Question 1

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

Accepted Answer

The answer of What is the principle monetary policy tool...

Question 2

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 money's ability to function in this capacity by decreasing its value so rapidly that people may resort to bartering or using foreign currency instead.

Question 3

Hyperinflation can be caused by

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...

Question 4

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.

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Question 5

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

Accepted Answer

According to the quantity theory of money, inflation is primarily caused by an increase in the supply of money in the economy. Therefore, the growth rate of the money supply minus the growth rate of real output (B) is the best choice for the formula to calculate inflation rate. Option A (money supply minus real output) and Option C (real output minus the money supply) are illogical and do not make sense. Option D (the growth rate of real output minus the growth rate of the money supply) is incorrect because it implies that an increase in the output would lead to lower inflation, which is not necessarily true.

Question 6

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 is equal to the growth rate of money supply minus the growth rate of real GDP. Therefore, inflation rate = 20% - 5% = 15%.

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

The quantity equation states that

Accepted Answer

The quantity equation is M × V = P × Y, which states that the money supply (M) multiplied by the velocity of money (V) equals the price level (P) multiplied by real output (Y). This equation is used to understand the relationship between the monetary base and the broader money supply, as well as between the money supply, prices, and economic output.

Question 9

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.

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Question 10

How do open market operations work?

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Question 11

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.

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Question 12

The German Hyperinflation of the early 1920s was caused by

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Question 13

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 14

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.

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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 seeks to explain the connection between money and

Accepted Answer

The quantity theory of money suggests that changes in the supply of money in an economy will directly impact the level of prices. As the quantity of money in circulation increases, prices will rise, and vice versa. This relationship between money and prices is expressed in the equation MV = PQ, where M is the money supply, V is the velocity of circulation, P is the price level, and Q is the level of real output.

Question 17

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

Accepted Answer

The quantity theory of money states that the total amount of money in an economy is directly proportional to the price level and the level of transactions. This was derived from the quantity equation (MV = PQ), where M represents the money supply, V represents the velocity of money, P represents the price level, and Q represents the quantity of transactions. The quantity theory of money assumes that the velocity of money is fixed, meaning that a given amount of money will be spent a certain number of times within a given period. Therefore, the correct answer is C, as the quantity theory of money assumes a fixed velocity of money.

Question 18

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

Hyperinflation is a situation where there is an extremely rapid increase in the prices of goods and services in an economy. This often results in the devaluation of the local currency, as was the case in Zimbabwe. The exchange rate of 2 billion Zimbabwean dollars to one U.S. dollar is a clear indication of the severity of the hyperinflation.

Question 19

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 price level in an economy is directly proportional to the amount of money in circulation in that economy. In the long run, the theory predicts that inflation results from the money supply growing at a faster rate than real GDP. This means that if the money supply increases too quickly relative to the productive capacity of the economy, there will be too much money chasing too few goods, and prices will rise. Therefore, option D is the correct choice.

Question 20

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.

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