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CHAPTER 13
MONEY AND THE BANKING SYSTEM
1.
Money is
a. valuable because it is backed by gold.
b. whatever is generally accepted in exchange for goods and services.
c. anything that is a liability of a commercial bank
d. an object to be consumed.
2.
In the United States, the purchasing power of money is determined by
a. the underlying precious metals that back each unit of currency.
b. the value of U.S. treasury bonds that back each unit of currency.
c. Federal Reserve policy, which controls the money supply.
d. Congress, which controls the money supply.
3.
Which of the following is not a component of the M1 money supply?
a. demand deposits
b. large-denomination (more than $100) bills
c. interest-earning checking deposits
d. outstanding balances on credit cards
4.
Which of the following is primarily responsible for controlling the money supply in the
United States?
a. the U.S. Congress
b. the Board of Governors of the Federal Reserve System
c. the U.S. Treasury
d. the Council of Economic Advisors
5.
Which of the following compose the reserves of a commercial bank?
a. demand deposits and time deposits
b. vault cash and deposits of the bank with the Federal Reserve
c. U.S. securities and stock equity
d. cash and U.S. securities
6.
If the Fed wanted to use all three of its major monetary control tools to decrease the money
supply, it would
a. buy bonds, reduce the discount rate, and reduce reserve requirements.
b. sell bonds, reduce the discount rate, and reduce reserve requirements.
c. sell bonds, increase the discount rate, and increase reserve requirements.
d. buy bonds, increase the discount rate, and increase reserve requirements.
7.
When the Federal Reserve sells government bonds to the public, it directly
a. increases the M1 money supply and increases the reserves of the commercial banking
system.
b. increases the M1 money supply, while reducing the reserves of the commercial
banking system.
c. reduces the M1 money supply, while increasing the reserves of the commercial
banking system.
d. reduces the M1 money supply and decreases the reserves of the commercial banking
system.
8.
What restricts the Fed’s ability to write checks and purchase U.S. securities?
a. Congress; the Fed must receive a budget allocation from Congress before it can write a
check.
b. The gold requirement; the Fed cannot write a check unless it has a sufficient amount of
gold to back the expenditure.
c. Reserve requirements; the Fed must maintain 20 percent of its assets in the form of
cash against the deposits that it is holding for commercial banks.
d. Nothing; the Fed can create money simply by writing a check on itself.
9.
Suppose the Fed purchases $100 million of U.S. securities from the public. If the reserve
requirement is 20 percent, the currency holdings of the public are unchanged, and banks
have zero excess reserves both before and after the transaction, the total impact on the
money supply will be a
a. $100 million decrease in the money supply.
b. $100 million increase in the money supply.
c. $200 million increase in the money supply.
d. $500 million increase in the money supply.
10.
A bank receives a demand deposit of $1,000. The bank loans out $600 of this deposit and
increases its excess reserves by $300. What is the legal reserve requirement?
a. 10 percent
b. 20 percent
c. 30 percent
d. 60 percent
Answer Key 1 through 10
1. (b), 2. (c), 3. (d), 4. (b), 5. (b), 6. (c), 7. (d), 8. (d), 9. (d), 10. (a)
CHAPTER 14
MODERN MACROECONOMICS: MONETARY
POLICY
1.
The velocity of money is
a. the rate at which the price index for consumer goods rises.
b. the multiple by which an increase in government expenditures will cause output to rise.
c. set by the Board of Governors of the Federal Reserve System.
d. the average number of times one dollar is used to buy final goods and services during a
year.
2.
During 2001, the Fed injected additional reserves into the banking system, which reduced
the federal funds rate and other short-term interest rates. Other things constant, which of the
following is most likely to result from this policy shift?
a. an increase in the rate of unemployment
b. a reduction in the growth of employment
c. an increase in aggregate demand and real GDP
d. a reduction in the long-run rate of inflation
3.
The demand curve for money
a. shows the amount of money balances that individuals and businesses wish to hold at
various interest rates.
b. reflects the open market operations policy of the Federal Reserve.
c. shows the amount of money that individuals and businesses wish to hold at various
price levels.
d. reflects the discount rate policy of the Federal Reserve.
