MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

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1 Study Questions 5 (Money) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The functions of money are 1) A) medium of exchange, unit of account, and store of value. B) pricing, contracts, and means of payment. C) medium of exchange and the ability to buy goods and services. D) medium of exchange, unit of account, and means of payment. 2) Which of the following is a primary function of money? 2) A) to serve as an encouragement to work B) to serve as a unit of account C) to raise funds for the government D) to reduce the burden of excessive imports 3) The fact that using money avoids the double coincidence of wants necessary in a barter economy illustrates which function of money? A) unit of account B) medium of exchange C) store of value D) source of liquidity 3) 4) A $25,000 price tag on a new car is an example of money as 4) A) a time deposit. B) medium of exchange. C) a store of value. D) a unit of account. 5) Which of the following applies to money when it serves as a store of value? I. Money is a store of value because it is an agreed measure for stating goods' prices. II. The more stable money's value, the better it serves as a store of value. III. When money serves as a store of value, it requires a double coincidence of wants. A) I only B) II only C) II and III D) I and II 5) 6) Which of the following is money? 6) A) checks in the checkbook B) checking deposits C) credit cards D) All of the above are money. 7) A highly liquid asset 7) A) generally has a very limited market for its resale. B) is highly leveraged. C) can be converted into a means of payment easily without loss of value. D) has high transaction costs associated with its sale. 8) Depository institutions undertake all the following activities except they do not. 8) A) create liquidity B) print money C) pool risk D) minimize the cost of monitoring borrowers 9) Depository institution create liquidity when they 9) A) have liabilities that are illiquid. B) buy assets that are liquid. C) borrow long and lend short. D) borrow short and lend long. 1

2 10) Controlling the quantity of money and interest rates to influence aggregate economic activity is called A) monetary policy. B) bank antitrust policy. C) fiscal policy. D) foreign policy. 10) 11) The monetary base includes 11) A) U.S. Treasury notes and other government securities. B) Coins, and deposits of depository institutions. C) coins, currency, and checkable deposits. D) foreign and domestic deposits at the Fed. 12) Which of the following is a tool that is used by the Fed to control the quantity of money? 12) A) open market operations B) real interest rate C) government expenditure multiplier D) excess reserves 13) Which of the following is NOT a policy tool of the Federal Reserve System? 13) A) open market operations B) the amount of required reserves held by member banks C) the interest rate charged by the Fed for loans to member banks D) the tax rate imposed on interest income 14) The minimum percentage of deposits that a depository institution must hold and cannot use for lending is known as the A) money multiplier. B) minimum rate. C) required reserve ratio. D) discount rate. 14) 15) Federal Reserve policy tools include all of the following EXCEPT 15) A) required reserve ratios. B) desired reserve ratios. C) the discount rate. D) open market operations. 16) A bank creates money by 16) A) buying bonds from the Federal Reserve B) purchasing currency from the Federal Reserve C) printing more checks D) lending its excess reserves 17) A bank expands the quantity of money directly by 17) A) buying and selling bonds with the Federal Reserve. B) taking in reserves in return for time deposits. C) taking in reserves in return for checking deposits. D) making loans. 18) Bank managers lend the excess reserves created when new deposits come in because they want to 18) A) deplete required reserves. B) earn a profit. C) deplete desired reserves. D) create new money in the economy. 19) If required reserves are $150 and deposits are $1000, what is the required reserve ratio? 19) A) 5 percent B) 10 percent C) 15 percent D) 85 percent 2

3 20) You deposit $4,000 in currency in your checking account. The bank holds 20 percent of all deposits as desired reserves. As a direct result of your deposit, your bank will create A) $200 of new money. B) $3,200 of new money. C) $1,600 of new money. D) $800 of new money. 21) When bank deposits increase from $1 million to $2 million, banks' required reserves increase from $100,000 to $200,000. The required reserve ratio is. A) 0.25 B) 0.10 C) 1.00 D) ) 21) 22) Which of the following affects the amount of money a person is willing to hold? 22) A) The interest rate that you earn on your savings account increases. B) The price level rises from 103 to 107. C) The use of credit cards increases. D) All of the above are correct. 23) Suppose you hold $50 to buy groceries weekly and then the price of groceries increases by 5 percent. To be able to buy the same amount of groceries, what must happen to your nominal money holdings? A) They must increase by $5. B) They must increase by $2.50. C) They can decrease by $5. D) They must increase, but the amount of the increase is different than the above answers. 23) 24) The opportunity cost of holding money is 24) A) the inverse of the price level multiplied by the interest rate. B) the price level. C) real GDP. D) the interest rate. 25) Which of the following is correct? The demand for money 25) A) depends on the quantity of money. B) increases when the interest rate increases. C) increases as real GDP increases. D) decreases as the price level increases. 26) All of the following are examples of financial innovations that have decreased the demand for money EXCEPT A) inflation. B) credit cards. C) automatic transfers between deposits. D) ATM machines. 26) 27) An increase in the interest rate 27) A) leads to a downward movement along the demand for money curve. B) leads to an upward movement along the demand for money curve. C) shifts the demand for money curve leftward. D) shifts the demand for money curve rightward. 3

4 28) Use the figure above to answer this question. Suppose the economy is operating at point a. A move to could be explained by. A) point c; an increase in the interest rate B) point d; an increase in real GDP C) point e; a decrease in the interest rate D) point b; an increase in real GDP 28) 29) The velocity of circulation is 29) A) the relationship between increases in income and investment. B) the average number of times per year a dollar is spent on goods and services in GDP. C) the ratio of currency to demand deposits. D) the relationship between income and spending. 30) If real GDP is $10 trillion and the velocity of circulation is 2, the quantity of money 30) A) is $20 trillion. B) is $2 trillion. C) is $5 trillion. D) cannot be determined from the information given. 31) The quantity of money in an economy is $9 million, and the velocity of circulation is 3. Nominal GDP in this economy is. A) $6 million B) $27 million C) $3 million D) $9 million 31) 4

5 Answer Key Testname: STUDY QUESTIONS 5 (MONEY) 1) A 2) B 3) B 4) D 5) B 6) B 7) C 8) B 9) D 10) A 11) B 12) A 13) D 14) C 15) B 16) D 17) D 18) B 19) C 20) B 21) B 22) D 23) B 24) D 25) C 26) A 27) B 28) B 29) B 30) D 31) B 5