Question 1

Under a system of fixed exchange rates,a large increase in export revenues (without a corresponding jump in imports)has what effect on the domestic money supply?
A) The money supply will increase.
B) The money supply will decline.
C) The money supply will not be affected.
D) The answer depends on whether the central bank has imposed credit controls on the commercial banks.

Accepted Answer

Under fixed exchange rates, an increase in export revenues will result in an inflow of foreign currency, which the central bank must buy to maintain the fixed exchange rate. This results in an increase in domestic currency supply as the central bank pays for the foreign currency with its own currency holdings. This increase in the domestic money supply can lead to inflationary pressures.

Question 2

The narrowest measure in the money supply is represented by:
A) M1.
B) M2.
C) M3.
D) M4.

Accepted Answer

M1 is the narrowest measure of the money supply and includes only the most liquid forms of money, such as physical currency, checking accounts, and traveler's checks. It does not include less liquid assets such as savings deposits or money market funds, which are included in broader measures such as M2 and M3.

Question 3

IDs and Paired-Concept Questions
These terms can be used individually as short-answer identification questions, or they can be used in pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two terms and (2) the relationship between them.
-Inflation tax,negative real rates

Accepted Answer

The inflation tax refers to the reduction in the purchasing power of money due to inflation, which effectively acts as a tax on the holders of currency. Negative real rates, on the other hand, refer to the situation where the nominal interest rate is lower than the inflation rate, resulting in a negative real return on an investment.

The relationship between the two is that when inflation is high and nominal interest rates are low, it can lead to negative real rates. This means that even though investors may receive interest on their investments, the purchasing power of that return is eroded by inflation, effectively resulting in a "tax" on their investment returns. In other words, high inflation can lead to negative real rates, which in turn can act as a form of inflation tax on investors.

Question 4

IDs and Paired-Concept Questions
These terms can be used individually as short-answer identification questions, or they can be used in pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two terms and (2) the relationship between them.
-Medium of exchange,M2

Accepted Answer

The answer of IDs and Paired-Concept Questions
These terms can be...

Question 5

Which of the following is essential to a strategy of deep finance?
A) avoiding a government budget deficit
B) maintaining very high real interest rates
C) avoiding strongly negative real interest rates
D) all of the above

Accepted Answer

Deep finance requires avoiding strongly negative real interest rates. This is because negative real interest rates lead to low savings and low investment, which ultimately hinders economic growth. Avoiding a government budget deficit and maintaining high real interest rates may be beneficial, but they are not essential components of a strategy of deep finance.

Question 6

IDs and Paired-Concept Questions
These terms can be used individually as short-answer identification questions, or they can be used in pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two terms and (2) the relationship between them.
-Hyperinflation,government budget deficit

Accepted Answer

The answer of IDs and Paired-Concept Questions
These terms can be...

Question 7

Policies for financial deepening seek to promote ________ in the real size of the financial system,while shallow finance promotes ________ in the real size of the financial system.
A) growth; reduction
B) reduction; growth
C) stability; measured growth
D) deflation; retraction

Accepted Answer

Policies for financial deepening aim to promote growth in the real size of the financial system, by increasing the quantity, quality, and level of financial services. In contrast, shallow finance policies focus on reducing the size of the financial system or limiting its expansion, often due to concerns about financial stability or lack of access to resources. Therefore, the correct answer is A, as it reflects the opposite outcomes of the two types of policies.

Question 8

Which of the following is NOT one of the basic roles essential for the smooth functioning of the financial system?
A) a medium of exchange and store of value, called money
B) a channel for mobilizing savings from numerous sources and channeling them to investors, called financial intermediation
C) a means of transferring and distributing risk across the economy
D) an efficient and comprehensive tax system, allowing more revenue for domestic governments

Accepted Answer

While an efficient tax system is important for the fiscal health of a country, it is not considered one of the basic roles essential for the smooth functioning of the financial system. The other three options are all fundamental roles of the financial system.

Question 9

A floating exchange rate allows developing countries to:
A) insulate themselves from world inflation.
B) appreciate their currency against the dollar.
C) isolate themselves from trade with developed nations.
D) risk rapid financial destabilization.

Accepted Answer

The answer of A floating exchange rate allows developing countries...

Question 10

Which of the following is NOT a liquid financial asset?
A) currency in circulation
B) time deposits
C) demand deposits
D) foreign aid

Accepted Answer

Foreign aid is not a financial asset and cannot be readily converted into cash like currency in circulation, time deposits, and demand deposits.

Question 11

IDs and Paired-Concept Questions
These terms can be used individually as short-answer identification questions, or they can be used in pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two terms and (2) the relationship between them.
-Financial assets,nonfinancial assets

Accepted Answer

The answer of IDs and Paired-Concept Questions
These terms can be...

Question 12

What,particularly in a developing country,is the most visible and vital component of the financial system (as acceptor of deposits and grantor of shorter-term credit)?
A) investment banking
B) commercial banking
C) foreign investors
D) hedge funds

Accepted Answer

Commercial banks are the most visible and vital component of the financial system in a developing country as they are the main acceptors of deposits and grantors of shorter-term credit to individuals and businesses. Investment banking, hedge funds, and foreign investors may also contribute to the financial system but are not as essential as commercial banks in meeting the financial needs of the general population.

