Deck 5: Money and Inflation

Question 1

Money is another measure of ________.

A) income because they both are flow measures
B) wealth because they both measure the total collection of property that serves as store of value
C) the flow of earnings one draws every two weeks
D) all of the above
E) none of the above

Answer 1

none of the above

Question 2

The FOMC ________.

A) meets four times a year to decide on how to conduct open market operations that influence the money supply
B) meets six times a year to decide on how to conduct open market operations that influence the money supply and interest rates
C) meets eight times a year to decide on how to conduct open market operations that influence the money supply and interest rates
D) meets twelve times a year to decide on how to conduct open market operations that influence interest rates
E) none of the above

Answer 2

meets eight times a year to decide on how to conduct open market operations that influence the money supply and interest rates

Question 3

Money is not ________.

A) income because the former is a stock measure and the latter a flow
B) wealth because the latter is generally used to procure the former
C) as desirable as barter because the latter is more efficient than the former
D) all of the above
E) none of the above

Answer 3

income because the former is a stock measure and the latter a flow

Question 4

Money is not ________.

A) income because the former is a stock measure and the latter a flow
B) wealth because the former is generally used to procure the latter
C) as inefficient as barter because the latter requires a double coincidence of wants
D) all of the above
E) none of the above

Question 5

Which of the following is most like money?

A) game arcade tokens
B) board game "money"
C) credit cards
D) baseball trading cards
E) frequent flyer miles

Question 6

The Federal Reserve System consists of ________.

A) eleven district banks and a board of governors
B) ten district banks and the FOMC
C) eleven district banks
D) twelve district banks and a board of governors
E) none of the above

Question 7

Someone who has just inherited a "goldmine" has received a great deal of ________.

A) wealth
B) money
C) income
D) currency
E) liquidity

Question 8

Fred has always been known as "the rich kid." Strictly speaking, this must mean that ________.

A) Fred has a lot of cash
B) Fred's income is quite high
C) Fred won the lottery before he was legally eligible
D) Fred has a flashy wardrobe
E) Fred has a lot of wealth

Question 9

When the Fed sells government securities in the open market, the money supply ________ because ________.

A) decreases; banks lose liquidity, they make fewer loans and checking account deposits decrease
B) increases; banks gain liquidity, they make more loans and checking account deposits increase
C) increases; banks lose liquidity, they make more loans and checking account deposits increase
D) decreases; banks gain liquidity, they make fewer loans and checking account deposits decrease
E) none of the above

Question 10

Characteristics that enable an item to serve well as money include each of the following, except ________.

A) durable
B) abundant
C) divisible
D) portable
E) verifiable

Question 11

In modern economies, the supply of money depends mainly on the economy's ________.

A) tax rates
B) mining of precious metals
C) net exports
D) growth of output of goods and services
E) none of the above

Question 12

In addition to the chairman of the Board of Governors, the FOMC consists of ________.

A) Six rotating members of the Board of Governors and five presidents of Federal Reserve banks
B) Six other members of the Board of Governors, four rotating bank presidents and the president of the New York Federal Reserve
C) Six other members of the Board of Governors and five presidents of Federal Reserve banks; all twelve rotating members
D) Twelve Federal Reserve Bank presidents
E) none of the above

Question 13

Suppose you have a collection of gold coins from the 19th century. Comment on their suitability to provide for you each of the three functions of money.

Question 14

Open Market operations consist mainly of ________.

A) the government buying and selling private securities in the open market
B) the Fed buying and selling government securities in the open market
C) the government selling its own securities in the open market
D) the Fed setting rates for securities traded in the open market
E) none of the above

Question 15

Money serves as ________.

A) a unit of account,
B) a store of value
C) a medium of exchange
D) all of the above
E) none of the above

Question 16

The most liquid asset is ________.

A) stocks
B) bonds
C) cash
D) real estate
E) none of the above

Question 17

The phrase "double coincidence of wants" ________.

A) is useful to explain why barter is an efficient practice
B) refers to two people who have similar tastes
C) suggests a quite improbable circumstance
D) clarifies the distinction between income and wealth
E) none of the above

Question 18

Subject to a few legal and practical restrictions, anything may be exchanged for anything else. The distinctive advantage of money is that ________.

