Question 1

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

The new funds made available by the Federal Reserve to financial markets are called excess reserves. If banks decide to loan out any of these excess reserves, they would still have the required reserves they need to maintain by law. Therefore, the loans made using excess reserves would be considered part of the banks' excess reserves.

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

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

Question 3

Hyperinflation can be caused by

Accepted Answer

The answer of Hyperinflation can be caused by
...

Question 4

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

Accepted Answer

The purchasing power of money is the value of goods or services that can be purchased with a unit of currency. If the price level falls, the same amount of money can buy more goods or services, which increases the purchasing power of money.

Question 5

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 to the extent that the exchange rate reached one U.S. dollar to 2 billion Zimbabwean dollars is an indication of hyperinflation.

Question 6

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 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

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

Accepted Answer

The quantity theory of money states that the general price level in an economy is directly proportional to the amount of money in circulation, assuming that velocity and real GDP remain constant. Therefore, if the money supply grows faster than the rate of real GDP growth, there will be more money chasing the same amount of goods and services, leading to inflation.

Question 9

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 10

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 11

Which of the following is not a consequence of hyperinflation?

Accepted Answer

Hyperinflation actually diminishes money's function as a medium of exchange because people lose confidence in the currency's value and seek alternative forms of payment, such as bartering or using a more stable currency.

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.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 fact that an initial injection of funds (such as new reserves from the Federal Reserve) can lead to a multiple increase in the overall money supply and lending. This is often because banks use the initial injection to make new loans, which in turn create new deposits and thus more funds available for lending. Therefore, the most likely result of the Federal Reserve's new funds would be an increase in bank deposits.

Question 13

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

Accepted Answer

The quantity equation states that the money supply multiplied by the velocity of money equals the price level multiplied by real output. The quantity theory of money assumes that real output is constant in the short run and that changes in the money supply will solely affect the price level through changes in the velocity of money. Therefore, the velocity of money is assumed to be constant in the short run.

Question 14

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=PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is real GDP. Solving for P, we get P=MV/Q. Given that V grows by 5%, M grows by 10%, and Q grows by 4%, we can calculate the inflation rate as follows:

P_new = (1.05M) / (1.04Q)
P_old = M / Q

Inflation rate = (P_new - P_old) / P_old * 100
= [(1.05M / 1.04Q) - (M / Q)] / (M / Q) * 100
= [(1.05/1.04) - 1] * 100
= 0.9615 * 100
= 9.615%

Therefore, the inflation rate is 11 percent (rounded to the nearest whole number).

Question 15

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

The best solution for the Zimbabwean government in 2009 was to abandon its own currency and adopt a more stable currency like the U.S. dollar. This would provide stability and restore confidence in the economy, as the local residents and foreign investors would have faith in a currency that had a stronger value and could provide a more stable standard of living. The adoption of the U.S. dollar as the official currency allowed the government to curb inflation and stabilize the economy.

Question 16

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 17

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 an accurate explanation of hyperinflations. When a government spends more than it collects in taxes or other revenues, it may resort to printing money to finance its deficits. As the money supply swells, inflation can spiral out of control, leading to hyperinflation.

Question 18

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, if the rate of growth in real GDP exceeds the rate of growth in the money supply, then there will be an increase in the demand for money relative to the supply of money. This will lead to a decrease in prices, which is known as price deflation.

Question 19

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 20

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

Accepted Answer

The quantity theory of money states that inflation is directly related to the growth rate of the money supply relative to the growth rate of real output. Therefore, the best choice is B, which represents the growth rate of the money supply minus the growth rate of real output.

Quiz 25: Money, banks, and the Federal Reserve System