Question 1

The decision about the forms in which to hold one's wealth is called the ________ decision.
A)Taylor
B)portfolio allocation
C)Fisher effect
D)life-cycle

Accepted Answer

The "portfolio allocation decision" is the decision about the forms in which to hold one's wealth.

Question 2

Jan's Dry Cleaning holds $10,000 on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000 and cost an extra $80 per year in lost production. If, in addition, an armored car service is engaged to pick up cash more frequently for a fee of $120 per year, cash holdings will be further reduced to $6,000 per day. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings further to $4,000. If any reduction in cash holdings will be used to purchase government bonds earning 5 percent, then how much money should Jan's hold?
A)$10,000
B)$8,000
C)$6,000
D)$4,000

Accepted Answer

Note that each additional step reduces the average money holding by $2,000, and that the benefit of each reduction is the 5 percent return from holding additional government bonds. The benefit of each reduction is therefore $100 (0.05 × $2,000)per year. Each additional step should only be taken if this benefit of $100 per year exceeds the additional cost. Since the cost of a making a midday deposit is an extra $80 per year in lost production, this step should be taken. However, the additional cost of increasing the frequency of pickups is $120 per year, so the additional benefit is smaller than the extra cost. Therefore, this additional step should not be taken, and the money holding should be reduced by $2,000 to $8,000.

Question 3

Jim has the following assets and liabilities: $\begin{array}{l|r|}
\hline \text { Credit card balance } & \$ 1,000 \
\hline \text { Cash } & \$ 200 \
\hline \text { Government bonds } & \$ 3,000 \
\hline \text { Checking } & \$ 300 \
\hline \text { Car loan balance } & \$ 10,000 \
\hline \text { Car } & \$ 15,000 \
\hline
\end{array}$
  
Which of the following actions would increase Jim's money demand by $200?
A)Jim writes a check for $200 to pay down his credit card balance.
B)Jim writes a check for $200 to pay down her car loan balance.
C)Jim pays $200 cash for a new lamp.
D)Jim gets a $200 cash advance on his credit card and puts the proceeds in his checking account.

Accepted Answer

Jim's money demand increases when he holds more liquid assets like cash or checking account balances. By getting a $200 cash advance and depositing it into his checking account, he increases his liquid assets by $200.

Question 4

The benefit of holding money is ________, while the opportunity cost of holding money is ________.
A)the nominal interest rate; the fees charged by banks
B)the nominal interest rate; its usefulness in carrying out transactions
C)increased income; lost purchasing power
D)its usefulness in carrying out transactions; the nominal interest rate

Accepted Answer

Holding money involves a cost-benefit calculation. Money has an opportunity cost because interest is foregone, but money's benefit is liquidity: the ability to make transactions easily.

Question 5

The decision about how much money to hold is an application of the:
A)scarcity principle.
B)principle of comparative advantage.
C)principle of increasing opportunity cost.
D)cost-benefit principle.

Accepted Answer

Holding money involves a cost-benefit calculation. Money has an opportunity cost because interest is foregone, but money's benefit is liquidity: the ability to make transactions easily.

Question 6

Jan's Dry Cleaning holds $10,000 on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000 and cost an extra $80 per year in lost production. If, in addition, an armored car service is engaged to pick up cash more frequently for a fee of $120 per year, cash holdings will be further reduced to $6,000 per day. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings further to $4,000. If any reduction in cash holdings will be invested in government bonds earning 7 percent, then how much money should Jan's hold?
A)$10,000
B)$8,000
C)$6,000
D)$4,000

Accepted Answer

Note that each additional step reduces the average money holding by $2,000, and that the benefit of each reduction is the 7 percent return from holding additional government bonds. The benefit of each reduction is therefore $140 (0.07 × $2,000)per year. Each additional step should only be taken if this benefit of $140 per year exceeds the additional cost. Since the cost of a making a midday deposit is an extra $80 per year in lost production, this step should be taken. Similarly, the additional cost of increasing the frequency of pickups is $120 per year, which is also less than the benefit of $140 per year. However, the cost of employing a computerized cash management service is $180, so the additional benefit is smaller than the extra cost. Therefore, this additional step should not be taken, and the money holding should be reduced by $4,000 to $6,000.

Question 7

The opportunity cost of money is:
A)the time spent going to the bank to withdraw funds.
B)the fees charged by banks to provide checking services.
C)the nominal interest rate.
D)the price level.

Accepted Answer

When people hold cash they face an opportunity cost because they forego earnings on interest-bearing accounts.

