Chapter 2

The Role of Money in the Macroeconomy

D2Interpretive
1. The most prominent role for money is to serve as a A) form of credit. B) source of income. C) means of payment. D) standard of value. Answer: C

D1Applied
2. You ust !ou"ht a new car. #n this transaction$ you used money as a A) form of credit. B) source of income. C) means of payment. D) standard of value. Answer: C

D1Factual
%. The &1 definition of money includes A) currency outside !an's plus chec'a!le deposits and (urodollars. B) currency outside !an's plus chec'a!le deposits plus retail money mar'et deposit accounts. C) currency outside !an's plus chec'a!le deposits plus traveler)s chec's. D) currency outside !an's plus chec'a!le deposits plus small*denomination time deposits. Answer: C

D1Interpretive
+. &oney functions as a standard of value when people A) compare prices. B) !uy financial assets. C) purchase "oods and services. D) save. Answer: A

7,itter-.il!er-/dell Money, Banking, and Financial Markets $ (leventh (dition

D1Factual
0. A hi"hly li1uid asset is one that A) loses its value. B) appreciates over time. C) can !e 1uic'ly turned into the medium of e2chan"e without loss. D) cannot !e used in financial transactions. Answer: C

D1Factual
3. An asset that can !e 1uic'ly turned into the medium of e2chan"e without ta'in" a loss is said to !e very A) accounta!le. B) li1uid. C) divisi!le. D) profita!le. Answer: B

D2Applied
4. 5hich of the followin" lists of assets is in the correct order from most li1uid to least li1uid6 A) A car$ a small denomination time deposit$ a dollar !ill B) 7overnment !onds$ chec'in" accounts$ parcel of land C) 7overnment !onds$ apartment !uildin"$ money mar'et deposit account D) A dollar !ill$ "overnment !onds$ a house Answer: D

D2Applied
8. 5hich of the followin" is the least li1uid6 A) A chec'in" account B) A "overnment !ond C) A traveler)s chec' D) A money mar'et deposit account Answer: B

D2Applied
9. 5hich of the followin" is the most li1uid6 A) A (urodollar deposit B) Currency C) A chec'in" account D) A small*denomination time deposit Answer: B

D2Factual
1:. The &1 definition of money does not include A) demand deposits. B) ne"otia!le order of withdrawal accounts. C) money mar'et deposit accounts. D) chec'in" accounts with savin"s and loan associations. Answer: C

Chapter 2The ,ole of &oney in the &acroeconomy8

D3Factual
11. The &1 definition of the money supply includes A) (urodollars. B) travelers; chec's. C) lar"e*denomination certificates of deposit. D) small*denomination certificates of deposit. Answer: B

D2Factual
12. The difference !etween &1 and &2 definitions of the money supply is that &2 includes A) demand deposits at !an's. B) lar"e denomination time deposits. C) retail money mar'et mutual funds shares. D) <=5 accounts. Answer: C

D2Factual
1%. A difference !etween &2 and &% measures of the money supply is that &% includes A) !an' repurchase a"reements. B) retail money mar'et mutual fund shares. C) demand deposits at !an's. D) <=5 accounts. Answer: A

D3Factual
1+. 5hich of the followin" is not included in &%6 A) #nstitutional money mar'et mutual fund shares B) >ar"e*denomination time deposits C) .mall*denomination time deposits D) All of the a!ove are included in &% Answer: D

D3Factual
10. 5hich of the followin" is not included in &26 A) Ban' repurchase a"reements B) .avin"s deposits C) Travelers) chec's D) .mall*denomination time deposits Answer: A

D2Interpretive
13. The ?????????????????? measure of money is the only definition of money that is "enerally accepted as a means for payment. A) &1 B) &2 C) &% D) &+ Answer: A

9,itter-.il!er-/dell Money, Banking, and Financial Markets $ (leventh (dition

D1Factual
14. ?????????????????? is the narrowest and most traditional definition of money. A) &1 B) &2 C) &% D) &+ Answer: A

D1Applied
18. The central !an' in most countries is responsi!le for A) monetary policy. B) fiscal policy. C) fiscal and monetary policy. D) printin" and currency only@ most central !an's have no policy role. Answer: A

D1Factual
19. #n the /nited .tates$ the money supply is determined !y the A) Aederal ,eserve. B) /... Con"ress. C) /... Treasury. D) Aederal Deposit #nsurance Corporation. Answer: A

D2Applied
2:. The proportion of the money supply that is held in the form of currency is ultimately determined !y A) the Aederal ,eserve. B) the pu!lic. C) the /... Con"ress. D) commercial !an's. Answer: B

D2Interpretive
21. The Aederal ,eserve controls the money supply !y A) printin" currency. B) settin" commercial !an' profit mar"ins. C) maintainin" constant fractions of various forms of money. D) wholesalin" coins and paper currency to local !an's. Answer: D

D1Factual
22. 5hich of the followin" is not an important advanta"e of the use of money over !arter6 A) #t is not necessary to remem!er a lar"e num!er of e2chan"e ratios of "oods for other "oods. B) /ncertainty in tradin" is reduced to a minimum. C) #nflation is a pro!lem in a !arter economy !ut not in one that uses money. D) The use of money reduces the amount of time people spend ma'in" transactions. Answer: C

Chapter 2The ,ole of &oney in the &acroeconomy10

D2Interpretive
2%. 5hich of the followin" characteristics is re1uired of a "ood medium of e2chan"e6 A) Bi"h intrinsic value B) >ow uncertainty over value in trade C) Deterioratin" e2chan"e value over time D) A hi"h rate of return Answer: B

D1Factual
2+. An effective medium of e2chan"e must A) !e a "ood store of value. B) !e a unit of account. C) e2hi!it low uncertainty over its value in trade. D) All of the a!ove Answer: D

D1Interpretive
20. #f people lost confidence in the medium of e2chan"e$ the li'ely result would !e A) inflation. B) increased !arter activity. C) increased financial intermediation. D) no more transactions ta'in" place. Answer: B

D2Interpretive
23. The value of money ?????????????????? the price level. A) is the same as B) varies positively with C) varies inversely with D) none of the a!ove Answer: C

D2Interpretive
24. A risin" price level causes A) reduced !arter activity. B) consumers to shift from chec'in" accounts to currency. C) a decrease in the money supply. D) a decrease in the value of money. Answer: D

D1Interpretive
28. &oney increases economic "rowth !y facilitatin" transfers from A) savers to !orrowers. B) the "overnment to investors. C) investors to savers. D) investors to !orrowers. Answer: A

11,itter-.il!er-/dell Money, Banking, and Financial Markets $ (leventh (dition

D2Interpretive
29. #n a !arter economy$ the only way people can invest is if A) consumption is positive. B) there is inflation. C) they save !y ac1uirin" "oods directly. D) money is introduced. Answer: C

D2Interpretive
%:. Ainancial mar'ets increase the volume of savin" and investment !y A) storin" lar"e 1uantities of cash. B) reducin" the velocity of money. C) providin" savers a variety of ways to lend to !orrowers. D) maintainin" low interest rates. Answer: C

D1Factual
%1. 5hich of the followin" is not a financial institution6 A) A mutual fund B) An insurance company C) A pension fund D) A minin" company Answer: D

D2Interpretive
%2. The primary role of financial institutions is to A) re"ulate the money supply. B) transfer funds from investors to !orrowers. C) pac'a"e savin"s for transfer to !orrowers. D) lend money to consumers. Answer: C

D1Interpretive
%%. 5hen hyperinflation occurs$ A) 7DC falls to Dero. B) interest rates fall. C) savin"s rates rise. D) money is a less effective medium of e2chan"e. Answer: D

D2Interpretive
%+. 5hen hyperinflation occurs$ money !ecomes a less efficient medium of e2chan"e !ecause money ceases to !e a relia!le A) store of value. B) unit of account. C) investment. D) source of income. Answer: A

Chapter 2The ,ole of &oney in the &acroeconomy12

D1Factual
%0. ,isin" prices at a fast and furious pace is referred to as A) inflation. B) hyperinflation. C) deflation. D) a recession. Answer: B

D1Factual
%3. #n the /nited .tates$ currency is A) !ac'ed !y "old. B) !ac'ed !y silver. C) !ac'ed !y nothin" tan"i!le. D) a lia!ility on the !oo's of commercial !an's. Answer: C

D1Factual
%4. #n the /nited .tates$ money is !ac'ed !y A) "old. B) "old and silver. C) "old$ silver$ and Aederal ,eserve notes. D) social convention and the le"al system. Answer: D

D1Factual
%8. =n a commercial !an')s !alance sheet$ a chec'in" account appears as A) a security. B) a lia!ility. C) an asset. D) capital. Answer: B