A) it is likely to retain its value, whether it is kept or exchanged
B) it has little, if any, use other than exchange
C) it can generate income while it is kept
D) it is likely to be accepted by everyone in exchange for anything
E) none of the above

Question 19

Wealth ________.

A) may serve the monetary function of store of value
B) means essentially the same as money
C) differs from money in that wealth is more liquid
D) is the flow that corresponds to the stock of income
E) none of the above

Question 20

A prisoner of war camp seems a likely place for "cigarette money," because ________.

A) nearly all prisoners smoke cigarettes
B) of the absence of better alternatives
C) cigarettes are abundant and easy to count
D) the guards can enforce the practice of accepting cigarettes as a medium of exchange
E) cigarettes retain their value over time

Question 21

Financial innovations such as direct deposit of paychecks, electronic payment of bills, and automated teller machines (ATMs) have likely ________.

A) had minimal effect on M1 and M2
B) reduced the size of M2 relative to M1
C) increased both M1 and M2 relative to GDP
D) caused the growth rates of M1 and M2 to become more stable
E) reduced the size of M1 relative to M2

Question 22

Which of the following is true for the European Central Bank (ECB)?

A) its executive board meets more often than the FOMC
B) each member country's central bank has similar functions to the Federal Reserve Banks
C) it is housed in Frankfurt, Germany
D) all of the above
E) none of the above

Question 23

If the euro replaces the U.S. dollar as the world's most popular currency, that will likely ________.

A) reduce M1, without affecting M2
B) reduce M2, without affecting M1
C) cause a temporary increase in M1
D) affect neither M1 nor M2
E) none of the above

Question 24

The principal reason(s) that so much U.S. currency is held outside the U.S is (are) ________.

A) many people around the world trust the U.S. dollar more than any other currency
B) banks all around the world find it convenient to hold large amounts of U.S. dollars
C) U.S. citizens and corporations spend a lot of dollars abroad
D) all of the above
E) none of the above

Question 25

M1 differs from M2 because ________.

A) M1 includes demand deposits and M2 does not
B) M1 includes currency held by the nonbank public and M2 includes only currency held by banks
C) M1 includes non interest-bearing checking accounts and M2 includes interest bearing time deposit accounts
D) all of the above
E) none of the above

Question 26

Typically, when someone borrows money from a bank, M2 ________, because ________.

A) increases; the money is held for a while in a liquid form
B) decreases; the money is held for a while in a liquid form
C) does not change; the loan affects only the subcategories within M2
D) decreases; of the decline in the bank's vault cash
E) none of the above

Question 27

M1 differs from M2 because ________.

A) M2 includes components that are less liquid than any component of M1
B) M1 does not include savings deposits and M2 does
C) M1 is included in M2 but M2 has more components
D) all of the above
E) none of the above

Question 28

M1 differs from M2 because ________.

A) M1 is less liquid than M2
B) M1 includes demand deposits and M2 does not
C) M1 includes only the most liquid forms of money and M2 includes all of M1 and some less liquid items
D) all of the above
E) none of the above

Question 29

Which of these transactions results in an increase in M2?

A) certificate of deposit matures, adding $520 to your checking account
B) withdrawal of $100 cash from your checking account
C) depositing a bank loan of $400 into your savings account
D) depositing a $300 paycheck into your savings account
E) none of the above

Question 30

Both the Federal Reserve System in the United States and the European Central Bank are comprised of geographically dispersed Banks. How might such decentralization contribute to successful monetary policy?

Question 31

The Fed's narrowest measure of money is ________.

A) M1
B) M2
C) M3
D) all of the above
E) none of the above

Question 32

When the Fed buys government securities in the open market, the money supply ________ because ________.

A) decreases; banks lose liquidity, they make fewer loans and checking account deposits decrease
B) increases; banks gain liquidity, they make more loans and checking account deposits increase
C) increases; banks lose liquidity, they make more loans and checking account deposits increase
D) decreases; banks gain liquidity, they make fewer loans and checking account deposits decrease
E) none of the above

Question 33

Open market operations alter the money supply by ________.

