Part 3.1.

Short-run macroeconomic analysis

Chapter 3. Equilibrium in the goods market and the effects of fiscal policy

Chapter 4. Equilibrium in the monetary market and the effects of monetary policy
1) The functions of money are
A) medium of exchange and the ability to buy goods and services.
B) medium of exchange, unit of account, and means of payment.
C) pricing, contracts, and means of payment.
D) medium of exchange, unit of account, and store of value.
2) Which of the following does NOT describe a function of money?
A) a unit of account
B) a hedge against inflation
C) a medium of exchange
D) a store of value
3) Which of the following is a primary function of money?
A) to serve as a unit of account
B) to serve as an encouragement to work
C) to reduce the burden of excessive imports
D) to raise funds for the government
4) The most direct way in which money replaces barter is through its use as a
A) medium of exchange.
B) recording device.
C) store of value.
D) unit of account.
5) When you buy a hamburger for lunch, you are using money as a
A) store of value.
B) standard of deferred payment.
C) medium of exchange.
D) unit of accounting.
6) The unit of account function occurs when money serves as a
A) means of payment.
B) medium of exchange.
C) pricing mechanism.
D) double coincidence of wants.
7) A $25,000 price tag on a new car is an example of money as
A) medium of exchange.
B) a unit of account.
C) a store of value.
D) a time deposit.
8) In a world with no money, costs are expressed in terms of other goods. If one video
game costs two hamburgers, and a hamburger costs three sodas, how many sodas would it
take to buy a video game?
A) 6
B) 5
C) 3
D) D) 3/2
9) Which of the following is an example of using money as a store of value?
A) paying for a new dress with a credit card
B) paying cash for a new automobile
C) paying rent with a check on a demand deposit
D) keeping $200 on hand for an emergency
10) When you keep money in a change jar to be used later, what function is it fulfilling?
A) medium of exchange.
B) recording device.
C) store of value.
D) unit of account.
11) M1 is a measure of
money and includes both currency and checking deposits.
A)
liquidity and in which the most liquid asset is money.
B)
money and includes both savings deposits and currency.
C)
money and includes both savings deposits and money market mutual funds.
D)
12) Which of the following is NOT included in the M1 definition of money?
A) currency held outside banks
B) time deposits
C) traveler's checks
D) checking deposits at savings and loans
13) The largest component of M1 is
A) currency.
B) checking deposits.
C) coins.
D) savings deposits.
14) The definition of M2 includes
A) M1.
B) savings deposits.
C) time deposits.
D) all of the above
15) Which of the following is NOT included in the M2 definition of money?
A) currency held by banks
B) money market mutual fund balances
C) savings deposits
D) checkable deposits
16) The largest component of M2 is
A) deposits
B) currency
C) money market mutual funds
D) travelers checks
17) Which of the following is part of M2?
A) checks
B) credit cards
C) currency held inside a bank
D) none of these are part of M1 or M2
18) If you use $500 of currency to purchase a saving deposit,
A) M1 decreases, but M2 is unchanged
B) M1 decreases and M2 increases
C) M1 is unchanged, but M2 increases
D) M1 and M2 both increase
19) Liquidity is the
A) speed with which the price of an asset changes as its intrinsic value changes.
B) inverse of the velocity of money.
C) same as the velocity of money.
D) ease with which an asset can be converted into money.
20) An individual wanting the most liquid asset possible will hold
A) currency.
B) a savings account.
C) checkable deposits at a bank.
D) U.S government bonds.
21) Checks are
A) money, as are credit cards.
B) not money, but credit cards are.
C) money, but credit cards are not.
D) not money, and neither are credit cards.
22) Credit cards are
 A) money but are not a large part of the money supply.
B) not money.
C) money and are the largest part of the money supply.
D) not money because they are not made of paper.
23) Using a credit card can best be likened to
A) taking out a loan.
B) a barter exchange.
C) using any other form of money because you immediately get to take the goods home.
D) writing a check on your demand deposit account.
24) Credit cards are NOT money because they
A) have a value in exchange but little intrinsic value.
B) are not issued by the government.
C) do not serve as a unit of account.
D) are ID cards that make borrowing easier.
25) Which of the following is NOT a function of money?
A) medium of exchange
B) barter
C) unit of account
D) store of value
26) The fact that money can be exchanged for goods reflects money's role as a
A) cause of inflation.
B) medium of exchange.
C) unit of account.
D) store of value.
27) Money .
A) is always composed of coins and paper
B) loses its value as it becomes older
C) requires a double coincidence of wants
D) is any commodity that is generally acceptable as a means of payment
28) In an economy, there is $200 million in currency held outside banks, $100 million in
traveler's checks, $250 million in currency held inside the banks, $300 million in checking
deposits, and
$600 million in savings deposits. The value of M1 is .
A) $750 million
B) $1,200 million
C) $1,150 million
D) $600 million
29) Sam has $500 in traveler's checks. He cashes a $100 traveler check, deposits $150 into
his checking account at a Savings and Loan Association, and deposits the remaining $250
into a savings account at a credit union. Immediately, .
A) M1 decreases by $250 and M2 does not change
B) M1 decreases by $400 and M2 increases by $250
C) M1 does not change and M2 increases by $250
D) M1 and M2 do not change