Question 13

Total liquid liabilities (M3),the broadest measure of money,is the sum of:
A) currency in circulation outside banks plus demand deposits.
B) currency in circulation outside banks plus demand deposits plus time and saving deposits.
C) currency in circulation outside banks plus demand deposits plus time and saving deposits plus income taxes.
D) currency in circulation outside banks plus demand deposits plus time and savings deposits plus liabilities of specialized institutions.

Accepted Answer

M3 includes currency in circulation, demand deposits, time and savings deposits, and liabilities of specialized institutions, making it the broadest measure of money supply.

Question 14

Why do developing countries have floating exchange rates?
A) to insulate themselves from world inflation
B) to stabilize government deficits
C) to keep reserves low
D) to keep their money value higher than the dollar

Accepted Answer

Developing countries often have floating exchange rates to insulate themselves from world inflation. Fixed exchange rates can be difficult to maintain when a country's economy and inflation levels are not as stable as those of the countries with whom they are trading. A floating exchange rate allows a country to adjust their currency's value based on market demand and supply without potentially harmful consequences from maintaining a fixed exchange rate.

Question 15

According to the box study "Does Micro Credit Reduce Poverty?," what was the effect of opening micro credit branches in randomly selected slum neighborhoods as compared to slums without these additional branches?
A) Slums with access to more mirco credit experienced a reduction in poverty within 18 months.
B) Slums with access to Spandana loans opened 1.7% more businesses than those without access.
C) There was a significant increase in total consumption expenditures between treatment and control areas.
D) Spandana branches had an influx of borrowers, averaging a total of 70 percent of households taking out loans.

Accepted Answer

The study found that slums with access to Spandana loans opened 1.7% more businesses than those without access, indicating a modest impact on business creation.

Question 16

IDs and Paired-Concept Questions
These terms can be used individually as short-answer identification questions, or they can be used in pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two terms and (2) the relationship between them.
-Commercial banks,financial intermediation

Accepted Answer

The answer of IDs and Paired-Concept Questions
These terms can be...

Question 17

What is achieved by having an upward adjustment in reserve requirements?
A) The money multiplier is increased, lowering inflation.
B) It reduces the stock of money that can be supported by a given amount of reserves.
C) The money multiplier is decreased.
D) Both b and c, which may help moderate inflation.

Accepted Answer

An upward adjustment in reserve requirements reduces the stock of money that can be supported by a given amount of reserves, thereby decreasing the money multiplier. This can help moderate inflation by reducing the amount of money in circulation. Therefore, both b and c are correct.

Question 18

IDs and Paired-Concept Questions
These terms can be used individually as short-answer identification questions, or they can be used in pairs. In the latter case, ask students to explain (1) the meaning and significance of each of the two terms and (2) the relationship between them.
-Shallow finance,informal credit market

Accepted Answer

The answer of IDs and Paired-Concept Questions
These terms can be...

Question 19

If a country wants to enact policies for growth in the real size of the financial system,financial deepening,it will require:
A) a negative real interest rate.
B) a negative GDP.
C) a positive real interest rate.
D) a decrease in inflation.

Accepted Answer

Financial deepening is the process of increasing the size and scope of a country's financial system. This requires a positive real interest rate, which attracts more investment and encourages savings. A negative real interest rate would discourage saving and incentivize borrowing, leading to inflationary pressures and potentially destabilizing the financial system. A negative GDP would indicate an economic contraction, which is generally not conducive to financial deepening. A decrease in inflation can be a positive step, but it is not sufficient on its own to foster financial deepening.

Question 20

During the period beginning in the 1950s and continuing into the 1980s (and even beyond),Argentina,Brazil,and Chile experienced:
A) chronic inflation.
B) acute inflation.
C) runaway inflation.
D) little to no inflation.

Accepted Answer

These countries experienced chronic inflation during this period, characterized by persistent and relatively high inflation rates.

Quiz 12: Financial Development and Inflation

Under a system of fixed exchange rates,a large increase in export revenues (without a corresponding jump in imports) has what effect on the domestic money supply?

The narrowest measure in the money supply is represented by:

Which of the following is essential to a strategy of deep finance?

Policies for financial deepening seek to promote in the real size of the financial system,while shallow finance promotes in the real size of the financial system.

Which of the following is NOT one of the basic roles essential for the smooth functioning of the financial system?

A floating exchange rate allows developing countries to:

Which of the following is NOT a liquid financial asset?

What,particularly in a developing country,is the most visible and vital component of the financial system (as acceptor of deposits and grantor of shorter-term credit) ?

Total liquid liabilities (M3) ,the broadest measure of money,is the sum of:

Why do developing countries have floating exchange rates?

According to the box study "Does Micro Credit Reduce Poverty?," what was the effect of opening micro credit branches in randomly selected slum neighborhoods as compared to slums without these additional branches?

What is achieved by having an upward adjustment in reserve requirements?

If a country wants to enact policies for growth in the real size of the financial system,financial deepening,it will require:

During the period beginning in the 1950s and continuing into the 1980s (and even beyond) ,Argentina,Brazil,and Chile experienced: