Question 1

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 2

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 3

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 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

The quantity theory of money 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 GDP. If we assume that V and Q are constant (i.e. not affected by the increase in money supply), then an increase in M will result in an increase in P (i.e. inflation).

Using this formula, we can calculate the inflation rate as follows:

(20 percent increase in M) – (5 percent increase in Q) = 15 percent inflation rate

Question 5

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 6

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

Accepted Answer

According to the quantity theory of money, inflation is directly proportional to the growth rate of the money supply and inversely proportional to the growth rate of real output. Therefore, the inflation rate equals the growth rate of the money supply minus the growth rate of real output, which is given by choice B.

Question 7

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 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 in the long run, inflation results from the money supply growing at a faster rate than real GDP. This means that if the money supply increases faster than the rate at which goods and services are being produced, then there will be more money chasing fewer goods, leading to a rise in prices. This is known as demand-pull inflation. Thus, choice D is the correct answer.

Question 9

How do open market operations work?

Accepted Answer

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Question 10

The German Hyperinflation of the early 1920s was caused by

Accepted Answer

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Question 11

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 12

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

Accepted Answer

The quantity theory of money 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 real output. The quantity theory of money assumes that changes in the money supply will lead to proportional changes in the price level, assuming that the velocity of money and real output remain constant. Therefore, the correct answer is C because the quantity theory assumes a fixed velocity of money.

Question 13

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

Accepted Answer

The quantity theory of money asserts that changes in the quantity of money in an economy are directly proportional to changes in the price level. As the quantity of money in circulation increases, ceteris paribus, the value of each individual dollar (or other unit of currency) decreased, causing an increase in the general price level. Therefore, the quantity theory of money seeks to explain the connection between money and prices.

Question 14

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 currency to the point where it took billions of Zimbabwean dollars to equal just one U.S. dollar is characteristic of hyperinflation. Stagflation refers to a combination of high inflation and sluggish economic growth, while deflation is the opposite of inflation, with prices actually decreasing over time.

Question 15

Which of the following is not a consequence of hyperinflation?

Accepted Answer

Hyperinflation results in a decrease in the value of money, making it less desirable as a store of value or unit of account. However, it does not enhance money's function as a medium of exchange.

Question 16

The quantity equation states that

Accepted Answer

The quantity equation is represented by the formula M × V = P × Y, where M is the money supply, V is the velocity of money, P is the price level and Y is the real output. This equation shows the relationship between the money supply, the velocity of money, the price level and real output in an economy.

Question 17

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 18

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

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Question 19

Hyperinflation can be caused by

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...

Question 20

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.

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