A) influencing banks' ability to make loans to individuals and corporations
B) adding currency to or withdrawing currency from banks' vaults
C) adding currency to or withdrawing currency from the checking accounts of individuals and corporations
D) influencing banks' ability to make loans to the government
E) none of the above

Question 34

Which of the following is true for the European Central Bank (ECB)?

A) its executive board meets less often than the FOMC
B) the members of its executive board have lifetime appointments
C) it is a more decentralized system than the Federal Reserve
D) all of the above
E) none of the above

Question 35

Which of these transactions results in an increase in M1?

A) withdrawal of $100 cash from your checking account
B) certificate of deposit matures, adding $520 to your checking account
C) depositing a bank loan of $400 into your savings account
D) depositing a $300 paycheck into your savings account
E) none of the above

Question 36

M1 does not include cash that is held in ATMs or bank vaults, because ________.

A) no one really owns that money
B) that money is included in M2
C) that money earns no interest
D) the right to access that money is counted already as bank deposits
E) none of the above

Question 37

Recent financial turmoil has caused many people to increase saving and to prefer assets that are perceived to be relatively safe and liquid. What are the likely effects on M1 and M2?

Question 38

As of 2010 the outstanding U.S. currency is $872 billion, which implies that the typical U.S. citizen holds $2,800 in cash. Is this an accurate inference? Why?

A) Yes; because dividing total currency of $872 billion by total U.S. population in 2010 roughly works out to $2,800 per person
B) No; because criminals and foreigners hold large sums of dollars, so the average citizen holds far less.
C) No; because the average citizen probably does not have $2800 in her checking account to back up all that cash
D) Yes; because the Fed rarely makes accounting mistakes when computing M1
E) none of the above

Question 39

Current Federal Reserve policy focuses on interest rates, rather than on monetary aggregates, because ________.

A) monetary aggregates do not provide clear or consistent signals to guide policymakers
B) open market operations affect interest rates more directly than they affect monetary aggregates
C) according to the Fisher effect, the interest rate is a key determinant of the inflation rate
D) all of the above
E) none of the above

Question 40

Credit cards are a popular means of payment. Why are credit card accounts not included in M1 or M2? Are credit cards of no relevance to these money measures?

Question 41

In the quantity theory of money, which of these variables is endogenous?

A) the price level
B) the velocity of money
C) real output
D) the money supply
E) none of the above

Question 42

The quantity theory of money ________.

A) is used by classical economists to explain how frequent changes in velocity lead to infrequent changes in the price level.
B) gives mathematical grounding for the view that a country's central bank determines the general price level through control of the money supply.
C) implies that changes in the money supply never have an impact on real variables
D) all of the above
E) none of the above

Question 43

The quantity theory of money explains how ________ depends on ________.

A) real GDP; the money supply
B) the price level; the demand for money
C) the money supply; the velocity of money
D) all of the above
E) none of the above

Question 44

The velocity of money ________.

A) represents the average number of times a dollar turns over through the year
B) provides the link between the money supply and nominal income
C) times the money supply should equal total income according to the equation of exchange
D) all of the above
E) none of the above

Question 45

The quantity theory of money ________.

A) is the product of Keynesian economists
B) links total income to a country's supply of money
C) explains why the equation of exchange is true by definition
D) all of the above
E) none of the above

Question 46

The quantity theory of money ________.

A) is formulated in terms of aggregate output because the nominal value of transactions is difficult to measure
B) tells us how much money is held for a given amount of nominal spending
C) implicitly tells us the quantity of money that people want to hold
D) all of the above
E) none of the above

Question 47

In the quantity theory of money, the assumption that aggregate output is fixed is based on the view that ________.

A) wages and prices are perfectly flexible in the long run
B) the velocity of money is constant in the short run
C) the demand for real money balances is proportional to income
D) changes in the quantity of money lead to proportional changes in the price level
E) none of the above

Question 48

The equation of exchange ________.

