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CHAPTER 3
The Role of Money and Credit
1. Which of the following is likely to increase economic growth?
a. Decreases in the money supply
b. Decreases in the interest rate
c. Decreases in credit flows
d. Increases in money demand
ANSWER: b
2. Which of the following would be most likely to lead to an increase in the interest rate?
a. An increase in the required reserve ratio
b. A decrease in household income
c. An increase in the money supply
d. A decrease in the demand for money
ANSWER: a
3. Which of the following statements is true regarding interest rate determination?
a. The quantity demanded of money is positively related to the interest rate.
b. The supply of money is strongly influenced by the spending plans of consumers, businesses,
governments, and foreign entities.
c. Ceteris paribus, the quantity demanded of money and the interest rate are inversely related.
This means the demand-for-money curve is downward sloping.
d. The demand for money is inversely related to the interest rate.
ANSWER: c
4. The cost of credit is all of the following except?
a. The return or yield on money to lenders
b. The interest rate associated with borrowing or lending money
c. Equivalent to the supply of money
d. The cost to borrowers of obtaining money
ANSWER: c
5. The specific amount of money that spending units wish to hold at a specific interest rate is the
a. quantity supplied of money.
b. quantity demanded of money.
c. demand for money.
d. supply of money.
ANSWER: b
6. Ceteris paribus, the relationship between the quantity of money demanded and the interest rate is
a. direct.
b. positive
c. inverse.
d. constant over time
ANSWER: c
7. The ceteris paribus assumption refers to which of these?
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Chapter 3
a. holding all other factors constant
b. assuming economic variables are always fluctuating
c. assuming economic theory never changes
d. holding one variable constant and allowing all others to vary
ANSWER: a
8. Ceteris paribus, when the interest rate falls, the quantity demanded of money
a. decreases.
b. increases.
c. decreases at increasing rates.
d. remains the same.
ANSWER: b
9. A portfolio adjustment will not occur when
a. interest rates change, ceteris paribus.
b. interest rates remain the same, ceteris paribus.
c. relative rates of return change.
d. the opportunity costs of holding money changes.
ANSWER: b
10. Graphically, the demand curve for money is
a. upward sloping.
b. downward sloping.
c. perfectly vertical.
d. perfectly horizontal.
ANSWER: b
11. A rightward shift in the demand curve for money means that
a. the demand for money has increased.
b. the demand for money has decreased.
c. the quantity for money demanded has increased.
d. the quantity for money demanded has decreased.
ANSWER: a
12. A leftward shift in the demand curve for money means that
a. the quantity for money demanded has increased.
b. the quantity for money demanded has decreased.
c. the demand for money has increased.
d. the demand for money has decreased.
ANSWER: d
13. A rightward shift of the supply curve of money means that
a. the supply of money has increased.
b. the supply of money has decreased.
c. the demand for money has increased.
d. the quantity supplied of money has decreased.
ANSWER: a
The Role of Money and Credit
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14. A leftward shift of the supply curve of money illustrates that the
a. quantity supplied of money has increased.
b. quantity supplied of money has decreased.
c. supply of money has increased.
d. supply of money has decreased.
ANSWER: d
15. Which of the following is false?
a. The Fed sets the required reserve ratio that determines the maximum amount of money that
banks can lend.
b. Depository institutions must hold reserve assets equal to a fraction of deposit liabilities; that
fraction is called the required reserve ratio.
c. The Fed controls the amount of cash assets available for reserves.
d. The Fed must consult with depository institutions before setting the required reserve ratio.
ANSWER: d
16. Ceteris paribus, as interest rates rise, the quantity demanded of money
a. decreases.
b. increases.
c. remains the same.
d. increases at decreasing rates.
ANSWER: a
17. Ceteris paribus, as interest rates decline, the quantity demanded of money
a. falls.
b. increases at decreasing rates.
c. increases.
d. remains the same.
ANSWER: c
18. The demand for money is directly related to which of these?
a. Fortune
b. Income
c. The interest rate
d. All of the above
ANSWER: b
19. An increase in income will generally raise
a. the purchases of households and firms.
b. the spending plans of households and firms.
c. Both a and b
d. None of the above
ANSWER: c
20. Graphically, an increase in income would tend to
a. shift the demand curve for money to the left.
b. shift the demand curve for money to the right.
c. have no effect on the demand curve for money.
d. cause a movement along the demand curve for money.
