Deck 15: Money, Interest Rates, and the Exchange Rate

Question 1

Which of the following is not a function of money?

A) medium of exchange
B) store of value
C) a high rate of return
D) unit of account

Answer 1

a high rate of return

Question 2

Which of the following is not one of the components of M1 in the U.S.?

A) coins
B) paper currency
C) currency
D) gold

Answer 2

gold

Question 3

The total quantity of currency plus demand deposits is called:

A) M1.
B) M2.
C) the monetary base.
D) broad money.

Answer 3

M1.

Question 4

If you deposit currency from your wallet into your checking account, then:

A) M2 has changed but M1 has remained constant.
B) both M1 and M2 have changed.
C) both M1 and M2 have remained constant.
D) M1 has changed but M2 had remained constant.

Question 5

Which of the following is not a form of near money?

A) coins
B) savings accounts
C) time deposits
D) short-term government securities

Question 6

The monetary base is equal to:

A) C + R.
B) C + money-market mutual funds.
C) 1 divided by the reserve requirement.
D) M1 + M2.

Question 7

Which of the following is not included in the monetary base?

A) financial institution's deposits at the central bank
B) currency
C) total bank reserves
D) reserves of gold in the hands of the public

Question 8

The money multiplier is equal to:

A) C^p * R.
B) R + M1.
C) one divided by the reserve requirement.
D) one divided by R.

Question 9

If the reserve requirement is 20 percent, then the money multiplier would be:

A) 2.
B) 5.
C) 7.
D) 10.

Question 10

If the banking system has a required reserve ratio of 20 percent, then the money multiplier is:

A) 0.2.
B) 0.8.
C) 1.25.
D) 5.0.

Question 11

Which of the following statements is false?

A) Changes in the reserve requirement change the amount banks have to deposit with the central bank.
B) Changes in the reserve requirement change the money multiplier.
C) Changes in the reserve requirement change the money supply.
D) Changes in the reserve requirement have no impact on the money supply.

Question 12

The rate of interest charged by the central bank for loaning reserves to financial institutions is the:

A) prime rate.
B) Federal funds rate.
C) discount rate.
D) commercial paper rate.

Question 13

The interest rate the central bank charges private-sector banks for a loan is known as the:

A) federal funds rate.
B) prime rate.
C) discount rate.
D) multiplier rate.

Question 14

An increase in the discount rate:

A) reduces the cost of reserves borrowed from the central bank.
B) signals the central bank's desire to restrain monetary growth.
C) signals the central bank's desire to increase monetary growth.
D) signals the central bank's desire to lend additional reserves.

Question 15

A decrease in the discount rate:

A) increases the cost of reserves borrowed from the Federal Reserve.
B) signals the Federal Reserve's desire to restrain monetary growth.
C) signals the Federal Reserve's desire to increase monetary growth.
D) signals the Federal Reserve's desire to lend less additional reserves.

Question 16

Which of the following refers to the buying and selling of bonds by the central bank?

A) discounting
B) reserve requirement changing
C) prime rate effects
D) open market operations

Question 17

Which of the following is not a tool used by the central bank to change the money supply?

A) the discount rate
B) the federal funds rate
C) the reserve requirement
D) open market operations

Question 18

The most frequently used tool of the Federal Reserve is:

A) the reserve requirement.
B) the discount rate.
C) open market operations.
D) the federal funds rate.

Question 19

When a central bank buys a bond, the money supply:

A) increases.
B) decreases.
C) remains constant.
D) decreases very rapidly.

Question 20

When a central bank sells a bond, the money supply:

A) increases.
B) decreases.
C) remains constant.
D) increases very rapidly.

Question 21

If the Federal Reserve wants to reduce the money supply, it could:

A) raise the discount rate.
B) sell bonds on the open market.
C) raise the required reserve ratio.
D) all of the above

Question 22

If the Federal Reserve wants to increase the money supply it could:

A) lower the discount rate.
B) sell bonds on the open market.
C) raise the required reserve ratio.
D) all of the above

Question 23

With a monetary base of $40 million and a required reserve ratio of 10%, the money supply would be:

A) $300 million.
B) $400 million.
C) $600 million.
D) $2.5 billion.