30) A firm that takes deposits from households and firms and makes loans to other
households and firms is a
A) usurer.
B) depository institution.
C) credit company.
D) stockbroker.
31) A depository institution is best defined as
A) as the lender of last resort.
B) an insurance agency, such as the FDIC.
C) the most powerful body within the Federal Reserve.
D) as an institution that accepts deposits and makes loans.
32) The major role of a commercial bank is to
 A) make mortgage loans.
B) sell shares and use the proceeds to buy stocks.
C) receive deposits and make loans.
D) restrain the growth of the quantity of money.
33) Banks are in business
A) because they keep all their assets as reserves.
B) to maximize their reserves.
C) to make a profit.
D) to make as many loans as possible.
34) For a commercial bank, the term "reserves" refers to
A) a banker's concern ("reservation") in making loans to an individual without a job.
B) the profit that the bank retains at the end of the year.
C) the cash in its vaults and its deposits at the central bank.
D) the net interest that it earns on loans.
35) A bank's reserves include
A) the cash in its vault plus the value of its depositors' accounts.
B) the cash in its vault plus its deposits held at the central bank.
C) the cash in its vault plus any gold held for the bank at Fort Knox.
D) its common stock holdings, the cash in its vault, and any deposits at the central bank.
36) Bank managers lend excess reserves because they want to
A) make a profit
B) create new money in the economy
C) curry favor with borrowers
D) borrow money from the the central bank
37) Which of the following statements concerning commercial banks is true?
A) Banks need to maintain cash reserves equal to their deposits.
B) Most banks maintain cash reserves equal to a fraction of deposits.
C) Cash reserves earn the highest rate of return of any asset for a bank.
D) Since the advent of the central bank, banks do not need to maintain cash reserves.
38) Bank managers lend the excess reserves created when new deposits come in because
they want to
A) create new money in the economy.
B) earn a profit.
C) deplete required reserves.
D) deplete desired reserves.
39) The reserve ratio is a bank's reserves as a fraction of its
A) total assets.
B) total loans.
C) currency.
D) total deposits.
40) Excess reserves are
A) desired reserves minus actual reserves.
B) required reserves minus actual reserves.
C) liquidity funds minus actual reserves.
D) actual reserves minus desired reserves.
41) The majority of money is created when
A) banks make loans
B) new coins are minted
C) new bills are printed
D) the central bank sells bonds
42) A bank creates money by
A) lending its excess reserves
B) purchasing currency from the Federal Reserve
C) buying bonds from the Federal Reserve
D) printing more checks
43) Banks make additional loans when desired reserves
 A) exceed actual reserves, a situation of negative excess reserves.
B) are less than actual reserves, a situation of negative excess reserves.
C) exceed actual reserves, a situation of positive excess reserves.
D) are less than actual reserves, a situation of positive excess reserves.
44) Whenever actual reserves exceed desired reserves, the bank
A) can lend out additional funds.
B) needs to call in loans.
C) will go out of business.
D) must increase the amount of its required reserves by obtaining more cash.
45) You deposit $4,000 in currency in your checking account. The bank holds 20 percent of
all deposits as desired reserves. As a direct result of your deposit, your bank will create
A) $200 of new money.
B) $800 of new money.
C) $1,600 of new money.
D) $3,200 of new money.
46) You withdraw $2,000 from your account. Your bank has a desired reserve ratio of 20
percent. This transaction, by itself, will directly reduce
A) the quantity of money by $1,600.
B) deposits by $1,600.
C) the quantity of money by $2,000.
D) deposits by $2,000.
Assets Liabilities
Reserves $100 Deposits $400
Loans $600 Net Worth $300
Total $700 Total $700
47) The above table gives the initial balance sheet for Mini Bank. Mini Bank's actual reserve
ratio equals .
A) 25 percent
B) 14.3 percent
C) 33.3 percent
D) 20 percent
48) The above table gives the initial balance sheet for Mini Bank. If the bank's desired reserve
ratio is 10 percent, how much does this bank have in excess reserves?
A) $60
B) $100
C) $40
D) $10
49) The above table gives the initial balance sheet for Mini Bank. Mini Bank's balance sheet is
such that it will make
A) more loans.
B) fewer loans.
C) no change in its lending.
D) you cannot predict what the bank will do from this balance sheet.
50) When part of the quantity of money is held in currency, then
A) a currency drain occurs.
B) there is a higher level of excess reserves.
C) the money multiplier will increase in value.
D) the Fed will find it beneficial to increase the discount rate.
51) Currency outside of banks increases from $100 million to $200 million. This change is
considered
A) a currency drain.
B) a decrease in the monetary base.
C) expansionary monetary policy.
D) contractionary monetary policy.
52) The monetary expansion process from an open market operation continues until
A) required reserves are eliminated.
 B) the Federal Reserve takes actions to stop the process.
C) the discount rate is lower than market interest rates.
D) excess bank reserves are eliminated.
53) The money multiplier determines how much
A) real GDP will be expanded given an increase in autonomous investment.
B) the monetary base will be expanded given a change in the quantity of money.
C) the quantity of money will be expanded given a change in the monetary base.
D) money demand will expand given a change in the quantity of money.
54) The money multiplier is the ratio of the change in the
