Deck 22: Money, the Price Level, and Inflation

Question 1

During periods of inflation, which function of money is most severely affected?

A)Medium of exchange
B)Store of value
C)Means of payment
D)Unit of account

Answer 1

B

Question 2

Which of the following is a liability of the Reserve Bank?

A)Reserve Bank notes
B)Coins
C)Loans to authorised deposit- taking institutions
D)Australian government securities

Answer 2

A

Question 3

The above table presents the balance sheet of the TBK commercial bank. What is this bank's actual reserve ratio?

A)$120
B)$700
C)17.14 per cent
D)20 per cent

Answer 3

D

Question 4

Which of the following is true regarding the quantity theory of money?
I. The theory predicts that in the long run the inflation rate equals the money growth rate minus the growth rate of real GDP.
II. The theory predicts that countries with high growth rates of money will have high inflation rates.
III. The theory predicts that increases in the growth rate of velocity lowers the inflation rate.

A)I and II
B)II and III
C)I and III
D)I, II and III

Question 5

A medium of exchange is

A)the thing traded when barter takes place.
B)an object that sellers will accept as payment.
C)a measure by which prices are expressed.
D)an asset that is used to settle future debts.

Question 6

M1 is a measure of

A)money and includes both currency and current deposits.
B)money and includes both fixed deposits and currency.
C)liquidity in which the most liquid asset is money.
D)money and includes both fixed deposits and money market mutual funds.

Question 7

The opportunity cost of holding money increases when

A)the nominal interest rate rises.
B)consumers' real incomes increase.
C)the price level falls.
D)the purchasing power of money rises.

Question 8

If the desired reserve ratio is 3 per cent and deposits totalled $575 billion, banks would hold

A)$17.25 billion in reserves.
B)$17.25 billion in excess reserves.
C)$557.75 billion in reserves.
D)$1,725 billion in currency.

Question 9

Controlling the quantity of money and interest rates to influence aggregate economic activity is called

A)monetary policy.
B)fiscal policy.
C)bank antitrust policy.
D)foreign policy.

Question 10

Reserves are .

A)gold in a bank's vault plus its gold at the Reserve Bank
B)cash in a bank's vault plus its gold at the Reserve Bank
C)cash in a bank's vault plus its deposits at the Reserve Bank
D)cash in a bank's vault plus the cash carried by its customers

Question 11

The above table presents the balance sheet of the TBK commercial bank. If the desired reserve ratio is 25 per cent, what is the value of this bank's desired reserves?

A)$175
B)$150
C)$120
D)20 per cent

Question 12

The most direct way in which money eliminates the need for a double coincidence of wants is through its use as a

A)store of value.
B)unit of account.
C)standard of deferred payment.
D)medium of exchange.

Question 13

Liquidity can

A)be created by borrowing long and lending short.
B)only be created by the government.
C)be created by borrowing short and lending long.
D)only be created by the Reserve Bank.

Question 14

In the short run, which of the following actions raises the interest rate?

A)An increase in the demand for money
B)An increase in bond prices
C)An increase in the quantity of money
D)A decrease in the demand for money

Question 15

The unit of account

A)is an accounting of the total units of goods and services produced in an economy.
B)is an agreed measure for stating the prices of goods and services in an economy.
C)is a type of value stored within all assets.
D)is a type of accounting of how many currency units there are in an economy.

Question 16

Liquidity is the same as

A)diversification of an investor's store of value.
B)easy conversion of an asset to a means of payment, with little or no loss of value.
C)easy conversion of an asset to a means of payment, allowing for loss of value.
D)easy conversion of money to an asset, allowing for loss of value.

Question 17

According to the quantity theory of money, money growth and inflation are

A)positively correlated.
B)independent, that is, not correlated.
C)positively correlated if the inflation rate is positive and negatively correlated if the inflation rate is negative.
D)negatively correlated.

Question 18

In the short run, when the Reserve Bank increases the quantity of money,

A)bond prices fall and the interest rate rises.
B)the supply of money curve shifts leftward.
C)bond prices rise and the interest rate falls.
D)the demand for money increases.

Question 19

When the nominal interest rate rises, the quantity of money demanded decreases because

A)people will buy fewer goods and hold less money.
B)people shift funds from money holdings to interest- bearing assets.
C)people move funds from interest- bearing assets into money.
D)the price level also rises and people decrease their demand for money.

