Question 1

In the economy of Briskland, the commercial banks have deposits of $500 billion. Their reserves are $50 billion, 80 percent of which is in deposits with the Central Bank. There is $20 billion in Central Bank notes outside the banks, and there are no coins.
a) What is the monetary base?
b) If all the deposits are money, what is the total quantity of money?
c) What is the banks' reserve ratio?
d) What is the currency drain as a percentage of the quantity of deposits?

Accepted Answer

The answer of In the economy of Briskland, the commercial...

Question 2

In comparing growth rates of money growth and inflation across countries, the long-run proposition of the quantity theory of money is supported.

Accepted Answer

The quantity theory of money suggests that in the long run, there is a direct relationship between the growth rate of money supply and the rate of inflation across countries. This means that if the money supply grows at a faster rate than the economy's ability to produce goods and services, inflation will increase, supporting the long-run proposition of the theory when comparing different countries.

Question 3

The smaller the currency drain, the
A) smaller the increase in the quantity of money from an increase in reserves.
B) more likely it is that the banking system will hold a larger proportion of unplanned reserves.
C) the smaller the effect of a change in the discount rate.
D) larger the increase in the quantity of money from an increase in reserves.

Accepted Answer

The smaller the currency drain, the larger the increase in the quantity of money from an increase in reserves because less money is being held by the public in the form of currency, allowing banks to lend out a greater proportion of their reserves, thereby increasing the money supply more effectively.

Question 4

In the economy of Brightland, the commercial banks have deposits of $600 billion. Their reserves are $60 billion. All reserves are in deposits with the Central Bank and the commercial banks hold no excess reserves. There is $120 billion in Central Bank notes outside the banks, and there are no coins.
a) What is the economy's monetary base?
b) What is the quantity of money in the economy?
c) Calculate the money multiplier.
d) Suppose the Central Bank of Brightland undertakes an open market purchase of securities of so that the monetary base increases by $5 billion. By how much will the quantity of money change?

Accepted Answer

The answer of In the economy of Brightland, the commercial...

Question 5

Friedmania is a country in which the quantity theory of money operates. The country has a constant population, capital stock, and technology so real GDP does not change. In 2014, real GDP was $500 million, the price level, measured by the GDP deflator, was 150 and the velocity of circulation of money was 10. (Because the price level is measured by the GDP deflator, it must be divided by 100 before it is used in the equation of exchange.) In 2015, the quantity of money increased by 20 percent.
a) What was the quantity of money in 2014?
b) What was the velocity of circulation in 2015?
c) What was the price level in 2015?

Accepted Answer

The answer of Friedmania is a country in which the...

Question 6

International data supports the quantity theory of money conclusion that high money growth rates are associated with inflation.

Accepted Answer

The quantity theory of money suggests that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. International data generally supports this theory, showing that countries with higher rates of money growth often experience higher inflation rates. This is because an increase in the money supply, without a corresponding increase in goods and services, leads to higher prices.

Question 7

The commercial banks in Fundland have
Reserves $500 million
Loans $3,500 million
Deposits $4,000 million
Total assets $5,000 million
The banks hold no unplanned reserves.
a) Calculate the banks' desired reserve ratio.
b) An immigrant arrives in Fundland with $10 million, which she deposits in a bank. How much does the immigrant's bank lend initially?

Accepted Answer

The answer of The commercial banks in Fundland have
Reserves $500...

Question 8

________ in the currency drain ________ the money multiplier.
A) A decrease; does not change
B) An increase; increases
C) A decrease; decreases
D) An increase; decreases

Accepted Answer

An increase in the currency drain decreases the money multiplier because it means more money is being held by the public rather than deposited in banks, reducing the base for banks to create additional money through lending.

Question 9

________ in the desired reserve ratio will ________ the money multiplier.
A) An increase; have no effect on
B) An increase; decrease
C) A decrease; decrease
D) A decrease; will have no effect on

Accepted Answer

An increase in the desired reserve ratio means banks want to hold more reserves compared to the deposits they receive, which effectively reduces the amount of money they can lend out. This reduction in lending capacity decreases the money multiplier, as the money multiplier is inversely related to the reserve ratio.

Question 10

If the desired reserve ratio rises, the money multiplier
A) decreases.
B) increases.
C) stays the same.
D) probably changes but more information is needed to determine if it increases or decreases.