A) quantity of money to the change in the monetary base
B) currency drain to the change in the quantity of money.
C) monetary base to the change in the quantity of money
D) desired reserve ratio to the change in the monetary base
55) The money multiplier is
A) the amount by which a change in the quantity of money is multiplied to determine the
change in the monetary base.
B) the amount by which a change in the monetary base is multiplied to determine the
change in the quantity of money.
C) equal to bank reserves divided by the change in the monetary base.
D) equal to bank reserves divided by the change the quantity of money.
56) When the monetary base increases by $2 billion, the quantity of money increases by $10
billion. Thus, the money multiplier equals
A) 0.2
B) 5
C) 20.0
D) none of the above
57) in the desired reserve ratio will the money multiplier.
A) An increase; have no effect on
B) An increase; decrease
C) A decrease; decrease
D) A decrease; will have no effect on
58) When the monetary base increases by $4 billion, the quantity of money increases by $10
billion. Thus, the money multiplier equals
A) 0.4
B) 2.5
C) 40.0
D) none of the above
59) Suppose that the money multiplier is 3. If the monetary base decreases by $2 million, the
quantity of money will
A) increase by $6 million.
B) increase by $666,667.
C) decrease by $6 million.
D) decrease by $666,667.
60) Suppose that the money multiplier is 6. If the monetary base increases by $1 million, the
quantity of money will
A) increase by $6 million.
B) increase by $166,667.
C) decrease by $6 million.
D) decrease by $166,667.
61) Suppose that the money multiplier is 3. If the monetary base increases by $1 million, the
quantity of money will
A) increase by $3 million.
B) increase by $300,000.
C) decrease by $3 million.
D) decrease by $300,000.
62) Suppose that the money multiplier is 4. If the monetary base decreases by $2 million, the
quantity of money will
A) increase by $8 million.
B) increase by $500,000.
C) decrease by $8 million.
D) decrease by $500,000.
63) The banking system has just experienced an increase in deposits of $50,000. The
currency drain ratio is 20 percent and the desired reserve ratio is 10 percent. What does the
money multiplier equal?
A) 4.00
B) 3.33
C) 0.25
D) 10.00
64) If the money multiplier is 3.5, a $10 billion increase in the monetary base
A) increases the quantity of money by $35 billion.
B) increases the quantity of money by $10 billion.
C) increases the quantity of money by $3.5 billion.
D) increases the quantity of money but not by an amount given above.
65) If a customer deposits $10,000 in currency into a checking account, the bank's total
reserves ____.
A) increase
B) do not change
C) are greater than 100 percent
D) decrease
66) A bank's required reserves are calculated by multiplying .
A) its deposits by the required reserve ratio
B) the sum of its deposits and cash in its vault by the reserve ratio
C) cash in its vault by the required reserve ratio
D) the gold in its vault by the reserve ratio
67) A bank cannot create money unless its .
A) required reserves are greater than actual reserves
B) excess reserves are zero
C) desired reserves are greater than actual reserves
D) excess reserves equal deposits multiplied by the reserve ratio
68) The change in the quantity of money divided by the change in the monetary base is called
the ___multiplier.
A) monetary base
B) money
C) deposit
D) monetary policy
69) The nominal demand for money is
A) inversely related to GDP.
B) measured in constant dollars.
C) inversely related to the price level.
D) proportional to the price level.
70) If the price level doubles, the
A) nominal demand for money increases.
B) nominal demand for money decreases.
C) real demand for money decreases.
D) real demand for money increases.
71) Suppose you hold $50 to buy groceries weekly and then the price of groceries increases
by 5 percent. To be able to buy the same amount of groceries, what must happen to your
nominal money holdings?
A) They must increase by $5.
B) They can decrease by $5.
C) They must increase by $2.50.
D) They must increase, but the amount of the increase is different than the above answers.
72) The real quantity of money is
A) inversely related to GDP.
B) measured in current dollars.
C) inversely related to the price level.
D) measured in constant dollars.
73) The opportunity cost of holding money is the
A) interest rate.
B) price of goods and services.
C) level of wage and rental income.
D) ease with which an asset can become money.
74) The opportunity cost of holding money balances increases when
A) the purchasing power of money rises.
B) the interest rate rises.
C) the price of goods and services falls.
D) consumers' incomes increase.
75) When the interest rate rises, the
A) quantity of money demanded decreases.
B) demand for money decreases.
C) demand for money increases.
D) quantity of money demanded increases.
76) When the interest rate rises, the quantity of money demanded decreases because
A) people will buy fewer goods and hold less money.
B) the price level also rises and people decrease their demand for money.
C) people move funds from interest-bearing assets into money.
D) people shift funds from money holdings to interest-bearing assets.
77) Which of the following is correct? The demand for money
A) increases as real GDP increases.
B) decreases as the price level increases.
C) depends on the quantity of money.
D) increases when the interest rate increases.
78) When real GDP increases, the demand for money
A) increases.
B) decreases.
C) stays the same.
D) we cannot make a prediction without additional information.
79) The demand for money curve
A) is horizontal.
B) has a positive slope.
C) is vertical.
D) has a negative slope.

