Question 1

The difference between M1 and M2 definitions of the money supply is that M2 includes

Accepted Answer

A)   demand deposits at banks.
B)   large denomination time deposits.
C)   retail money market mutual funds shares.
D)   NOW accounts. C

Question 2

Which of the following is the most liquid?

Accepted Answer

A)   A Eurodollar deposit
B)   Currency
C)   A checking account
D)   A small-denomination time deposit B

Question 3

__________ is the narrowest and most traditional definition of money.

Accepted Answer

A)   M1
B)   M2
C)   M3
D)   M4 A

Question 4

Changes in the money supply have an immediate effect on an economy's

Accepted Answer

A)   liquidity.
B)   GDP.
C)   price level.
D)   employment.

Question 5

Deflation is another word for

Accepted Answer

A)   falling prices.
B)   hyperinflation.
C)   recession.
D)   depression.

Question 6

When commercial banks make loans, they

Accepted Answer

A)   increase bank capital.
B)   increase bank reserves.
C)   create checking account money.
D)   create new currency.

Question 7

Which of the following is the least liquid?

Accepted Answer

A)   A checking account
B)   A government bond
C)   A traveler's check
D)   A money market deposit account

Question 8

In a recession, an increase in the money supply is likely to cause

Accepted Answer

A)   some increase in interest rates.
B)   some increase in output.
C)   some increase in velocity.
D)   an equal increase in inflation.

Question 9

In the United States, the money supply is determined by the

Accepted Answer

A)   Federal Reserve.
B)   U.S. Congress.
C)   U.S. Treasury.
D)   Federal Deposit Insurance Corporation.

Question 10

An increase in the money supply is most likely to lead to rising prices when

Accepted Answer

A)   velocity is declining.
B)   money demand is rising.
C)   supply and demand are equal.
D)   the economy is producing under conditions of high employment.

Question 11

The M1 definition of money includes

Accepted Answer

A)   currency outside banks plus checkable deposits and Eurodollars.
B)   currency outside banks plus checkable deposits plus retail money market deposit accounts.
C)   currency outside banks plus checkable deposits plus traveler's checks.
D)   currency outside banks plus checkable deposits plus small-denomination time deposits.

Question 12

In the United States, money is backed by

Accepted Answer

A)   gold.
B)   gold and silver.
C)   gold, silver, and Federal Reserve notes.
D)   social convention and the legal system.

Question 13

Changes in the money supply do not always cause predictable changes in the level of spending because

Accepted Answer

A)   the velocity of money is not always constant.
B)   the inflation rate varies.
C)   the economy's proximity to full employment varies.
D)   the saving rate varies.

Question 14

Which of the following is not included in M3?

Accepted Answer

A)   Institutional money market mutual fund shares
B)   Large-denomination time deposits
C)   Small-denomination time deposits
D)   All of the above are included in M3.

Question 15

Money increases economic growth by facilitating transfers from

Accepted Answer

A)   savers to borrowers.
B)   the government to investors.
C)   investors to savers.
D)   investors to borrowers.

Question 16

Money functions as a standard of value when people

Accepted Answer

A)   compare prices.
B)   buy financial assets.
C)   purchase goods and services.
D)   save.

Question 17

When hyperinflation occurs, money becomes a less efficient medium of exchange because money ceases to be a reliable

Accepted Answer

A)   store of value.
B)   unit of account.
C)   investment.
D)   source of income.

Question 18

The proportion of the money supply that is held in the form of currency is ultimately determined by

Accepted Answer

A)   the Federal Reserve.
B)   the public.
C)   the U.S. Congress.
D)   commercial banks.

Question 19

The M1 definition of the money supply includes

Accepted Answer

A)   Eurodollars.
B)   travelers' checks.
C)   large-denomination certificates of deposit.
D)   small-denomination certificates of deposit.

Question 20

Increases in the money supply will not necessarily cause inflation if the increase in the money supply is offset by

Accepted Answer

A)   a falling velocity of money.
B)   a constant velocity of money.
C)   falling GDP levels.
D)   full employment.

Exam 2: The Role of Money in the Macroeconomy