ANSWER: b
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Chapter 3
21. Which of the following statements best describes the reason for an inverse relationship between
the quantity of money demanded and the interest rate?
a. When the interest rate rises, portfolio adjustments are made which increase the holdings of
money. In short, as the opportunity cost of money goes down, people hold less.
b. When the interest rate rises, portfolio adjustments are made which increase the holdings of
money. In short, as the opportunity cost of money goes up, people hold more.
c. When the interest rate falls, portfolio adjustments are made which decrease the holdings of
money. In short, as the opportunity cost of money goes down, people hold less money.
d. When the interest rate falls, portfolio adjustments are made which increase the holdings of
money. In short, as the opportunity cost of money goes down, people hold more.
ANSWER: d
22. Graphically, a decrease in planned spending tends to
a. shift the quantity demanded of money upward.
b. shift the quantity demanded of money downward.
c. shift the demand curve for money to the right.
d. shift the demand curve for money to the left.
ANSWER: d
Questions 23–26 refer to Figure 3-1.
MS0 MS1
I0
I1
MD0
Q of M0
Q of M1
Figure 3-1
23. Which of the following statements best describes Figure 3-1?
a. As the Fed increases reserves and with them the money supply, the interest rate falls.
b. As the Fed decreases available reserves and decreases money supply, the interest rate falls.
c. As consumer incomes rise, consumers are more willing to spend money. As a result, they
increase their demand for money and the interest rate falls.
d. As the Fed increases the required reserve ratio, the money supply increases and the interest
rate falls.
ANSWER: a
The Role of Money and Credit
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24. In Figure 3-1, which of the following is true?
a. Money demand is vertical.
b. Money supply is vertical.
c. As the interest rate increases, the quantity demanded of money also increases.
d. As the interest rate decreases, the quantity demanded of money also decreases.
ANSWER: b
25. The decrease in the interest rate shown in Figure 3-1 could have been caused by
a. an increase in consumer income.
b. the Fed increasing the money supply.
c. the Congress decreasing taxes.
d. an increase in the required reserve ratio.
ANSWER: b
26. In Figure 3-1,
a. the demand for money curve is vertical.
b. money demand increases.
c. the money supply falls.
d. the interest rate falls.
ANSWER: d
Questions 27–30 refer to Figure 3-2.
i
MS
i'
i
MD'
MD
Q of M
Figure 3-2
27. Which of the following statements best describes Figure 3-2?
a. As the Fed increases reserves and with them the money supply, the interest rate tends to
increase.
b. As the Fed decreases available reserves and decreases the money supply, the interest rate
tends to increase.
c. As consumer incomes fall, consumers become more frugal. As a result they increase their
demand for money and the interest rate increases.
d. An increase in household incomes is likely to increase the demand for money. As money
demand increases, the interest rate rises.
ANSWER: d
28. Which of the following statements most accurately describes the economic theory underpinning
Figure 3-2?
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Chapter 3
a. An increase in the demand for money led to an increase in interest rates, ceteris paribus.
b. An increase in interest rates led to an increase in money demand, ceteris paribus.
c. An increase in the money supply led to an increase in interest rates, ceteris paribus.
d. None of the above accurately describe the theory underlying the diagram.
ANSWER: a
29. What may have caused the changes illustrated in Figure 3-2?
a. A decrease in the required reserve ratio
b. A decrease in interest
c. An increase in consumer incomes
d. An increase in interest rates
ANSWER: c
30. In Figure 3-2,
a. an increase in interest rates cause money demand to increase.
b. an increase in money demand causes interest rates to increase.
c. a decrease in the money supply causes the interest rate to increase.
d. an increase in the interest rate the causes money supply to increase.
ANSWER: b
31. If a commercial bank has checkable deposit liabilities of $50,000 and the required reserve ratio is
set at 12%, the commercial bank must hold how much in reserves assets?
a. None. It is not mandatory to hold reserves.
b. $3,000
c. $6,000
d. $44,000
ANSWER: c
32. If a commercial bank has checkable deposits of $150,000 and the required reserve ratio is set at
10%, the commercial bank must hold how much in reserves?
a. None. It is not mandatory to hold reserves.
b. $10,000
c. $15,000
d. $150,000
ANSWER: c
33. The required reserve ratio is set by which of the following?
a. Congress
b. State governors
c. The Fed
d. The President's economic advisor
ANSWER: c
34. Reserves may be held in the form of
a. vault cash.
b. reserve deposit accounts at the Fed.
c. U.S. Savings Bonds.
d. a and b, but not c
ANSWER: d
35. Graphically, an increase in the money supply would
a. shift the quantity supplied of money downward.
b. slide the quantity supplied of money upward.
