Economics 1

Module Test V

Multiple Choice.

1. One reason why inflation if undesirable is that

a. it causes loss to lenders and savers who do not anticipate it.

b. it benefits buyers, not sellers.

c. wages rise faster than profits and prices.

d. it puts an extra burden on people who are in debt.

2. For money to serve as an efficient medium of exchange, it must have all but which one of the

following characteristics?

a. general acceptability

b. convertibility

c. high value for its weight

d. divisibility

3. A requirement for a gold standard was that

a. the price level be stable.

b. there be no paper money.

c. the paper money be convertible into gold.

d. gold coinage by 100% of money supply.

4. The value of money depends primarily on

a. the gold backing of the currency

b. the gold backing of both currency and deposits

c. its purchasing power

d. who issues it

e. the general price level

5. Demand deposits are

a. not usually considered as part of a country's money supply.

b. backed by gold but not convertible into it

c. categorized as belonging to M2 money supply.

d. categorized as belonging to M1 money supply.

6. One way that time deposits differ from demand deposits is that

a. it is in practice always necessary to give advance warning before withdrawing money from the deposits.

b. time deposits are not considered very liquid assets.

c. demand deposits earn interest; time deposits do not.

d. time deposits usually cannot be drawn on by personal check (except for NOW accounts).

7. A government bond could fill one function of money by acting as

a. medium of exchange

b. store of wealth

c. unit of account

d. hedge against inflation

8. The "narrow" definition of money, based only on its use as a medium of exchange, is

a. currency

b. currency and demand deposits

c. currency and demand and time deposits

d. currency, demand deposits, and near money.

9. The commercial banking system is distinct from investment banks and savings banks in that it

a. lends the savings to the public borrowers

b. pays interest on savings account

c. is subject to some government regulation

d. creates money

10. A commercial bank is able to create money by

a. printing it

b. creating a demand deposit as it extends a new loan.

c. maintaining reserves

d. issuing checks to its deposits.

11. The process of creation of deposit money by commercial banks

a. is possible because of the fractional reserve banks.

b. is consciously undertaken by each bank

c. always occur if there are excess reserves

d. permits only small, gradual changes in the supply of money.

12. A bank that has insufficient reserves may

a. borrow from other banks or from Central Bank (CB).

b. stop making new loans

c. sell securities to other banks or to the public

d. do all of the above

13. Which of the following is not a tool that CB can use to alter money supply?

a. open market operations

b. changes in the discount rate

c. changes in the required reserve ratio

d. changes in tax rates

14. Open market operations are

a. used by the CB regularly to meet seasonal, cyclical, and erratic fluctuations in the banks' need for reserves.

b. used only sparingly by the CB in order not to upset the government bond market.

c. conducted primarily in order to make a profit for the CB.

d. not very effective as a means of influencing the supply of money and credit.

15. An increase in the required reserve ratio has the effect of

a. reducing total reserves

b. reducing the multiple by which the money supply can expand.

c. increasing excess reserves

d. enabling the banks to reduce borrowings from the CB.

16. The amount of money held for transactions balances will

a. vary in the same direction as income

b. vary in the same direction as interest rates

c. vary inversely with savings

d. be larger the shorter the interval between paydays

17. Precautionary balances would be expected to increase if

a. business conditions were to become less certain.

b. interest rate increased

c. people were expecting securities prices to rise

d. prices and incomes fell

18. The speculative motive for desiring to hold money balances

a. means that more cash will be held if bond prices are expected to rise in the future.

b. means that more cash will be held if interest rates are expected to be lower in the future.

c. varies directly with income

d. is greater the lower the rate of interest.

19. An excess supply of money balances causes

a. bond prices and interest rates to rise.

b. bond prices and interest rates to fall.

c. bond prices to fall and interest rates to rise

d. bond prices to rise and interest rates to fall

20. If the CB wishes to pursue an expansionary monetary policy, it should

a. buy bonds on the open market, thus containing reserves of commercial banks and causing interest rates to rise.

b. sell bonds on the open market, thus expanding reserves of commercial banks and causing interest rates to fall.

c. buy bonds on the market, thus expanding commercial bank reserves and causing interest rates to fall.

d. sell bonds on the open market, thus contracting reserves of commercial banks and causing interest rates to rise.

21. Suppose the CB believes that there is too much inflationary pressure in the economy. Its contradictory policy should include

a. the purchase of government bonds on the open market.

b. forcing the National Treasury to buy more government securities.

c. the sale of government bonds on the open market

d. a decrease in reserve requirements.

22. One advantage of monetary policy over fiscal policy is that

a. the decision lag is much shorter

b. its effects are easier to predict

c. its effects are felt uniformly throughout the economy

d. high interest rate do not hurt anybody, but high taxes do

23. One way that monetary policy deliberately tries to influence the course of the economy

a. directly affecting income

b. making it harder (more costly) or easier (less costly) to borrow money.

c. changing the velocity of money

d. directly affecting the price level

24. Generally recognized as a sign of a policy favoring tighter money is a

a. reduction of the required reserve ratio

b. rise in government bond purchases by the CB

c. rise in the money supply

d. rise in the discount rate

25. A tax takes the same amount from everyone, regardless of income is

a. regressive

b. progressive

c. not fair at all

d. proportional to the benefit received

26. The judgment concerning whether a tax is regressive, proportional, or progressive is based on a comparison of the amount of tax with the

a. tax base

b. value of the item being taxed

c. taxpayer's income

d. distribution of income

27. The 10% surtax on personal income taxes passed by Congress raised the tax rate in each

bracket by 10% of itself. This meant that the income tax

a. became slightly more progressive than before

b. became slightly closer to proportional than before

c. required an equal absolute increase from everyone

d. even affected those with no taxable income

28. Property taxes generally

a. fall entirely on the homeowner or landlord

b. are less likely to be shifted in the long-run than in the short-run

c. fall on renters aw well as homeowners and landlords

d. are borne entirely by the occupant of a house

29. The marginal rate of taxation of a progressive income tax is necessarily

a. the same as the average rate

b. less than the average rate

c. more than the average rate

d. higher the lower the income

30. The marginal rate of 70 percent on a taxable income of P200,000.

a. means that the average person with P200,000 of income pays P

b. 140,000 in taxes

c. has no effect whatever because of exemptions, deductions and tax avoidance.

d. signifies the collection of P.70 on each additional peso of income for a person in that tax bracket.

e. applies to capital gains as well as to dividend income

31. Tax "incidence" indicates

a. who actually bears the final burden of the tax

b. who pays the tax to the Federal Treasury

c. the progressivity of the tax

d. whether or not the tax is fair

32. A country is relatively more efficient than another in producing a good if

a. it produces it more cheaply in terms of alternate goods not produced

b. it produces it at lower money cost

c. it has lower wage levels

d. there are economics of scale available

33. Which of these statements represents the least appropriate use of concept of opportunity cost?

a. Exports can be though of as the opportunity cost imports

b. The opportunity cost of product B is the amount of product A that could be produced with the same resources.

c. The opportunity cost increased output may be measured by the utility of leisure given up to produce the output

d. The opportunity cost of producing C is the sum of its fixed and variable costs.

34. Nations through trade

a. may consume at levels beyond their production possibilities frontiers

b. will be limited in their consumption to points on the production possibilities frontier

c. will not alter their previous production patterns

d. are more likely to be confined to choice inside their production possibilities frontiers.

35. The doctrine of comparative advantage says that there are gains from international trade

a. only if both comparative and absolute advantage are present

b. if opportunity costs are the same in the countries involved

c. only if there are economies of scale available

d. if countries specialize in the production of goods in which they are relatively more efficient.

36. Inaugurating trade with nations whose wage levels are much lower

a. will lower the real wages in the high-wage nations

b. will probably raise per capita real income in both countries

c. may help political relationships but does not contribute economically

d. will lower the real wages in low-gain nations.

37. A country would welcome an improvement in its terms of trade because

a. it can then export more

b. its exchange rate will rise

c. the cost of its imports will fall in terms of what it must give up to get them

d. it now becomes cheaper to produce the same goods at home instead of importing them

38. For a country with one important exported commodity (such as soil)

a. a rise in its price in international exported markets will improve the country's terms of trade.

b. a fall in its price will improve the terms of trade

c. its terms of trade will be unaffected by a change in its price

d. a rise in its price will be helpful to the terms of trade and balance of payments only if world demand for it is elastic

39. The principle of comparative advantage indicates that

a. free trade is invariably best

b. free trade is hardly ever best

c. free trade is better than some trade

d. trade with mutual gain is possible

40. From the point of view of the domestic standard of living, a country should

a. welcome cheap imports

b. try to expand exports

c. impose tariffs to keep out foreign competition

d. try to be self-sufficient.

41. The infant-industry argument for tariffs

a. is recognized as wrong because protections often extends beyond infancy.

b. is recognized as wrong because it is present and not future comparative advantages that should be considered

c. is recognized as theoretically sound if economies of scale exist

d. says that industries should be protected in poor countries to provide for the welfare of infants

there

42. Which of the following would be the least valid reason for imposing a tariff?

a. to protect an infant industry that will eventually be competitive.

b. to diversify the economy

c. to maximize real income

d. to maintain a vital bur high-cost defense industry

43. A general increase of import duties by a nation during a time of unemployment

a. is unlikely to produce any short-run increase of income and employment

b. should prove a very substantial stimulus to employment

c. would have the same effect on the allocation of resources as an export subsidy.

44. The European Economic Community

a. is an example of a completely free-trading area, externally as well as internally.

b. was intended to allow the free movement of labor, capital, and goods among its members.

c. now includes all of Europe

d. has completely fixed exchange rates among its currencies and in relation to others.

45. Which of the following statements is true about the balance of payments?

a. Current account debits must equal current account credits

b. Visibles must equal invisibles

c. Total debits must equal total credits

d. Desired payments must equal actual payments

46. A loan accompanied by delivery by the United States of $2 million in military equipment to

Philippines leads to the following in the balance of payments

a. a $2 million credit in the current account.

b. a $2 million debit in the capital account

c. both (a) and (b)

d. no record because the transaction was of military equipment

47. Increased preferences of Philippine consumers for Japanese cars would

a. shift the supply of dollars curve to the left and lead to an appreciation in the value of the yen.

b. shift the demand for dollars curve to the left and lead to a depreciation in the value of the yen.

c. shift the demand for dollars curve to the right and lead to an appreciation in the value of the yen

d. shift the supply of dollars curve to the right and lead to a depreciation in the value of a dollar.

48. People like to hold cash for

a. transactions purchaser

b. precautionary motives

c. speculative motives

d. all of the above

49. To increase money supply in circulation, the CB can do the following except

a. decrease bank reserve requirement

b. buy government bonds

c. increase taxes

d. decrease government expenditure

e. c and d

50. All are functions of money except one

a. it is a medium of exchange

b. it acts as a store of value

c. it serves as a unit of account

d. generally acceptable

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