Accepted Answer

When the desired reserve ratio rises, banks hold more reserves for each dollar of deposits, which means there is less capacity to create new money through the lending process. This leads to a decrease in the money multiplier.

Question 11

In Zealand, banks' desired reserve ratio is 20 percent and there is no currency drain. The money multiplier equals
A) 0.50.
B) 0.20.
C) 20.0.
D) 5.0.

Accepted Answer

The money multiplier is calculated as 1 / desired reserve ratio. With a desired reserve ratio of 20 percent (or 0.20), the money multiplier is 1 / 0.20 = 5.0.

Question 12

In Zealand, banks' desired reserve ratio is 20 percent and the currency drain also equals 20 percent. The money multiplier equals
A) 2.18.
B) 3.33.
C) 5.0.
D) 3.0.

Accepted Answer

The answer of In Zealand, banks' desired reserve ratio is...

Question 13

Assuming velocity of circulation is constant, a 10 percent increase in the quantity of money leads to a 10 percent increase in nominal GDP in both the short run and the long run.

Accepted Answer

According to the Quantity Theory of Money, if the velocity of money is constant, a change in the money supply leads to a proportional change in nominal GDP.

Question 14

According to the quantity theory of money, inflation causes an increase in the money supply.

Accepted Answer

The quantity theory of money actually posits that an increase in the money supply causes inflation, not the other way around.

Question 15

The commercial banks in Lendland have
Reserves $400 million
Loans $3,600 million
Deposits $4,000 million
Total assets $4,600 million
The banks hold no unplanned reserves.
a) Calculate the banks' reserve ratio.
b) An immigrant arrives in Lendland with $5 million, which he deposits in a bank. How much does the immigrant's bank lend initially?

Accepted Answer

The answer of The commercial banks in Lendland have
Reserves $400...

Question 16

The banking system has just experienced an increase in deposits of $50,000. The currency drain ratio is 20 percent and the desired reserve ratio is 10 percent. What does the money multiplier equal?
A) 4.00
B) 3.33
C) 0.25
D) 10.00

Accepted Answer

The money multiplier is calculated as 1 / (currency drain ratio + desired reserve ratio). In this case, the money multiplier is 1 / (0.20 + 0.10) = 4.00.

Question 17

The quantity theory of money asserts that an increase in the quantity of money leads to an equal percentage increase in the price level in the long run.

Accepted Answer

The quantity theory of money, often represented by the equation MV = PQ (where M is the quantity of money, V is the velocity of money, P is the price level, and Q is the output of goods and services), suggests that in the long run, a change in the quantity of money in an economy will lead to a proportional change in the price level, assuming velocity (V) and output (Q) are constant.

Question 18

Fisheria is a country in which the quantity theory of money operates. The country has a constant population, capital stock, and technology. In 2010, real GDP was $300 million, the quantity of money was $60, and the velocity of circulation of money was 10. In 2015, the price level rose by 20 percent.
a) What was the price level in 2014? (The price level is measured by the GDP deflator, which is 100 in the base year. So the price level from the equation of exchange needs to be multiplied by 100 to convert it to the GDP deflator.)
b) What was real GDP in 2015?
c) What was the velocity of circulation in 2015?
d) What was the quantity of money in 2015?

Accepted Answer

The answer of Fisheria is a country in which the...

Quiz 8: Money, the Price Level, and Inflation

In comparing growth rates of money growth and inflation across countries, the long-run proposition of the quantity theory of money is supported.

The smaller the currency drain, the

International data supports the quantity theory of money conclusion that high money growth rates are associated with inflation.

in the currency drain the money multiplier.

in the desired reserve ratio will the money multiplier.

If the desired reserve ratio rises, the money multiplier

In Zealand, banks' desired reserve ratio is 20 percent and there is no currency drain. The money multiplier equals

In Zealand, banks' desired reserve ratio is 20 percent and the currency drain also equals 20 percent. The money multiplier equals

Assuming velocity of circulation is constant, a 10 percent increase in the quantity of money leads to a 10 percent increase in nominal GDP in both the short run and the long run.

According to the quantity theory of money, inflation causes an increase in the money supply.

The banking system has just experienced an increase in deposits of $50,000. The currency drain ratio is 20 percent and the desired reserve ratio is 10 percent. What does the money multiplier equal?

The quantity theory of money asserts that an increase in the quantity of money leads to an equal percentage increase in the price level in the long run.