80) Use the figure above to answer this question. Suppose the economy is operating at point
a. A move to could be explained by .
A) point e; a decrease in the interest rate
B) point c; an increase in the interest rate
C) point d; an increase in real GDP
 D) point b; an increase in real GDP
81) Use the figure above to answer this question. Suppose the economy is operating at point
a. A move to could be explained by .
A) point c; an increase in the use of credit cards
B) point b; an increase in real GDP
C) point b; an increase in interest rates
D) point e; an increase in exports

82) In the above figure, suppose the economy is initially on the demand for money curve
MD1. What is the effect of a fall in the interest rate?
A) The demand for money curve would shift rightward to MD2.
B) The demand for money curve would shift leftward to MD0.
C) There would be a movement upward along the demand for money curve MD1.
D) There would be a movement downward along the demand for money curve MD1.
83) In the above figure, suppose the economy is initially on the demand for money curve
MD1. What is the effect of a rise in the interest rate?
A) The demand for money curve would shift rightward to MD2.
B) The demand for money curve would shift leftward to MD0.
C) There would be a movement upward along the demand for money curve MD1.
D) There would be a movement downward along the demand for money curve MD1.
84) In the above figure, suppose the economy is initially on the demand for money curve
MD1. What is the effect of an increase in real GDP?
A) The demand for money curve would shift rightward to MD2.
B) The demand for money curve would shift leftward to MD0.
C) There would be a movement upward along the demand for money curve MD1.
D) There would be a movement downward along the demand for money curve MD1.
85) In the above figure, suppose the economy is initially on the demand for money curve
MD1. What is the effect of an increase in financial innovation such as the introduction of
ATMs?
A) The demand for money curve would shift rightward to MD2.
B) The demand for money curve would shift leftward to MD0.
C) There would be a movement upward along the demand for money curve MD1.
D) There would be a movement downward along the demand for money curve MD1.
86) In the above figure, suppose the economy is initially on the demand for money curve
MD1. What is the effect of increased use of credit cards?
A) The demand for money curve would shift rightward to MD2.
B) The demand for money curve would shift leftward to MD0.
C) There would be a movement upward along the demand for money curve MD1.
D) There would be a movement downward along the demand for money curve MD1.
87) In the figure above, an increase in the monetary base would create a change such as a
A) movement from point a to point b along the supply of money curve MS0.
B) movement from point b to point a along the supply of money curve MS0.
C) shift from the supply of money curve MS0 to the supply of money curve MS1.
D) shift from the supply of money curve MS1 to the supply of money curve MS0.
88) In the figure above, a decrease in the monetary base would create a change such as a
A) movement from point a to point b along the supply of money curve MS0.
B) movement from point b to point a along the supply of money curve MS0.
C) shift from the supply of money curve MS0 to the supply of money curve MS1.
D) shift from the supply of money curve MS1 to the supply of money curve MS0.