The Role of Money and Credit
c. shift the money supply curve to the right.
d. shift the money supply curve to the left.
ANSWER: c
36. Graphically, an injection of reserves into the banking system
a. shifts the money supply curve to the left.
b. shifts the money supply curve to the right.
c. shifts the quantity supplied of money upward.
d. shifts the quantity supplied of money downward.
ANSWER: b
37. Graphically, an increase in the required reserve ratio would
a. shift the money supply curve to the left.
b. shift the money supply curve to the right.
c. shift the quantity supplied of money upward.
d. shift the quantity supplied of money downward.
ANSWER: a
38. Graphically, a decrease in the provision of reserves would
a. shift the quantity supplied of money upward.
b. shift the quantity supplied of money downward.
c. shift the money supply curve to the left.
d. shift the money supply curve to the right.
ANSWER: c
39. Graphically, a decrease in the required reserve ratio would
a. shift the quantity of money upward.
b. shift the quantity supplied of money downward.
c. shift the money supply curve to the left.
d. shift the money supply curve to the right.
ANSWER: d
40. Graphically, the supply curve for money is
a. downward sloping.
b. upward sloping.
c. vertical.
d. horizontal.
ANSWER:
c
41. If the interest rate is above the equilibrium rate, there is an
a. excess demand for money and downward pressure on the interest rate.
b. excess quantity supplied of money and upward pressure on the interest rate.
c. excess supply of money and upward pressure on the interest rate.
d. excess quantity supplied of money and downward pressure on the interest rate.
ANSWER: d
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42. If the interest rate is below the equilibrium point, there is an
a. excess supply of money and rising interest rates.
b. excess quantity demanded of money and rising interest rates.
c. excess demand of money and falling interest rates.
d. excess quantity demanded and falling interest rates.
ANSWER: b
43. Equilibrium occurs at the interest rate where
a. supply equals demand.
b. supply is less than demand.
c. quantity supplied equals quantity demanded.
d. quantity supplied is more than quantity demanded.
ANSWER: c
44. If the demand for money increases ceteris paribus, interest rates will
a. fall.
b. remain the same.
c. fall, then stabilize.
d. rise.
ANSWER: d
45. If the supply of money falls ceteris paribus, interest rates will
a. fall.
b. rise.
c. remain the same.
d. fall, then stabilize.
ANSWER: b
46. If the demand for money decreases ceteris paribus, interest rates will
a. fall.
b. rise.
c. rise, then stabilize.
d. remain the same.
ANSWER: a
47. If the supply of money increases ceteris paribus, interest rates will
a. rise.
b. fall.
c. rise, then stabilize.
d. remain the same.
ANSWER: b
48. If there is a rightward shift in the demand curve for money, interest rates will
a. fall.
b. rise.
c. remain the same.
d. fall, then stabilize.
ANSWER: b
The Role of Money and Credit
49. If there is a leftward shift in the supply curve for money, interest rates will
a. remain the same.
b. fall, then stabilize.
c. rise.
d. fall.
ANSWER: c
50. If there is a leftward shift in the demand curve for money, interest rates will
a. fall.
b. remain the same.
c. rise, then stabilize.
d. rise.
ANSWER: a
51. If there is a rightward shift in the money supply curve, interest rates will
a. rise.
b. remain the same.
c. rise, then stabilize.
d. fall.
ANSWER: d
52. If there is a rightward shift in the money supply curve, the
a. demand for money will increase.
b. demand for money will decrease.
c. quantity demanded of money will increase.
d. quantity demanded of money will decrease.
ANSWER: c
53. If there is a rightward shift in the demand curve for money,
a. the money supply will increase.
b. the money supply will decrease.
c. the quantity supplied of money will remain the same.
d. the quantity supplied of money will decrease.
ANSWER: c
54. If there is a leftward shift in the money supply curve
a. demand for money will increase.
b. demand for money will decrease.
c. quantity demanded of money will increase.
d. quantity demanded of money will decrease.
ANSWER: d
55. Ceteris paribus, increases in reserves will lead to which of the following?
a. Increases in the interest rate and increases in credit
b. Increases in the interest rate and decreases in credit
c. Decreases in the interest rate and increases in credit
d. Decreases in the interest rate and decreases in credit
ANSWER: c
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Chapter 3
56. Increases in credit are associated with which of the following?
a. Decreases in income and increases in spending
b. Increases in income and increases in spending
c. Increases in income and decreases in spending
d. Decreases in income and decreases in spending
ANSWER: b
57. Credit flows come from
a. depository institutions.
b. nonfinancial institutions.
c. non-depository financial institutions.
d. All of the above
ANSWER: d
58. Over time, the Fed's control over the extension of credit has
a. remained constant.
b. increased.
c. decreased.
d. None of the above. The Fed has complete control over credit extension.