D1Interpretive
%9. 5hen commercial !an's ma'e loans$ they A) increase !an' capital. B) increase !an' reserves. C) create chec'in" account money. D) create new currency. Answer: C

D2Factual
+:. Aor a commercial !an'$ a new loan is A) a reserve. B) capital. C) a lia!ility. D) an asset. Answer: D

13,itter-.il!er-/dell Money, Banking, and Financial Markets $ (leventh (dition

D1Factual
+1. Ban' ?????????????????? are in the form of vault cash and deposits with the central !an'. A) assets B) lia!ilities C) capital D) reserves Answer: D

D1Factual
+2. A !an';s e2cess reserves are e1ual to A) total reserves minus re1uired reserves. B) demand deposits minus loans. C) cash plus deposits at the central !an'. D) net worth. Answer: A

D2Factual
+%. #n the /nited .tates$ the reserve re1uirement on demand deposits is appro2imately A) 1: percent. B) 2: percent. C) 0: percent. D) 9: percent. Answer: A

D1Interpretive
++. A !an' can ma'e new loans as lon" as it has A) e2cess reserves. B) re1uired reserves. C) reserves. D) capital. Answer: A

D2Interpretive
+0. A !an' is fully loaned up when it has no A) capital. B) reserves. C) e2cess reserves. D) vault cash. Answer: C

D2Interpretive
+3. A !an' can create new money only when A) its reserves fall !elow the amount re1uired !y the Aederal ,eserve. B) it has e2cess reserves. C) its has vault cash. D) it is loaned up. Answer: B

Chapter 2The ,ole of &oney in the &acroeconomy14

D2Applied
+4. Ban's destroy money when they A) lend securities. B) sell securities. C) !uy securities. D) purchase "overnment !onds. Answer: B

D2Applied
+8. Car'er !an' is fully loaned up. 5hich of the followin" is not an option Car'er has to o!tain additional reserves6 A) Call in loans B) Buy securities C) .ell securities D) Borrow throu"h the federal funds mar'et Answer: B

D1Factual
+9. The interest rate char"ed on overni"ht loans !etween !an's is the A) discount rate. B) federal funds rate. C) Treasury !ill rate. D) prime rate. Answer: B

D2Factual
0:. 5hich of the followin" !est descri!es the ideal 1uantity of money6 A) #t e1uals the amount of spendin". B) #t e1uals the level of 7DC. C) #t e1uals the price level. D) #t sta!iliDes the price level while allowin" full employment. Answer: D

D2Interpretive
01. Chan"es in the money supply have an immediate effect on an economy;s A) li1uidity. B) 7DC. C) price level. D) employment. Answer: A

15,itter-.il!er-/dell Money, Banking, and Financial Markets $ (leventh (dition

D2Interpretive
02. By alterin" people)s li1uidity$ an increase in the money supply relative to the demand for li1uidity should lead to A) more spendin" on real assets !ut not financial assets. B) more spendin" on either real assets or financial assets. C) more spendin" on financial assets !ut not on real assets. D) no chan"e in spendin" on either real or financial assets. Answer: B

D2Applied
0%. #f an increase in the money supply causes people to !uy more financial assets$ A) securities prices "o up$ interest rates will fall$ and spendin" on plant and e1uipment falls. B) securities prices "o up$ interest rates will rise$ and spendin" on plant and e1uipment falls. C) securities prices "o up$ interest rates will fall$ and spendin" on plant and e1uipment rises. D) securities prices "o up$ interest rates will rise$ and spendin" on plant and e1uipment rises. Answer: C

D2Factual
0+. The rate at which money turns over is the definition of A) velocity. B) li1uidity. C) 7DC. D) a""re"ate demand. Answer: A

D2Interpretive
00. The velocity of money can !e computed !y A) multiplyin" real 7DC !y the price level. B) multiplyin" the price level !y the money supply. C) dividin" 7DC !y the price level. D) dividin" 7DC !y the money supply. Answer: D

D2Interpretive
03. Eelocity is the relationship !etween a chan"e in the money supply and the chan"e in A) the price level. B) money demand. C) real 7DC. D) 7DC. Answer: D

Chapter 2The ,ole of &oney in the &acroeconomy16

D2Interpretive
04. #f a 0 percent increase in the money supply always leads to a 0 percent increase in nominal 7DC$ this indicates that A) the price level is constant. B) the economy is at full employment. C) velocity is constant. D) real 7DC is constant. Answer: C