89) The figure above illustrates the effect of

A) an increase in real GDP.
B) a decrease in real GDP.
C) an increase in the monetary base.
D) a decrease in the monetary base.
90) In the money market, if the interest rate exceeds the equilibrium interest, there is a
surplus of money. How is the surplus eliminated?
A) People buy bonds to rid themselves of the surplus money, bidding up their price and
pushing interest rates down.
B) Banks will lend out the surplus, lowering interest rates.
C) The Federal Reserve will destroy currency, reducing the quantity of money.
D) The high interest rate increases the demand for money, eliminating the surplus.

91) In the figure above, if the interest rate is 8 percent, people demand $0.1 trillion
A) less money than the quantity supplied and the interest rate will rise.
 B) less money than the quantity supplied and the interest rate will fall.
C) more money than the quantity supplied and the interest rate will fall.
D) more money than the quantity supplied and the interest rate will rise.
92) In the figure above, if the interest rate is 8 percent, people demand $0.1 trillion
A) less money than the quantity supplied and bond prices will rise.
B) less money than the quantity supplied and bond prices will fall.
C) more money than the quantity supplied and bond prices will fall.
D) more money than the quantity supplied and bond prices will rise.
93) In the figure above, if the interest rate is 4 percent, there is a $0.1 trillion excess
A) quantity of money and the interest rate will rise.
B) quantity of money and the interest rate will fall.
C) demand for money and the interest rate will fall.
D) demand for money and the interest rate will rise.
94) In the figure above, if the interest rate is 4 percent, there is a $0.1 trillion excess
A) quantity of money and bond prices will rise.
B) quantity of money and bond prices will fall.
C) demand for money and bond prices will fall.
D) demand for money and bond prices will rise.
95) In the figure above, if the interest rate is 6 percent,
A) there is a $0.1 trillion excess quantity of money and the interest rate will rise.
B) there is a $0.1 trillion excess quantity of money and the interest rate will fall.
C) the money market is in equilibrium and the interest rate will remain constant.
D) there is a $0.1 trillion excess demand for money and the interest rate will rise.
96) If real GDP decreases, the demand for money curve will shift
A) leftward and the interest rate will rise.
B) leftward and the interest rate will fall.
C) rightward and the interest rate will rise.
D) rightward and the interest rate will fall.
97) If people are holding more money than they would willingly hold, they will bonds.
The price of a bond will and the interest rate will .
A) sell; rise; fall
B) sell; fall; rise
C) purchase; rise; fall
D) purchase; fall; rise
98) In the short run, which of the following actions raise the interest rate?
A) a decrease in the demand for money
B) an increase in bond prices
C) an increase in the quantity of money
D) an increase in the demand for money
99) In the short run, which of the following actions lower the interest rate?
A) a decrease in the demand for money
B) an increase in the demand for money
C) a decrease in the quantity of money
D) a decrease in bond prices

Problems
100) An economy with the stock of deposits is 100, cash holdings outside the banking system is 20, the
total reserves by banks is 10, of which derised (required) reserves is 8, excess reserves is 2, unit
triliion dong.
a. What is money multipler, money base, and money supply?
b. Suppose the central bank raises the derised reserves by 2 and the banks keep the excess reserves the
same, how much the money supply would change? Note that the money base doesn’t change.
c. Suppose the central bank buys bonds of 4 in value, how much the money supply would change
(compared with the initial amount).