A) states that the quantity of money divided by velocity must equal nominal income in a given year
B) is only an identity if we do not understand the determinants of velocity
C) shows that nominal income must equal real money balances times the number of times a dollar turns over in a year
D) all of the above
E) none of the above

Question 49

The quantity theory of money tells us that real money balances are proportional to income, since ________.

A) velocity is assumed constant in the short run
B) the supply and demand of money are equal in equilibrium
C) changes in the quantity of money lead to proportional changes in the price level
D) all of the above
E) none of the above

Question 50

According to Irving Fisher, velocity ________.

A) is determined by the way banks alone conduct transactions
B) equals the number of transactions times the average price per transaction all divided by total money balances
C) can change very quickly on short notice
D) all of the above
E) none of the above

Question 51

The quantity theory of money ________.

A) is the product of classical economists
B) links total income to a country's supply of money
C) is derived from the equation of exchange
D) all of the above
E) none of the above

Question 52

From the equation of exchange, if both real income (Y) and the quantity of money (M) double and the price level (P) remains constant, then velocity (V)________ and nominal income ________.

A) remains constant; doubles
B) doubles; remains constant
C) doubles; doubles
D) decreases by 50 percent; quadruples
E) none of the above

Question 53

From the equation of exchange, if both nominal income and the quantity of money (M) triple, the price level (P) increases by 50 percent and velocity (V) remains constant, then real output (Y)________.

A) also triples
B) increases by 50 percent
C) doubles
D) decreases by 50 percent
E) none of the above

Question 54

The velocity of money ________.

A) represents the average number of times a dollar is spent in a given year
B) provides the link between the money supply and money demand
C) times the money supply should equal real GDP
D) all of the above
E) none of the above

Question 55

The equation of exchange ________.

A) states that the quantity of money multiplied by velocity must equal nominal income in a given year
B) describes a relationship that is true by definition
C) shows that real GDP must equal real money balances times the number of times a dollar turns over in a year
D) all of the above
E) none of the above

Question 56

The quantity theory of money ________.

A) is formulated in terms of aggregate output because the nominal value of transactions is difficult to measure
B) assumes that the nominal value of transactions are a constant portion of aggregate output
C) assumes velocity is constant in the short run
D) all of the above
E) none of the above

Question 57

From the equation of exchange, if both nominal income and the quantity of money (M) double, the price level (P) decreases by 50 percent and velocity (V) remains constant, then real output (Y)________.

A) also doubles
B) triples
C) quadruples
D) decreases by 50 percent
E) none of the above

Question 58

The quantity theory of money ________.

A) is used by classical economist to explain how changes in the quantity of money lead to proportional changes in the price level.
B) gives mathematical grounding for the view that a country's central bank determines the general price level through control of the money supply.
C) implies that changes in the money supply have no long run impact on real variables
D) all of the above
E) none of the above

Question 59

According to Irving Fisher, velocity ________.

A) is determined by institutions that affect the way individuals transact
B) is affected by institutions only gradually
C) is assumed constant in the short run
D) all of the above
E) none of the above

Question 60

The quantity theory of money ________.

A) was best explained by Fisher's book"The Purchasing Power of Money"
B) links total money supply to a country's demand for money
C) explains why the equation of exchange is true by definition
D) all of the above
E) none of the above

Question 61

Inflation ________.

A) is more costly when it is anticipated than when it comes as a surprise
B) makes it more difficult to plan for the future, whether it is a surprise or not.
C) induces distortions in the money and goods market but not the labor market
D) all of the above
E) none of the above

Question 62

With increases in inflation demand for money that does not earn a return decreases. Carrying less cash in our pockets means higher ________.

A) shoe-leather costs
B) menu costs
C) capital gain tax bills
D) all of the above
E) none of the above

Question 63

With high inflation ________.

A) stock market investors are always worse off than consumers and households
B) producers are always worse off than consumers
C) creditors are always worse off than debtors
D) all of the above
E) none of the above

Question 64

Inflation might lead to ________ because ________.

A) higher demand for stocks; as the price level increases so do stock prices
B) higher production costs; businesses have to advertise more often due to faster price revisions
C) lower transaction costs; we would hold less cash
D) all of the above
E) none of the above

Question 65

Inflation leads to ________.