Question 20

The "double coincidence of wants" problem is

A)always present in all economic systems.
B)created by the use of money.
C)resolved by the use of money.
D)resolved under a system of barter.

Question 21

When the quantity of money demanded is greater than the quantity of money supplied, people
Bonds and the interest rate .

A)sell; rises
B)buy; rises
C)sell; falls
D)buy; falls

Question 22

When the nominal interest rate rises, the

A)quantity of money demanded decreases.
B)demand for money increases.
C)demand for money decreases.
D)quantity of money demanded increases.

Question 23

Which of the following affects the amount of money a person is willing to hold?

A)The price level rises from 103 to 107.
B)The use of credit cards increases.
C)The interest rate you earn on your savings account increases.
D)All of the above are correct.

Question 24

The equation of exchange becomes the same as the quantity theory of money by assuming that the velocity of circulation when the quantity of money changes and real GDP when the quantity of money changes.

A)changes; changes
B)does not change; changes
C)does not change; does not change
D)changes; does not change

Question 25

The Australian historical evidence

A)shows that a higher inflation rate causes an increase in the money growth rate.
B)generally supports the quantity theory of money in the long run.
C)does not support the quantity theory of money.
D)demonstrates that there is no correlation between the money growth rate and inflation.

Question 26

The quantity of money in an economy is $9 million, and the velocity of circulation is 3. Nominal GDP in this economy is .

A)$9 million
B)$6 million
C)$3 million
D)$27 million

Question 27

All the following statements about the Reserve Bank are true EXCEPT that it .

A)accepts current deposits from the nation's residents
B)regulates a nation's authorised deposit- taking institutions
C)controls the quantity of money
D)is a public authority

Question 28

If an economy has a velocity of circulation of 3, then

A)nominal GDP is 1/3 the size of the quantity of money.
B)the quantity of money is $3 for every dollar of GDP.
C)the quantity of money is 3 times real GDP.
D)in a year the average dollar is exchanged 3 times to purchase the goods and services that make up GDP.

Question 29

Financial innovations can have the effect of

A)only increasing the demand for money.
B)only decreasing the demand for money.
C)either increasing or decreasing the demand for money depending on what the innovation is.
D)increasing the Reserve Bank's monetary policy.

Question 30

If you use $500 of currency to make a deposit in a term deposit,

A)M1 is unchanged, but M3 increases.
B)M1 decreases, but M3 is unchanged.
C)M1 decreases and M3 increases.
D)M1 and M3 both increase.

Question 31

The fraction of a bank's total deposits that are held in reserves is called the

A)desired reserve ratio.
B)discount rate.
C)money multiplier.
D)deposit multiplier.

Question 32

The quantity theory asserts that real GDP is

A)equal to nominal GDP divided by the quantity of money.
B)equal to nominal GDP multiplied by the quantity of money.
C)never different from potential GDP.
D)not influenced by the quantity of money.

Question 33

The monetary base is the sum of

A)coins, currency and current deposits.
B)Treasury bills and other government securities.
C)Reserve Bank notes, coins and deposits of authorised deposit- taking institutions.
D)foreign and domestic deposits at the Reserve Bank.

Question 34

Catherine compares the prices of candy bars in order to get the "best buy." This comparison represents using money as a

A)medium of exchange.
B)unit of account.
C)store of value.
D)None of the above

Question 35

The velocity of circulation is

A)the rate of change of the GDP deflator.
B)the changes in the purchasing power of money over a given time period.
C)the average number of times a dollar of money is used in a year to buy goods and services that make up GDP.
D)constant.

Question 36

An open market purchase of securities by the Reserve Bank

A)decreases banks' total assets.
B)increases banks' reserves and decreases banks' securities.
C)decreases banks' reserves and increases banks' securities.
D)involves a bank purchasing government securities from the Reserve Bank .

Question 37

An increase in the currency drain

A)decreases the size of the money multiplier.
B)results in an increase in deposits.
C)results in an increase in required reserves.
D)leads to an increase in excess reserves.

Question 38

In the quantity theory of money, the quantity of money is assumed to

A)not influence the velocity of circulation.
B)be constant.
C)rise during recessions.
D)fall during recessions.