ANSWER: c
59. Since the late 1980s, total credit lending by commercial banks as a percentage of total lending in
the economy has
a. increased.
b. decreased.
c. remained the same.
d. increased at decreasing rates.
ANSWER: b
60. The growth rate of economic activity is measured by which of these?
a. Real CPI
b. Real PPI
c. Real GDP
d. Real DNFD
ANSWER: c
61. In the early 1990s, economic activity was most closely related to which of the following?
a. M1
b. M2
c. M3
d. DNFD
ANSWER: d
62. At the beginning of most recessions,
a. the money supply declines and the flow of credit increases.
b. the money supply declines and the flow of credit decreases.
c. the money supply increases and the flow of credit increases.
d. the money supply increases and the flow of credit decreases.
ANSWER:
b
63. Fluctuations in economic activity are __________ related to money and credit flows.
The Role of Money and Credit
a. strongly
b. weakly
c. not
d. None of the above
ANSWER: a
64. The inflation rate is essentially which of these?
a. The growth rate in the stock market
b. The growth rate in the average level of prices
c. The negative growth rate in the average level of prices
d. The growth rate in the liquidity of nonfinancial assets
ANSWER: b
65. The current inflation rate is most strongly influenced by which of the following?
a. Prior changes in money supply and credit growth
b. Current changes in money supply and credit growth
c. Future changes in money supply and credit growth
d. None of the above
ANSWER: a
66. The inflation is best described as
a. changes in the cost of a market basket that a typical urban consumer purchases.
b. the rate of change in consumer price index (CPI).
c. changes in the cost of a market basket that a typical producer purchases.
d. a one-time increase in the price level.
ANSWER: b
67. The CPI rose from 160.5 in 2003 to 163.0. in 2004. What was the annual inflation rate?
a. 163%
b. 2.5%
c. 1.6%
d. Not enough information is provided to solve the problem.
ANSWER: c
68. A fall in the money supply tends to cause
a. output to fall slowly and prices to increase quickly.
b. output to fall slowly and prices to fall with a lag.
c. output to fall quickly and prices to slow their increase after a lag.
d. output to fall rapidly and prices to increase slowly after a lag.
ANSWER: c
69. A rise in the money supply tends to cause
a. output to increase slowly and prices to increase quickly.
b. output to increase slowly and prices to fall with a lag.
c. output to increase quickly and prices to slow their rate of increase after a lag.
d. output to increase quickly and prices to increase more slowly after a lag.
ANSWER: d
70. The quantity of final goods and services produced in an economy in a given time period and
valued at today's prices is which of the following?
a. Nominal CPI
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Chapter 3
b. Real CPI
c. Nominal GDP
d. Real GDP
ANSWER: c
71. The quantity of final goods and services produced in an economy in a given time period and
valued at prices that are adjusted for inflation is which of the following?
a. Nominal CPI
b. Real CPI
c. Nominal GDP
d. Real GDP
ANSWER: b
72. Inflation and economic activity may be influenced by which of the following?
a. Current fiscal policy
b. Expectations about future monetary policy
c. Expectations about future inflation
d. All of the above
ANSWER: d
73. Economists who believe money supply is the most important variable that determines the health
of the economy are called
a. Monetarists.
b. Post-Keynesians.
c. Keynesians.
d. Institutionalists.
ANSWER: a
74. Monetarists believe
a. that credit flows (loans) trigger changes in spending and that they are more important than
everything else in determining the overall health of the economy.
b. that credit flows and money are only two among many different factors affecting the
economy.
c. that money matters more than anything else in determining the overall health of the
economy.
d. that credit flows and money are more important than everything else in determining the
overall health of the economy.
ANSWER: c
75. Changes in the growth rates of money and credit command a strong pull on
a. unemployment.
b. production.
c. inflation.
d. All of the above.
ANSWER: d
The Role of Money and Credit
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76. The producer price index (PPI) is a measure of
a. changes in foreign consumer prices
b. changes in urban consumer prices
c. changes in producer prices
d. changes in GDP
ANSWER: c
77. The market basket used in the CPI is made up of roughly how many items?
a. 4000
b. 40
c. 40,000
d. 400
ANSWER: d
78. The formal equation for the CPI is which of the following?
a. (Cost of the market basket in the given year/cost of the market basket in the base pe
100
b.