A) increased variability of relative prices only when it is anticipated
B) increased variability of relative prices only when it is unanticipated
C) increased variability of relative prices whether inflation is anticipated or not
D) lower variability of the general price level only when it is very high
E) none of the above

Question 66

The real interest rate ________ inflation ________.

A) is unaffected in the long run by; because of the classical dichotomy
B) moves one for one with expected; in the long run
C) always increases with; but because of the Fisher effect lower expected inflation ensues
D) all of the above
E) none of the above

Question 67

Inflation ________.

A) is costly because the classical dichotomy may not always hold
B) that is anticipated (or expected) can be costly
C) is costly for many reasons but chief among them is that inflation makes it more difficult to plan for the future
D) all of the above
E) none of the above

Question 68

The main reason that hyperinflation renders a currency worthless is that ________.

A) the government cannot print money fast enough to keep up with the rising prices
B) laws against raising prices are easily evaded
C) reducing government expenditures is politically unpopular
D) the government's "official" inflation rate is always a gross understatement
E) as soon as inflation seems out of control, everyone knows that the currency will soon lose whatever value it has today

Question 69

The quantity theory of money ________.

A) focuses mainly on the close link between short run fluctuations in velocity and the price level
B) works very well for the U.S. but it does not hold empirically for other countries in the long run
C) provides a long run theory of inflation because it is based on the assumption that prices and wages are fully flexible
D) all of the above
E) none of the above

Question 70

The real interest rate ________ inflation ________.

A) subtracted from the nominal rate yields expected; according to the Fisher equation
B) moves one for one, in the long run, with expected; according to the classical dichotomy
C) always increases with; but because of the Fisher effect lower expected inflation ensues
D) all of the above
E) none of the above

Question 71

The quantity theory of money ________.

A) suggests that inflation is always and everywhere a monetary phenomenon which has been shown to always be supported by the data
B) validates the classical assumption that wages and prices are completely flexible in the short run
C) provides a better description of short run fluctuations in inflation and money growth than the link between these variables in the long run
D) all of the above
E) none of the above

Question 72

The proposition that the velocity of money is fairly constant in the long run is known as the ________.

A) neutrality of money
B) classical dichotomy
C) quantity theory of money
D) Fisher effect
E) none of the above

Question 73

How have financial innovations such as direct deposit of paychecks, electronic payment of bills, and automated teller machines (ATMs) affected the velocity of money and the demand for real money balances?

Question 74

The proposition that the amount of goods and services produced in an economy in the long run is not affected by the price level is known as the ________.

A) neutrality of money
B) classical dichotomy
C) quantity theory of money
D) Fisher effect
E) none of the above

Question 75

Inflation might lead to ________ because ________.

A) lower demand for stocks; of tax distortions
B) lower demand for cash; money does not typically yield interest
C) uncertain or uneven demand for goods; higher fluctuations in relative prices make it harder for consumers to compare among goods and make rational consumption decisions
D) all of the above
E) none of the above

Question 76

The quantity theory of money ________.

A) implies that inflation equals the ratio of the growth rates of the money supply and of real income
B) provides central banks with a tool to prevent the rate of inflation from fluctuating
C) implies that, in the long run, changes in the money supply will be matched by changes in real income
D) all of the above
E) none of the above

Question 77

The proposition that changes in the money supply have no long-run effect on real variables is known as the ________.

A) classical dichotomy
B) quantity theory of money
C) neutrality of money
D) Fisher effect
E) none of the above

Question 78

Hyperinflation typically ________.

A) describes periods of extreme price increases of over 50% per month or 1,000% per year
B) is a a result of extreme periods of money growth that tend to come only from large fiscal imbalances
C) affects both poor and developed economies
D) all of the above
E) none of the above

Question 79

The Fisher effect ________.

A) comes from combining the Fisher equation and the classical dichotomy
B) predicts that in the long run nominal rates will rise with increases in expected inflation
C) shows that in high inflation we typically see high nominal rates
D) all of the above
E) none of the above

Question 80

Suppose Y = 100, P = 80, and V = 3.2. If Y rises to 105, and the inflation rate is 10 percent, what is the new value of M?