4.
Which of the following makes it more difficult for monetary policy makers to time policy
changes correctly?
a. Monetary policy makers cannot act without congressional approval.
b. The primary effects of the policy change will not be felt for 6 to 15 months into the
future.
c. The Board of Governors of the Federal Reserve System does not meet very often.
d. Monetary policy affects only the general level of prices; it exerts no impact on real
variables such as output and employment.
5.
“Monetary instability has been the major cause of economic instability in this country.
Expansion in the money supply has been the source of every major inflation. Every major
recession has been either caused or perpetuated by monetary contraction.” Who among the
following would most likely adhere to this view?
a. monetarists
b. Keynesians
c. supply-side economists
d. early proponents of the quantity theory of money
6.
A shift to a more expansionary monetary policy will
a. help bring inflation under control.
b. exert a stabilizing impact on the economy if the effects of the policy are felt during an
economic downturn.
c. exert a stabilizing impact if the effects of the policy are felt when the economy is
operating at its full-employment capacity.
d. reduce the natural rate of unemployment.
7.
Persistently expansionary monetary policy that stimulates aggregate demand and leads to
inflation will
a. lead to higher rates of real output in the long run.
b. fail to increase real output once decision makers fully anticipate the inflation.
c. lead to lower nominal interest rates once decision makers fully anticipate the inflation.
d. permanently reduce the rate of unemployment below its natural rate.
8.
The highest interest rates in the world are found in countries
a. that have followed a monetary policy that is highly restrictive.
b. with governments that have run large budget surpluses.
c. with governments that have run sizable budget deficits.
d. that have followed an expansionary monetary policy that resulted in high rates of
inflation.
9.
Cross country data illustrates that rapid expansion in the supply of money over a lengthy
period of time (for example, a decade) leads to
a. rapid growth of real output.
b. a low real rate of interest.
c. high rates of inflation.
d. an inflow of capital and a high rate of investment.
10.
Starting from a position of macroeconomic equilibrium at the full-employment level of real
GDP, in the short run an unanticipated increase in the money supply will
a. raise real interest rates, lower prices, and reduce real GDP.
b. raise real interest rates, lower prices, and leave real GDP unchanged.
c. raise nominal interest rates, lower prices, and leave real GDP unchanged.
d. lower real interest rates, raise prices, and increase real GDP.
ANSWER KEY 1 THROUGH 10
1. (d), 2. (c), 3. (a), 4. (b), 5. (a), 6. (b), 7. (b), 8. (d), 9. (c), 10. (d)
CHAPTER 16
ECONOMIC GROWTH AND THE WEALTH OF
NATIONS
1.
Economic growth is important because expansion in the output of goods and services
a. necessarily creates more jobs (more work for people).
b. makes it possible for individuals to consume more and achieve higher living standards.
c. leads to an increase in the general level of prices.
d. generates additional tax revenues for the government.
2.
Which of the following is true?
a. The fastest growing economies in the world are mostly less-developed countries.
b. The fastest growing economies in the world (those with annual real growth rates of 3.5
percent or more) are mostly high-income industrial countries.
c. The slowest growing countries in the world, many of which are experiencing declines
in per capita GDP, are less-developed countries.
d. Both a and c are true.
3.
Which of the following is true of modern technology?
a. Improvements in technology have propelled the production possibilities and living
standards of people in North America, Western Europe, and several other parts of the
world.
b. In low-income countries, proven technologies can be either emulated or imported at a
low cost.
c. Often, perverse institutions and policies in low-income countries undermine the gains
from improvements in technology.
d. All of the above are true.
4.
When competition is present and private ownership rights are clearly defined and securely
enforced by the legal system, business firms will have a strong incentive to
a. innovate and develop better products and lower cost production methods.
b. spend time attempting to plunder (take) the resources of others.
c. engage in wasteful activities that increase the cost of producing goods and services.
d. use resources during the current period rather than conserving them for the future.