100
c.
500
d. (Cost of the market basket in the base per
500
ANSWER: a
79. In the mid-to-late 1980s, which aggregate has been most closely related to the level of economic
activity?
a. M1
b. M2
c. M3
d. DNFD
ANSWER: b
80. Ceteris paribus, which of the following would not increase the demand for money?
a. Spending plans for households increase
b. Income increases
c. Interest rates decrease
d. The need to pay for purchases increases
ANSWER: c
81. Ceteris paribus, which of the following would not increase the supply of money?
a. The Fed lowers the reserve requirement ratio.
b. The Fed increases cash assets available for reserves.
c. The demand for money increases.
d. Banks increase loans.
ANSWER: c
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Chapter 3
82. The strongest correlation is between changes in the money supply and changes in
a. real GDP
b. nominal GDP
c. inflation
d. real GPI
ANSWER: b
83. Which of the following is true?
a. In recent decades, the banking system has been getting a declining share of credit extension.
b. Credit extension is much less important than changes in the money supply in affecting
economic activity.
c. When the demand for money increases, the interest rate decreases.
d. The quantity demanded of money is directly related to the interest rate.
ANSWER: a
84. Assume that the price of a market basket of goods is $100 in the base year, $103 one year later,
and $105 two years later. What is the inflation rate in the last year?
a. 5%
b. 3%
c. ((105 – 103)/100) %
d. ((105 – 103)/103) %
ANSWER: d
85. Which of the following actions would not cause credit to increase, ceteris paribus?
a. Increases in the prime rate
b. Reduction in the required reserve ratio
c. Increases in cash assets available for reserves.
d. Increases in the demand for money and credit
ANSWER: a
86. If the Fed increases the money supply, ceteris paribus, the interest rate will
a. fall.
b. rise.
c. remain the same.
d. It is impossible to determine what will happen.
ANSWER: a
87. Historical data suggest the following:
a. A sustained and significant rise in money supply or credit growth rates will tend to increase
the inflation rate and, with a lag, tend at times to raise output growth.
b. A sustained and significant rise in the money supply or credit growth rates will tend to
increase output growth and, with a lag, tend at times to raise the inflation rate.
c. A sustained and significant fall in money supply or credit growth will tend to increase the
inflation rate and, with a lag, to raise output growth.
d. A sustained and significant fall in money supply or credit growth will tend to increase output
growth and, with a lag, tend at times to raise the inflation rate.
ANSWER: b
The Role of Money and Credit
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88. Which of the following is false?
a. Depository institutions must hold reserve assets equal to a certain fraction of deposit
liabilities—called the required reserve ratio—which is set by the Fed.
b. The Fed influences the amount of cash assets outstanding and thus the amount available for
reserves.
c. The Fed has significant influence over the money supply.
d. The required reserve ratio is set by the president of the United States.
ANSWER: d
89. Which of the following is false?
a. The interest rate is determined by the supply of and demand for money.
b. Equilibrium occurs at the interest rate where the quantity demanded of money is equal to the
quantity supplied.
c. Changes in the supply of or demand for money (shifts of the supply or demand curves) affect
the interest rate.
d. Ceteris paribus, if quantity demanded increases, the interest rate rises and vice versa. Ceteris
paribus, if quantity supplied increases, the interest rate falls and vice versa.
ANSWER: d
90. Which of the following is true?
a. Technological advances in computer technologies have reduced the costs of borrowing and
lending across national borders and increased globalization of the financial system.
b. By the early 2000s, commercial banks were getting an increasing share of total credit
extension in the economy.
c. Money and credit are more highly correlated today than in the past.
d. A sustained fall in the money supply and credit growth rates will tend to raise aggregate
demand for goods and services, increase output, and with a lag increase the inflation rate.
ANSWER: a
91. Which of the following is false?
a. The quantity supplied of money is the amount that will be supplied at a specific interest rate.
b. The supply curve of money is vertical.
c. The supply of money is directly related to the interest rate; that is, when the interest rate
increases, the supply of money increases.
d. When the Fed raises the required reserve ratio, the supply of money decreases.
ANSWER: c
92. As the interest rate falls, the demand for money
a. remains the same.
b. Increases.
c. Decreases.
d. increases causing the quantity supplied of money to increase.
ANSWER: a
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Chapter 3
93. Changes in the growth rates of money and credit are correlated with changes in which of the
following?
a. Nominal GDP
b. Real GDP
c. Inflation
d. All of the above
ANSWER: d