Question 39

Authorised deposit- taking institutions do all of the following EXCEPT

A)set the required reserve ratio.
B)create liquidity.
C)minimise the cost of obtaining funds.
D)pool risks.

Question 40

In an economy, there is $200 million in currency held outside banks, $100 million in traveller's cheques, $250 million in currency held inside the banks, $300 million in current deposits, and $600 million in fixed deposits. The value of M1 is _.

A)$1,200 million
B)$750 million
C)$1,150 million
D)$600 million

Question 41

The difference between actual reserves and desired reserves is

A)excess reserves.
B)illegal reserves.
C)borrowings from the Reserve Bank.
D)net worth.

Question 42

The Reserve Bank of Australia

A)conducts the nation's monetary policy.
B)regulates the nation's financial institutions.
C)creates money by lending all its reserves.
D)Both answers A and B are correct.

Question 43

Which of the following equations represents the equation of exchange?

A)M = VP/Y
B)MY = PV
C)PM = VY
D)MV = PY

Question 44

Which of the following is NOT included in the M3 definition of money?

A)Term deposits
B)Current deposits
C)Certificates of deposits
D)Currency held by banks

Question 45

In the figure above, an increase in the monetary base would create a change such as a

A)movement from point b to point a along the supply of money curve MS₀.
B)shift from the supply of money curve MS₁ to the supply of money curve MS₀.
C)shift from the supply of money curve MS₀ to the supply of money curve MS₁.
D)movement from point a to point b along the supply of money curve MS₀.

Question 46

The major role of a commercial bank is to

A)make mortgage loans.
B)restrain the growth of the quantity of money.
C)receive deposits and make loans.
D)sell shares and use the proceeds to buy stocks.

Question 47

The risk of making a loan is

A)the risk that the borrower does not pay.
B)earning profits that are too high and cause higher taxes.
C)called "default risk" when taxes are not paid.
D)the risk that the lender does not pay.

Question 48

The opportunity cost of holding money balances rather than other assets is

A)the price level.
B)forgone liquidity.
C)forgone consumption.
D)the nominal interest rate.

Question 49

Money is

A)equivalent to barter.
B)a means of payment.
C)currency plus coins.
D)the same as gold.

Question 50

If an economy has no money, then all transactions must be conducted through the use of .

A)debit cards
B)barter
C)cheques
D)credit cards

Question 51

Modern Australian commercial banks perform all of the following functions EXCEPT

A)make loans to households and business firms.
B)accept current deposits.
C)accept savings deposits.
D)issue paper currency.

Question 52

If an economy tried to use bananas as money, which function would bananas likely have the most difficult time fulfilling?

A)A medium of exchange
B)A unit of account
C)A store of value
D)A means of payment

Question 53

Which of the following is a liability on the balance sheet of the Reserve Bank?

A)Australian government securities
B)Loans to authorised deposit- taking institutions
C)Reserve Bank notes
D)None of the above is correct because they are all assets of the Reserve Bank.

Question 54

Which of the following is NOT included in the M1 definition of money?

A)Currency held outside banks
B)Term deposits
C)Current deposits at banks
D)Traveller's cheques

Question 55

Which of the following is an asset of the Reserve Bank?

A)Reserve Bank notes
B)Loans to authorised deposit- taking institutions
C)Commercial bank deposits
D)The monetary base

Question 56

The quantity of real money demanded is

A)negatively related to the price level.
B)independent of the price level.
C)positively related to the price level.
D)sometimes negatively and sometimes positively related to the price level.

Question 57

Suppose a bank has a desired reserve ratio of 12 per cent. If someone deposits $1,000 in the bank,

A)immediately after the deposit, excess reserves increase by $880.
B)the bank's desired reserves rise by $1,000.
C)the bank can make loans of $1,000.
D)Both answers B and C are correct.

Question 58

In the figure above, a decrease in the monetary base would create a change such as a

A)shift from the supply of money curve MS₀ to the supply of money curve MS₁.
B)shift from the supply of money curve MS₁ to the supply of money curve MS₀.
C)movement from point b to point a along the supply of money curve MS₀.
D)movement from point a to point b along the supply of money curve MS₀.

Question 59

The quantity theory of money argues that, in the long run, a percentage change in the quantity of money will create an equal percentage change in

A)real GDP.
B)velocity.
C)the price level.
D)potential GDP.