5.
Which of the following is most important if a country is going to achieve and sustain rapid
economic growth?
a. large government expenditures as a share of GDP
b. institutions and policies that are supportive of competition (open markets) and freedom
of exchange
c. free elections and political democracy
d. monetary policy makers who are willing to expand the supply of money rapidly
6.
For a country to double its per capita income every 20 years, it would have to sustain an
annual economic growth rate equal to
a. 1.75 percent.
b. 2 percent.
c. 3.5 percent.
d. 4 percent.
7.
Which of the following is most important if a country wants to move from a low-income to
a high-income status?
a. high rates of monetary growth
b. sustained economic growth
c. high real interest rates
d. high nominal interest rates
8.
As government becomes larger and larger as a share of the economy, economic growth is
likely to decline because
a. higher taxes impose larger deadweight losses on the economy.
b. governments are involved in many activities for which they are ill-suited.
c. tax-transfer activities expand.
d. all of the above are true.
9.
Which of the following is most likely to help promote the efficient use of resources and
rapid economic growth?
a. high tariffs and imposition of other trade restrictions
b. high marginal tax rates
c. an open and competitive capital market
d. high rates of inflation
10.
In order to achieve a high economic freedom rating, a country must
a. elect political officials democratically.
b. protect property rights, enforce contracts even-handedly, and rely extensively on
markets to allocate goods and services.
c. provide citizens with housing, health care, and other basic goods free of charge.
d. use the taxing power of the state to redistribute income from the rich to the poor and,
thereby, promote income equality.
ANSWER KEY 1 THROUGH 10
1. (b), 2. (d), 3. (d), 4. (a), 5. (b), 6. (c), 7. (b), 8. (d), 9. (c), 10. (b)
SPECIAL TOPIC 7
INSTITUTIONS, POLICIES, AND THE IRISH
MIRACLE
1. During 1965-1985, the Irish economy was characterized by
a. rapid economic growth and a low rate of unemployment.
b. high taxes, growth of government as a share of the economy, erratic monetary policy, and
substantial restrictions on international trade.
c. low taxes, a high investment rate, low rates of inflation, and substantial growth in
international trade.
d. a high rate of inflation that helped the economy achieve both a high rate of growth and low
rate of unemployment.
2. Which of the following contributed to the turn around of the Irish economy during the mid-1980s
and rapid growth during the 1990s?
a. high rates of inflation that kept the rate of unemployment low
b. higher tariffs and erection of other trade barriers
c. lower taxes and smaller government as a share of GDP
d. regulations that strengthened labor unions and enhanced their ability to achieve higher
wage rates for workers
3. Which of the following is true with regard to the tax policy of Ireland?
a. Since 1987, Ireland has reduced personal income tax rates but not corporate income tax
rates.
b. Since 1987, Ireland has reduced corporate income tax rates but not personal income tax
rates.
c. Since 1987, Ireland has reduced both personal income and corporate income tax rates.
d. As the result of reductions in tax rates, the debt of the Irish government has increased
substantially as a share of the economy.
e. Both c and d are correct.
4. Which of the following is true?
a. While the Irish economy grew rapidly during the 1980s, its growth rate has slowed
substantially during the 1990s.
b. Since 1990, the per-capita GDP of Ireland has grown at an annual rate of slightly less than
3 percent.
c. Along with Greece and Portugal, the per-capita GDP of Ireland is one of the lowest among
the members of the European Union.
d. In 2002, the per-capita GDP of Ireland was one of the highest among the members of the
European Union.
5. The experience of Ireland during the last several decades indicates that high rates of economic
growth are unlikely to be achieved and sustained unless
a. tariffs and other trade barriers restrain the inflow of goods from low-wage countries.
b. sound policies including those supportive of rule of law, price stability, trade openness,
and moderate taxation are followed.
c. abundant natural resources, particularly cheap energy, are present.
d. government expenditures of 40 percent or more of GDP are present.
1.
2.
3.
4.
5.
ANS:
ANS:
ANS:
ANS:
ANS:
B
C
C
D
B