Question 24

Suppose that the banking system has a required reserve ratio of 10 percent. How much could the money supply increase in response to a $500 million increase in the monetary base?

A) $50 million
B) $500 million
C) $5 billion
D) $8.0 billion

Question 25

Suppose that the banking system has a required reserve ratio of 10 percent. How much could the money supply increase in response to a $1 billion increase in the monetary base?

A) $100 million
B) $1 billion
C) $10 billion
D) $20 billion

Question 26

Suppose that the banking system has a required reserve ratio of 20 percent. How much could the money supply increase in response to a $500 million increase in the monetary base?

A) $25 million
B) $500 million
C) $2.5 billion
D) $10 billion

Question 27

Suppose that the banking system has a required reserve ratio of 20 percent. How much could the money supply increase in response to a $1 billion increase in the monetary base?

A) $200 million
B) $2 billion
C) $5 billion
D) $10 billion

Question 28

Which of the following statements is true?

A) The demand for money is inversely related to the interest rate.
B) The demand for money is positively related to the interest rate.
C) Changes in the price level do not affect the demand for money.
D) An increase in the price level would tend to lower the demand for money.

Question 29

One of the major determinants of the demand for money is:

A) the amounted of money supplied.
B) interest rates.
C) the value of gold held in Fort Knox.
D) the exchange rate.

Question 30

The demand for money is _____ related to the price level.

A) directly
B) inversely
C) not
D) infrequently

Question 31

The demand for money is _____ related to the interest rate.

A) directly
B) inversely
C) not
D) infrequently

Question 32

The demand for money is _____ related to the level of income.

A) directly
B) inversely
C) not
D) not often

Question 33

The interest rate is:

A) is always stable.
B) the price of money.
C) is always set by the government.
D) is changed on a monthly basis.

Question 34

Changes in interest rates can lead to:

A) changes in capital inflows.
B) changes in capital outflows.
C) changes in the exchange rate.
D) all of the above

Question 35

If the interest rate on a 12-month deposit in a U.S. bank is 5 percent and the interest rate on a comparable 12-month deposit in a Canadian bank is 8 percent, we would expect that:

A) no one would want to invest in U.S. deposits.
B) the U.S. dollar would depreciate in value against the Canadian dollar.
C) the Canadian dollar to depreciate in value against the U.S. dollar.
D) banks in Canada will have to stop offering such high interest rates.

Question 36

Everything else equal, if Japan raises its interest rates:

A) the dollar would depreciate.
B) the U.S. demand for Japanese yen would increase.
C) the Japanese supply of yen would increase.
D) both a and b

Question 37

Which of the following is likely to be the correct sequence of events following an expansion of the U.S. money supply?

A) interest rates rise and the dollar depreciates
B) interest rates rise and the dollar appreciates
C) interest rates fall and the dollar depreciates
D) interest rates fall and the value of the dollar rises

Question 38

If the interest rate in London is higher than the interest rate in New York, then the dollar _____ and the British Pound _____.

A) appreciates, appreciates
B) appreciates, depreciates
C) depreciates, depreciates
D) depreciates, appreciates

Question 39

If monetary policy in Mexico becomes expansionary, then relative to the Canadian dollar the Mexican peso will tend to _____.

A) depreciate
B) appreciate
C) remain unchanged
D) initially appreciate but remain unchanged in the long run

Question 40

An increase in British interest rates relative to those of France will make the demand for pounds in France _____ and exports from France to the U.K. become _____.

A) decrease, cheaper
B) decrease, more expensive
C) increase, more expensive.
D) decrease, cheaper.

Question 41

If the demand for money in the U.S. increases, U.S.:

A) interest rates will rise and the dollar depreciates.
B) interest rates will rise and the dollar appreciates.
C) interest rates will fall and the dollar depreciates.
D) interest rates will fall and the dollar appreciates.

Question 42

If the demand for money in the U.S. decreases, U.S.:

A) interest rates will rise and the dollar depreciates.
B) interest rates will rise and the dollar appreciates.
C) interest rates will fall and the dollar depreciates.
D) interest rates will fall and the dollar appreciates.