Question 60

Which of the following decreases the demand for nominal money?

A)A decrease in the nominal interest rate
B)An increase in the quantity of money
C)An increase in real GDP
D)A decrease in the price level

Question 61

When you bought your textbook for this course, you were using money as a

A)unit of account.
B)store of value.
C)price mechanism.
D)medium of exchange.

Question 62

Money .

A)is any commodity that is generally acceptable as a means of payment
B)requires a double coincidence of wants
C)loses its value as it becomes older
D)is always composed of coins and paper

Question 63

A credit union is

A)a combination of credit card corporations.
B)a commercial bank owned by its depositors.
C)a thrift institution that issues credit cards.
D)an authorised deposit- taking institution owned by members of a particular group.

Question 64

In Australia today, money consists of

A)currency and deposits at banks.
B)coins only.
C)currency only.
D)deposits at banks only.

Question 65

After you finish your degree, suppose your salary is $52,000 per year. This is an example of using the function of money known as

A)compensation of employees.
B)store of value.
C)medium of exchange.
D)unit of account.

Question 66

The Reserve Bank of Australia does NOT do which of the following?

A)Lend money directly to the public
B)Issue bank notes
C)Hold Australian government securities
D)Act as a lender of last resort to banks

Question 67

When bank deposits increase from $1 million to $2 million, banks' desired reserves increase from
$100,000 to $200,000. The desired reserve ratio is .

A)0.10
B)10.0
C)1.00
D)0.25

Question 68

In the figure above, if the interest rate is 8 per cent, people demand $3.1 billion

A)less money than the quantity supplied and the interest rate will fall.
B)more money than the quantity supplied and the interest rate will rise.
C)more money than the quantity supplied and the interest rate will fall.
D)less money than the quantity supplied and the interest rate will rise.

Question 69

Commercial banks are able to create money by

A)making customers pay back their loans.
B)making loans.
C)printing Reserve Bank notes.
D)exchanging their reserves at the Reserve Bank for vault cash.

Question 70

Which of the following is NOT included in the M1 measure of money?

A)Currency held in bank vaults
B)Currency held outside banks
C)Current deposits at commercial banks
D)Current deposits at credit unions

Question 71

An open market operation occurs when _ buys or sells securities .

A)the Reserve Bank; from or to the federal government
B)a commercial bank; from or to the Reserve Bank or the federal government
C)a commercial bank; from or to the public
D)the Reserve Bank; in the open market

Question 72

If nominal GDP is $12 billion, the price level is 120, and the quantity of money is $4 billion, what is the velocity of circulation?

A)3
B)30
C)2.5
D)25

Question 73

Nicholas is saving money received daily from his parents as pocket money in order to purchase a new bicycle. His saving represents using money as

A)a store of value.
B)a unit of account.
C)a medium of exchange.
D)None of the above

Question 74

Which of the following is a tool used by the Reserve Bank of Australia to control the quantity of money?

A)The real interest rate
B)The government expenditure multiplier
C)Excess reserves
D)Open market operations

Question 75

An authorised deposit- taking institution is a firm that takes deposits from _ and makes loans to .

A)firms; other firms
B)households; firms
C)households and firms; other households and firms
D)firms; households

Question 76

Money as a medium of exchange
I. facilitates the exchange of goods.
II. reduces or eliminates the need for barter.

A)I only
B)II only
C)Both I and II
D)Neither I nor II

Question 77

Which of the following applies to the use of money as a unit of account?
I. A unit of account is an agreed measure for stating the prices of goods and services.
II. Using money as a unit of account creates a simplified pricing system.
III. Economies choose many goods as units of account.

A)I only
B)II only
C)I and III
D)I and II

Question 78

When the monetary base increases by $2 billion, the quantity of money increases by $10 billion. Thus, the money multiplier equals

A)20.
B)5.
C)0.2.
D)None of the above.

Question 79

Currency outside of banks increases from $100 million to $200 million. This change is considered

A)contractionary monetary policy.
B)a decrease in the monetary base.
C)a currency drain.
D)an increase in the monetary base.

Question 80

Suppose that M = 300, P = 150, and Y = 6. Then the velocity of circulation equals

A)0.02.
B)3.00.
C)0.50.
D)2.00.