Question 1

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

Accepted Answer

According to the quantity theory of money, inflation is primarily determined by the growth rate of the money supply relative to the growth rate of real output. In other words, if the money supply grows faster than the production of goods and services in the economy, this can lead to an increase in the general price level or inflation. Therefore, the correct formula for the inflation rate is the growth rate of the money supply minus the growth rate of real output, which is given by option B.

Question 2

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

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Question 3

How will the purchase of $100 million of government securities by the Federal Reserve change bank reserves and total checking account deposits in the banking system as a whole? Assume that banks do not hold any excess reserves,that households and firms do not change the amount of currency they hold,and that the required reserve ratio is 20 percent.

Accepted Answer

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Question 4

How effective is discount policy as compared to open market operations in managing the money supply? Explain how The Federal Reserve uses discount policy today.

Accepted Answer

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Question 5

The quantity equation states that

Accepted Answer

The quantity equation is expressed as M × V = P × Y, which shows the relationship between the money supply (M), its velocity (V), the price level (P), and real output (Y). This equation is the basis for the quantity theory of money, which suggests that changes in the money supply affect prices and output in the long run. Choice A is the correct equation, but it is presented in a different format. Choices C and D are incorrect as they do not reflect the quantity equation.

Question 6

What is the principle monetary policy tool used by the Fed.Why?

Accepted Answer

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Question 7

The German Hyperinflation of the early 1920s was caused by

Accepted Answer

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

Question 8

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 rate = % change in money supply - % change in real GDP. Therefore, inflation rate = 20% - 5% = 15%. So, the correct answer is A) 15 percent.

Question 9

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

Accepted Answer

The quantity theory of money states that, in the long run, inflation is directly proportional to the growth rate of the money supply relative to real GDP. This means that if the money supply grows at a faster rate than real GDP, there will be more money chasing the same amount of goods and services, which will lead to higher prices and inflation. Therefore, the correct choice is D, which states that inflation results from the money supply growing at a faster rate than real GDP.

Question 10

The quantity theory of money seeks to explain the connection between money and

Accepted Answer

The quantity theory of money posits that the supply of money in an economy has a proportional relationship with the overall price level of goods and services in that economy. In other words, if the supply of money increases, prices will also increase, all other things being equal. Therefore, the quantity theory of money seeks to explain the connection between money and prices.

Question 11

The velocity of money is defined as

Accepted Answer

The velocity of money is defined as the average number of times each dollar is used to purchase goods and services.

Question 12

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 13

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 14

Which of the following is not a consequence of hyperinflation?

Accepted Answer

Hyperinflation causes money to lose value rapidly, making it unappealing as a store of value and a unit of account. This phenomenon diminishes the ability of money to serve as a medium of exchange. Therefore, choice A is not a consequence of hyperinflation.

Question 15

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 16

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

Accepted Answer

The quantity theory of money states that changes in the money supply lead to proportional changes in the price level. This theory is based on the quantity equation, which is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced. The quantity theory of money assumes that the velocity of money is fixed, meaning that the number of times a unit of currency is spent in a given period of time does not change.

Question 17

Hyperinflation can be caused by

Accepted Answer

The answer of Hyperinflation can be caused by
...

Question 18

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 money supply, V is velocity of money, P is price level, and Y is real GDP. Solving for P, we get P=MV/Y. If velocity of money grows by 5%, then V=1.05. If money supply grows by 10%, then M=1.1. And if real GDP grows by 4%, then Y=1.04. Plugging these values into the equation, we get P=1.1*1.05/1.04=1.116. Therefore, the inflation rate is (1.116-1)*100=11.6%, which is closest to option C, 11%.

Question 19

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 20

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 and the devaluation of the Zimbabwean dollar to such an extreme extent indicates hyperinflation. This is characterized by a drastic decrease in the purchasing power of a country's currency, leading to skyrocketing prices for goods and services.

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