Question 43

Moving funds into and out of foreign currencies to take advantage of higher domestic or foreign interest rates is known as:

A) foreign-exchange speculation.
B) foreign-exchange protection.
C) exchange-rate arbitrage.
D) interest arbitrage.

Question 44

Suppose real interest rates in the U.S. rose. Foreign investors would try to take advantage of this and cause a(n) _____ of the dollar.

A) appreciation
B) depreciation
C) deviation
D) undervaluation

Question 45

Suppose real interest rates in the U.S. fell. Foreign investors would try to take advantage of this and cause a(n) _____ of the dollar.

A) appreciation
B) depreciation
C) overvaluation
D) deviation

Question 46

Suppose real interest rates in the U.K. rose. U.S. investors would try to take advantage of this and cause a(n) _____ of the dollar.

A) appreciation
B) depreciation
C) deviation
D) undervaluation

Question 47

Suppose real interest rates in the U.K. fell. U.S. investors would try to take advantage of this and cause a(n) _____ of the dollar.

A) appreciation
B) depreciation
C) deviation
D) undervaluation

Question 48

If the money supply in the U.S. decreases, U.S.:

A) interest rates will rise and the dollar depreciates.
B) interest rates will rise and the dollar appreciates.
C) interest rates will fall and the dollar depreciates.
D) interest rates will fall and the dollar appreciates.

Question 49

If the money supply in the U.S. increases, U.S.:

A) interest rates will rise and the dollar depreciates.
B) interest rates will rise and the dollar appreciates.
C) interest rates will fall and the dollar depreciates.
D) interest rates will fall and the dollar appreciates.

Question 50

An appreciation of the currency would be associated with _____ interest rates and capital _____.

A) lower, outflows
B) lower, inflows
C) higher, outflows
D) higher, inflows

Question 51

A depreciation of the currency would tend to be associated with _____ interest rates and capital _____.

A) lower, outflows
B) lower, inflows
C) higher, outflows
D) higher, inflows

Question 52

Lower U.S. interest rates would tend to cause the dollar to:

A) appreciate.
B) remain unchanged.
C) depreciate.
D) fall and the rise.
E) rise and then fall.

Question 53

Money is a very good substitute for all goods and services.

Question 54

In an economy with money there are far fewer prices than there would be if money did not exist.

Question 55

Even if governments did not produce money, some form of private money would emerge as a medium of exchange.

Question 56

During an inflationary period, money does not serve as a good store of value.

Question 57

The only truly functional form of money is gold.

Question 58

In the U.S. the money supply M1 is the total quantity of currency in the public's hands plus demand deposits.

Question 59

Demand deposits are not really money in the same sense that coins and paper currency issued by the government are.

Question 60

In the U.S. approximately $1 billion is held in the form of money-market mutual funds and time deposits.

Question 61

M1 is defined as coins and currency.

Question 62

Savings accounts are a form of near money.

Question 63

Money market mutual funds are a component of M1 but are not included in M2.

Question 64

The monetary base is equal to C + R.

Question 65

The monetary base is equal to the reserve requirement.

Question 66

If the central bank increases bank reserves by an extra $1 million, then the money supply would increase by $1 million.

Question 67

Changes in the reserve requirement change the money multiplier.

Question 68

Changes in the reserve requirement change the money multiplier and the money supply.

Question 69

The reserve requirement is the same for all of the world's central banks.

Question 70

The money multiplier is equal to 1 minus the required reserve ratio.

Question 71

A decrease in required reserves will reduce the money multiplier.

Question 72

If required reserves are 10% and the monetary base is $1 billion, then the money supply will be $5 billion.

Question 73

Changing the discount rate is a very precise way for the central bank to control the supply of money.

Question 74

The discount rate is the rate of interest charged by a bank that lends reserves to another bank.

Question 75

If the central bank buys bonds, the monetary base will fall and the money supply will rise.

Question 76

If the central bank sells bonds, the monetary base will fall.

Question 77

Only the U.S. federal government can create money in the U.S.

Question 78

Open market operations are the primary mechanism for directly changing the monetary base.

Question 79

By purchasing bonds the central bank reduces the monetary base.

Question 80

When the central bank buys bonds in the open market interest rates rise.