of money leads to a decrease in its value and a rapid increase in prices. This phenomenon has occurred in various countries throughout history, with disastrous economic consequences.

Question 17

In an attempt to bring lenders and borrowers together following the financial crisis of 2008,the Federal Reserve made a large amount of new funds available to financial markets.The Fed expected this to increase in the money supply and the total amount of lending because of the multiplier effect,in which a given amount of new reserves results in a multiple increase in

Accepted Answer

The multiplier effect refers to the increase in bank deposits that can result from a given amount of new reserves. This is because banks can use their excess reserves to make loans, which in turn increases the money supply and results in more bank deposits. Therefore, the correct answer is B) bank deposits.

Question 18

For the purchasing power of money to increase,the price level has to fall.

Accepted Answer

When the price level falls, the same amount of money can buy more goods and services, increasing the purchasing power of money.

Question 19

Using the quantity equation,if the velocity of money grows at 5 percent,the money supply grows at 10 percent,and real GDP grows at 4 percent,then the inflation rate will be

Accepted Answer

The quantity equation is MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP. Solving for P, we get P = MV/Y.

Using the given values, we can calculate the expected inflation rate as follows:

P = MV/Y
P = (1.05)(1.10) / 1.04
P = 1.1558

Therefore, the expected inflation rate is 15.58%, which rounds to approximately 11%. Thus, the best choice is C.

Question 20

The German Hyperinflation of the early 1920s was caused by

Accepted Answer

The answer of The German Hyperinflation of the early 1920s...

Quiz 14: Money,banks,and the Federal Reserve System