Question 8

Joan has the following assets and liabilities:  
$\begin{array}{l|r|}
\hline \text { Credit card balance } & \$ 1,000 \
\hline \text { Cash } & \$ 200 \
\hline \text { Government bonds } & \$ 3,000 \
\hline \text { Checking } & \$ 300 \
\hline \text { Car loan balance } & \$ 10,000 \
\hline \text { Car } & \$ 15,000 \
\hline
\end{array}$
  
Which of the following actions would increase Joan's money demand by $100?
A)Joan writes a check for $100 to pay down her credit card balance.
B)Joan writes a check for $100 to pay down her car loan balance.
C)Joan pays $100 cash for a new lamp.
D)Joan sells a $100 government bond and puts the proceeds in her checking account.

Accepted Answer

Selling a government bond and putting the proceeds in her checking account increases her liquid assets, thus increasing her money demand.

Question 9

The usefulness of money in carry out transactions is its ________ and the nominal interest rate is its ________.
A)supply; demand
B)demand; supply
C)cost; benefit
D)benefit; cost

Accepted Answer

Holding money involves a cost-benefit calculation. Money has an opportunity cost because interest is foregone, but money's benefit is liquidity: the ability to make transactions easily.

Question 10

Developments in the United States, such as credit cards, debit cards, ATMs, and online banking have:
A)increased the demand for money.
B)decreased the demand for money.
C)had no impact on the supply or demand for money.
D)increased the supply of money.

Accepted Answer

Because there are so many new, moneyless ways to make transactions, the demand for money has fallen over time.

Question 11

Jan's Dry Cleaning holds $10,000 on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000 and cost an extra $80 per year in lost production. If, in addition, an armored car service is engaged to pick up cash more frequently for a fee of $120 per year, cash holdings will be further reduced to $6,000 per day. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings further to $4,000. If any reduction in cash holdings will be invested in government bonds earning 3 percent, then how much money should Jan's hold?
A)$10,000
B)$8,000
C)$6,000
D)$4,000

Accepted Answer

Note that each additional step reduces the average money holding by $2,000, and that the benefit of each reduction is the 3 percent return from holding additional government bonds. The benefit of each reduction is therefore $60 (0.03 × $2,000)per year. Each additional step should only be taken if this benefit of $60 per year exceeds the additional cost. Since the cost of a making a midday deposit is an extra $80 per year in lost production, the additional benefit is smaller than the extra cost. Therefore, this additional step should not be taken, and the money holding should not be reduced at all but remain $10,000.

Question 12

Joan has the following assets and liabilities: $$\begin{array} { | l | r | } 
\hline \text { Credit card balarice } & \$ 1,000 \
\hline \text { Cash } & \$ 200 \
\hline \text { Goverzunent bonds } & \$ 3,000 \
\hline \text { Stock } & \$ 4,000 \
\hline \text { Checking } & \$ 1,500 \
\hline \text { Car loar balarice } & \$ 10,000 \
\hline \text { Car } & \$ 15,000
\end{array}$$  
Which of the following actions would decrease Joan's money demand by $200?
A)Joan writes a check for $200 to purchase additional shares of stock.
B)Joan gets a $200 cash advance on her credit card and puts the proceeds in her checking account.
C)Joan writes a $200 check for cash and holds the cash.
D)Joan sells $200 worth of stocks and puts the proceeds in her checking account.

Accepted Answer

Writing a check for $200 to purchase additional shares of stock decreases Joan's money demand because it moves money out of her liquid assets (checking account) and into a less liquid form (stocks), without increasing the total amount of money she has available for spending.

Question 13

The decision about how much money to hold is an application of the:
A)scarcity principle.
B)principle of comparative advantage.
C)equilibrium principle.
D)cost-benefit principle.

Accepted Answer

Holding money involves a cost-benefit calculation. Money has an opportunity cost because interest is foregone, but money's benefit is liquidity: the ability to make transactions easily.

Question 14

Jim has the following assets and liabilities: $$\begin{array} { | l | r | } 
\hline \text { Credit card balarice } & \$ 2,000 \
\hline \text { Cash } & \$ 500 \
\hline \text { Goverzunent bonds } & \$ 2,000 \
\hline \text { Stock } & \$ 5,000 \
\hline \text { Checking } & \$ 750 \
\hline \text { Car loar balarice } & \$ 5,000 \
\hline \text { Car } & \$ 15,000
\end{array}$$  
Which of the following actions would decrease Jim's money demand by $200?
A)Jim writes a check for $200 to pay down his credit card balance.
B)Jim sells a $200 government bond and puts the proceeds in his checking account.
C)Jim writes a $200 check for cash and holds the cash.
D)Jim sells $200 worth of stocks and puts the proceeds in his checking account.