D2Applied
08. Assume that nominal 7DC is F2 trillion and the money supply is F+:: !illion. The velocity of money is ??????????????????. A) F2.+ trillion B) F1.3 trillion C) :.2 D) 0.: Answer: D

D2Applied
09. #f the money supply is F1 trillion and the velocity of money is 0.:$ nominal 7DC is . A) F2:: !illion B) F0 trillion C) F0:: !illion D) Cannot !e determined from the information "iven Answer: B

D1Interpretive
3:. The velocity of money is determined !y the A) Aederal ,eserve. B) !an'in" system. C) /... Treasury. D) pu!lic. Answer: D

D2Interpretive
31. The Aederal ,eserve cannot always control the level of total spendin" in the economy usin" monetary policy !ecause it cannot control A) the money supply. B) velocity. C) total reserves. D) total !an' lendin". Answer: B

17,itter-.il!er-/dell Money, Banking, and Financial Markets $ (leventh (dition

D3Interpretive
32. 5hich of the followin" statements is incorrect6 A) The flow of spendin" depends on the supply of money and the velocity of money. B) A hi"her level of 7DC can !e caused !y hi"her prices or !y increased production. C) The determinants of the velocity of money are well*'nown and can !e easily influenced !y the Aed. D) The Aed)s main o! is to re"ulate the flow of spendin". Answer: C

D2Interpretive
3%. Chan"es in the money supply do not always cause predicta!le chan"es in the level of spendin" !ecause A) the velocity of money is not always constant. B) the inflation rate varies. C) the economy;s pro2imity to full employment varies. D) the savin" rate varies. Answer: A

D2Factual
3+. Byperinflation is most li'ely when it is fueled !y A) ever*increasin" levels of "overnment spendin". B) declines in the velocity of money. C) continuously risin" money demand. D) continuous increases in the money supply in ever*increasin" volume. Answer: D

D3Applied
30. #f inflation in a country consistently avera"es % percent a year$ prices will dou!le in A) % years. B) 42 years. C) 2+ years. D) %3 years. Answer: C

D2Factual
33. Durin" the 19%:s$ the money supply increased %0 percent while consumer prices A) rose 4: percent. B) also rose %0 percent. C) were virtually unchan"ed. D) fell 2: percent. Answer: D

Chapter 2The ,ole of &oney in the &acroeconomy18

D2Factual
34. Durin" the 198:s$ &1 dou!led$ and the price level increased a!out ?????????????????? percent. A) 1:: B) 3: C) 2:: D) %:: Answer: B

D2Interpretive
38. #ncreases in the money supply will not necessarily cause inflation if the increase in the money supply is offset !y A) a fallin" velocity of money. B) a constant velocity of money. C) fallin" 7DC levels. D) full employment. Answer: A

D2Interpretive
39. A necessary !ut not sufficient condition for the continuation of inflation is A) an e2pandin" money supply. B) increasin" "overnment deficits. C) risin" interest rates. D) decreasin" velocity. Answer: A

D2Interpretive
4:. #f a country is e2periencin" hyperinflation$ it is safe to assume that A) the velocity of money has decreased. B) the country has returned to a !arter economy. C) the country)s money supply has risen rapidly. D) real 7DC in the country has fallen. Answer: C

D2Interpretive
41. #n a recession$ an increase in the money supply is li'ely to cause A) some increase in interest rates. B) some increase in output. C) some increase in velocity. D) an e1ual increase in inflation. Answer: B

19,itter-.il!er-/dell Money, Banking, and Financial Markets $ (leventh (dition

D2Interpretive
42. An increase in the money supply is most li'ely to lead to risin" prices when A) velocity is declinin". B) money demand is risin". C) supply and demand are e1ual. D) the economy is producin" under conditions of hi"h employment. Answer: D

D2Interpretive
4%. 5hich of the followin" is a possi!le cause of short*run inflation6 A) A decrease in the money supply B) An increase in velocity C) An increase in output D) A decrease in velocity Answer: B

D2Applied
4+. The country of Gamula is currently e2periencin" conditions of full employment and capacity output. 5hich of the followin" is incorrect6 A) #ncreases in the money supply !y the central !an' of Gamula !ecome more and more li'ely to "enerate risin" prices. B) ,eal economic "rowth in Gamula is li'ely to increase. C) #nflation will result in Gamula if the increase in the money supply is e2actly lar"e enou"h to provide funds for the enlar"ed volume of transactions. D) All of the a!ove are true. Answer: C