Question 1

When the central bank sells $1,000,000 worth of government bonds to the public, the money supply:

Accepted Answer

When the Fed sells government bonds in the open market, there is less currency in the hands of the banking community, as some money must be used buy these bonds. As a consequence the amount of bank reserves decreases. This contraction of reserves decreases the money supply by more than $1,000,000.

Question 2

An open-market purchase of government securities by the Fed will:

Accepted Answer

When the Fed purchases government securities in the open market, it increases the amount of reserves that banks hold. This increase in reserves allows banks to expand their lending, which in turn increases the supply of money in the economy. Therefore, an open-market purchase of government securities by the Fed will increase bank reserves, and the money supply will increase.

Question 3

Velocity is determined by:

Accepted Answer

Velocity of money is determined by the frequency of transactions and the speed at which money is exchanged between entities. This is influenced by the payments methods and technology available to them.

Question 4

The speed at which money circulates is called:

Accepted Answer

The speed at which money circulates is referred to as velocity. This term is used in macroeconomics to describe how quickly money changes hands within a given time period. It is calculated by dividing the nominal Gross Domestic Product (GDP) by the money supply. This measurement is important for understanding the health of an economy and its potential for growth.

Question 5

Two countries, Alpha and Beta, have the same levels of nominal and real GDP.Each dollar in Alpha is used more frequently than each dollar in Beta.Therefore, it must be the case that ______ in Alpha than in Beta.

Accepted Answer

This comes from the Quantity Equation which says: P × Y = M × V and M = P × Y/V. In this case, both countries have the same PY. In Alpha, V is larger than it is in Beta. Therefore, M has to be smaller in Alpha than Beta.

Question 6

Nominal GDP divided by the money stock equals:

Accepted Answer

Nominal GDP divided by the money stock equals velocity, which is a measure of how often each unit of money changes hands in transactions.

Question 7

The link between the money supply and prices is strongest in:

Accepted Answer

Short run changes in the money supply can be missed because it is hard to distinguish between a change in relative prices and a change in the price level. In the long run, changes in the price level are easier to distinguish.

Question 8

When the central bank buys $1,000,000 worth of government bonds from the public, the money supply:

Accepted Answer

When the Fed buys government bonds in the open market, there is new currency in the hands of the banking community, which increases bank reserves. These reserves will be lent out, which increases the money supply by more than $1,000,000 because of the money multiplier.

Question 9

If the money supply equals 1,000, velocity equals 5, and real GDP equals 2,500, then the price level equals:

Accepted Answer

The Quantity Equation says: P × Y = M × V. In this case, (P × 2,500)= 1,000 × 5, and P = 5,000/2,500 = 2.

Question 10

The introduction of credit cards and debit cards has ______ velocity.

Accepted Answer

The introduction of credit cards and debit cards has increased velocity as consumers can now make purchases and transactions more quickly and easily, increasing the overall frequency of economic activity.

Question 11

In an open-market sale the Federal Reserve ______ government bonds and the supply of bank reserves ____.

Accepted Answer

In an open-market sale, the Federal Reserve sells government bonds, which decreases the supply of bank reserves.

Question 12

A rapidly growing supply of money will lead to:

Accepted Answer

A rapidly growing supply of money leads to an excess of demand over supply in the economy, which increases the general price level of goods and services, leading to inflation.

Question 13

If the money supply equals 2,000, velocity equals 3, and real GDP equals 4,000, then the price level equals:

Accepted Answer

The Quantity Equation says: P × Y = M × V. In this case, (P × 4,000)= 2,000 × 3, and P = 6,000/4,000 = 1.5

Question 14

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired reserve/deposit ratio is 10%.If the Central Bank prints an additional 200 econs and uses this new currency to buy government bonds from the public, the money supply in Macroland will increase from ______ econs to ______ econs, assuming that the public does not wish to change the amount of currency it holds.

Accepted Answer

The initial money supply is currency held by the public (2,000 econs) plus deposits (3,000 econs, calculated from reserves of 300 econs and a reserve ratio of 10%). The total initial money supply is 5,000 econs. With the Central Bank's action, the reserves increase by 200 econs, allowing deposits to increase by 2,000 econs (200/0.10), making the new money supply 7,000 econs.

Question 15

The quantity equation states that:

Accepted Answer

The quantity equation is expressed as MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is the real GDP. Therefore, money times velocity equals nominal GDP (PY).

Question 16

The quantity equation is always true because it:

Accepted Answer

The quantity equation is true by definition as it is a mathematical identity that relates money supply, velocity, price level, and output.

Question 17

In an open-market purchase the Federal Reserve ______ government bonds from the public and the supply of bank reserves ______.

Accepted Answer

In an open-market purchase, the Federal Reserve buys government bonds from the public. This increases the supply of bank reserves because the seller of the government bond receives a payment from the Federal Reserve, which adds to their bank account balance. This, in turn, increases the total supply of bank reserves, allowing banks to lend out more money.

Question 18

The money supply in Macroland is currently 2,500, bank reserves are 200, currency held by public is 500, and banks'desired reserve/deposit ratio is 0.10.Assuming the values of the currency held by the public and the desired reserve/deposit ratio do not change, if the Central Bank of Macroland wishes to increase the money supply to 3,000, then it should conduct an open-market ______ government bonds.

Accepted Answer

When the Central Bank wants to increase the money supply, it must purchase government from the public. To compute the amount of the purchase it uses the equation: MS = currency held by the public + (bank reserves/desired reserve-deposit ratio). In this case, currency held by the public is unchanged, so the increase MS by 500 comes from (bank reserves/desired reserve-deposit ratio): (x/0.10)= 500, where x is the increase in bank reserves. In this case x = 50, so an open-market purchase of 50 is appropriate.

Question 19

When the Fed sells government securities, the banks':

Accepted Answer

When the Fed sells government securities, banks use their reserves to purchase them, leading to a decrease in reserves. This contraction in reserves reduces the banks' ability to lend, thereby decreasing the money supply.

Question 20

If real GDP equals 5,000, nominal GDP equals 10,000, and the price level equals 2, then what is velocity if the money stock equals 2,000?

Accepted Answer

Numerically, V = (P × Y)/M, where V is velocity, P × Y is nominal GDP, and M is the money stock. In this case, 10,000/2,000 = 5.

Quiz 9: Money, Prices, and the Financial System