Accepted Answer

Paying down the credit card balance decreases liabilities without affecting the form of money held, thus reducing the demand for money to hold for transactions or precautionary reasons.

Question 15

Any value of the money supply chosen by the Federal Reserve implies a specific value for:
A)potential output.
B)the nominal interest rate.
C)government purchases.
D)the budget deficit.

Accepted Answer

When the Federal Reserve chooses a money supply, that particular money supply interacts with money demand to imply the nominal interest rate.

Question 16

The amount of wealth an individual chooses to hold in the form of money is called:
A)the money reaction function.
B)the demand for money.
C)the supply of money.
D)expansionary monetary policy.

Accepted Answer

The demand for money is the amount of wealth an individual chooses to hold in the form of money.

Question 17

Jim has the following assets and liabilities: $\begin{array}{l|r|}
\hline \text { Credit card balance } & \$ 1,000 \
\hline \text { Cash } & \$ 200 \
\hline \text { Government bonds } & \$ 3,000 \
\hline \text { Checking } & \$ 300 \
\hline \text { Car loan balance } & \$ 10,000 \
\hline \text { Car } & \$ 15,000 \
\hline
\end{array}$
  
What is Jim's money demand?
A)$500
B)$750
C)$1,250
D)$3,250

Accepted Answer

Money demand refers to the total amount of liquid assets (cash and checking) that Jim wants to hold. In this case, it's the sum of cash ($200) and checking ($300), which equals $500.

Question 18

The demand for money is:
A)unlimited, since people want to hold as much money as possible.
B)limited by the amount of currency printed by the government.
C)the amount of wealth an individual chooses to hold in the form of money.
D)the amount of income an individual chooses to hold in the form of money.

Accepted Answer

The amount of wealth an individual chooses to hold in the form of money is known as the "demand for money."

Question 19

Jan's Dry Cleaning holds $10,000 on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000 and cost an extra $80 per year in lost production. If, in addition, an armored car service is engaged to pick up cash more frequently for a fee of $120 per year, cash holdings will be further reduced to $6,000 per day. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings further to $4,000. If any reduction in cash holdings will be invested in government bonds earning 10 percent, then how much money should Jan's hold?
A)$10,000
B)$8,000
C)$6,000
D)$4,000

Accepted Answer

Note that each additional step reduces the average money holding by $2,000, and that the benefit of each reduction is the 10 percent return from holding additional government bonds. The benefit of each reduction is therefore $200 (0.1 × $2,000)per year. Each additional step should only be taken if this benefit of $200 per year exceeds the additional cost. Since the cost of a making a midday deposit is an extra $80 per year in lost production, this step should be taken. Similarly, the additional cost of increasing the frequency of pickups of $120 per year and the additional cost of employing a computerized cash management service of $180 are also less than the additional benefit of $200 per year. Therefore the money holding should be reduced by the full $6,000 to $4,000.

Question 20

Joan has the following assets and liabilities: $\begin{array}{l|r|}
\hline \text { Credit card balance } & \$ 1,000 \
\hline \text { Cash } & \$ 200 \
\hline \text { Government bonds } & \$ 3,000 \
\hline \text { Checking } & \$ 300 \
\hline \text { Car loan balance } & \$ 10,000 \
\hline \text { Car } & \$ 15,000 \
\hline
\end{array}$  
What is Joan's money demand?
A)$200
B)$300
C)$500
D)$1,500

Accepted Answer

Money demand refers to the total amount of money that an individual wants to hold in liquid form. For Joan, this includes cash ($200) and the balance in her checking account ($300), totaling $500.

Quiz 26: Stabilizing the Economy: The Role of the Fed

The decision about the forms in which to hold one's wealth is called the ________ decision.

The benefit of holding money is , while the opportunity cost of holding money is .

The decision about how much money to hold is an application of the:

The opportunity cost of money is:

The usefulness of money in carry out transactions is its and the nominal interest rate is its .

Developments in the United States, such as credit cards, debit cards, ATMs, and online banking have:

The decision about how much money to hold is an application of the:

Any value of the money supply chosen by the Federal Reserve implies a specific value for:

The amount of wealth an individual chooses to hold in the form of money is called:

The demand for money is: