Multiple Choice Question

1) The statement, "My iPhone is worth $700" represents money's function as

A) a medium of exchange.

B) a unit of account.

C) a store of value.

D) a standard of deferred payment.

2) Which of the following functions of money would be violated if inflation were high?

A) unit of account

B) store of value

C) certificate of gold

D) medium of exchange

3) If whole tomatoes were money, which of the following functions of money would be the hardest for tomatoes to satisfy?

A) unit of account

B) store of value

C) certificate of gold

D) medium of exchange

4) Which of the following information about fiat money is false? Fiat money

A) is backed by gold. B) serves as a medium of exchange.

C) has little to no value except as money.

D) is authorized by a central bank or governmental body.

5) A farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money?

A) medium of exchange

B) unit of account

C) store of value

D) standard of deferred payment

6) The most liquid measure of money supply is

A) M0.

B) M1.

C) M2.

D) M3.

7) If the Federal Reserve decided to include virtual money like bitcoins in its measure of the money supply, what would be the effect on M1 or M2?

A) M1 would rise.

B) M1 would fall.

C) M1 would rise and M2 would remain constant.

D) M2 would rise but M1 would remain constant.

8) You earn $500 a month, currently have $200 in currency, $100 in your checking account, $2,000 in your savings accounts, $3,000 worth of illiquid assets and $1,000 of debt. Using the M1 measure of money, you have

A) money = $2,300, annual income = $6,000, and wealth = $5,000.

B) money = $300, annual income = $6,000, and wealth = $4,300.

C) money = $200, annual income = $500, and wealth = $4,300.

D) money = $300, annual income = $6,000, and wealth = $5,000.

9) If a person withdraws $500 from his/her checking account and holds it as currency, then M1 will ________ and M2 will ________.

A) increase; decrease

B) not change; not change

C) not change; increase

D) decrease; increase

10) If households in the economy decide to take money out of checking account deposits and hold it as currency, this will initially

A) not change M1 and increase M2.

B) decrease M1 and decrease M2.

C) decrease M1 and not change M2.

D) not change M1 and not change M2.

11) Banks can make additional loans when required reserves are

A) greater than total reserves.

B) less than total reserves.

C) less than total deposits.

D) less than total loans.

12) Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back yard. If the required reserve ratio is 10 percent, checking account deposits in the banking system as a whole could drop up to a maximum of

A) $0.

B) $50.

C) $500.

D) $5,000.

13) Suppose that you deposit $2,000 in your bank and the required reserve ratio is 10 percent. The maximum loan your bank can made as a direct result of your deposit is

A) $200.

B) $1,800.

C) $2,000.

D) $20,000.

14) Banks can continue to make loans until their

A) actual reserves equal their required reserves.

B) excess reserves equal their required reserves.

C) actual reserves equal their excess reserves.

D) actual reserves equal their checking account balances.

15) Which of the following best describes how banks create money?

A) Banks charge higher interest rates on loans than they pay on deposits.

B) Banks charge fees for providing financial advice.

C) Banks create checking account deposits when making loans from excess reserves.

D) Banks make loans from reserves.

16) Which of the following is a true statement?

A) excess reserves = actual reserves - required reserves

B) excess reserves = deposits - required reserves

C) excess reserves = deposits - loans

D) excess reserves = loans - required reserves

17) A cash withdrawal from the banking system

A) decreases reserves.

B) decreases deposits.

C) decreases excess reserves.

D) All of the above are correct.

18) The four main monetary policy tools used by the Federal Reserve to manage the money supply are

A) interest rates, tax rates, exchange rates, and government spending.

B) tax rates, exchange rates, government purchases, and government transfer payments.

C) open market operations, discount policy, reserve requirements, and interest on reserves.

D) open market operations, the exchange rate of the dollar against foreign currencies, tax rates, and government purchases.

19) To increase the money supply, the Federal Reserve could

A) raise the discount rate.

B) increase the interest rate it pays on reserves.

C) raise the required reserve ratio.

D) conduct an open market purchase of Treasury securities.

20) Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15 percent, then the bank will now have excess reserves of

A) $0.

B) $5 million.

C) $15 million.

D) $20 million.

21) To offset the effect of households and firms deciding to hold more of their money in checking account deposits and less in currency, the Federal Reserve could

A) decrease the interest rate it pays on reserves.

B) sell Treasury securities.

C) raise government spending.

D) lower the required reserve ratio.

22) Lowering the discount rate will

A) decrease reserves, encourage banks to make fewer loans, and decrease the money supply.

B) decrease reserves, encourage banks to make fewer loans, and increase the money supply.

C) increase reserves, encourage banks to make more loans, and increase the money supply.

D) increase reserves, encourage banks to make more loans, and decrease the money supply.

23) The quantity theory of money predicts that, in the long run, inflation results from the

A) velocity of money growing at a faster rate than real GDP.

B) velocity of money growing at a lower rate than real GDP.

C) money supply growing at a lower rate than real GDP.

D) money supply growing at a faster rate than real GDP.

24) The quantity theory of money was derived from the quantity equation by asserting that

A) real output was fixed.

B) the money supply was fixed.

C) the velocity of money was fixed.

D) the velocity of money was zero.

25) According to the quantity theory of money, deflation will occur if the

A) money supply is less than real GDP.

B) money supply is more than real GDP.

C) money supply grows at a slower rate than real GDP.

D) money supply grows at a faster rate than real GDP.

26) The quantity theory of money assumes that

A) the velocity of money is negative.

B) the velocity of money is constant.

C) the velocity of money is zero.

D) the velocity of money fluctuates unpredictably.

27) According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be

A) 8%.

B) 6%.

C) 4%.

D) 2%.