Macroeconomics: Policy and Practice, 2e (Mishkin)
Chapter 5 Money and Inflation
5.1 What Is Money?
1) Money is not ________.
A) income because the former is a stock measure and the latter a flow
B) wealth because the latter is generally used to procure the former
C) as desirable as barter because the latter is more efficient than the former
D) all of the above
E) none of the above
2) Money is not ________.
A) income because the former is a stock measure and the latter a flow
B) wealth because the former is generally used to procure the latter
C) as inefficient as barter because the latter requires a double coincidence of wants
D) all of the above
E) none of the above
3) Money is ________.
A) an asset
B) a unit of measure
C) a tool
D) all of the above
E) none of the above
4) Money serves as ________.
A) a unit of account
B) a store of value
C) a medium of exchange
D) all of the above
E) none of the above
5) Wealth ________.
A) may serve the monetary function of store of value
B) means essentially the same as money
C) differs from money in that wealth is more liquid
D) is the flow that corresponds to the stock of income
E) none of the above
6) Someone who has just inherited a “goldmine” has received a great deal of ________.
A) wealth
B) money
C) income
D) currency
E) liquidity
7) Fred has always been known as “the rich kid.” Strictly speaking, this must mean that
________.
A) Fred has a lot of cash
B) Fred’s income is quite high
C) Fred won the lottery before he was legally eligible
D) Fred has a flashy wardrobe
E) Fred has a lot of wealth
8) The phrase “double coincidence of wants” ________.
A) is useful to explain why barter is an efficient practice
B) refers to two people who have similar tastes
C) suggests a quite improbable circumstance
D) clarifies the distinction between income and wealth
E) none of the above
9) The most liquid asset is ________.
A) stocks
B) bonds
C) cash
D) real estate
E) none of the above
10) Subject to a few legal and practical restrictions, anything may be exchanged for anything
else. The distinctive advantage of money is that ________.
A) it is likely to retain its value, whether it is kept or exchanged
B) it has little, if any, use other than exchange
C) it can generate income while it is kept
D) it is likely to be accepted by everyone in exchange for anything
E) none of the above
11) Which of the following is most like money?
A) game arcade tokens
B) board game “money”
C) credit cards
D) baseball trading cards
E) frequent flyer miles
12) A prisoner of war camp seems a likely place for “cigarette money,” because ________.
A) nearly all prisoners smoke cigarettes
B) of the absence of better alternatives
C) cigarettes are abundant and easy to count
D) the guards can enforce the practice of accepting cigarettes as a medium of exchange
E) cigarettes retain their value over time
13) Characteristics that enable an item to serve well as money include each of the following,
except ________.
A) durable
B) abundant
C) divisible
D) portable
E) verifiable
14) Suppose you have a collection of gold coins from the 19th century. Comment on their
suitability to provide for you each of the three functions of money.
5.2 The Federal Reserve System and the Control of the Money Supply
1) In modern economies, the supply of money depends mainly on the economy’s ________.
A) tax rates
B) mining of precious metals
C) net exports
D) growth of output of goods and services
E) none of the above
2) In addition to the chairman of the Board of Governors, the FOMC consists of ________.
A) six rotating members of the Board of Governors and five presidents of Federal Reserve banks
B) six other members of the Board of Governors, four rotating bank presidents and the president
of the New York Federal Reserve
C) six other members of the Board of Governors and five presidents of Federal Reserve banks;
all twelve rotating members
D) twelve Federal Reserve Bank presidents
E) none of the above
3) The Federal Reserve System consists of ________.
A) eleven district banks and a board of governors
B) ten district banks and the FOMC
C) eleven district banks
D) twelve district banks and a board of governors
E) none of the above
4) The FOMC ________.
A) meets four times a year to decide on how to conduct open market operations that influence
the money supply
B) meets six times a year to decide on how to conduct open market operations that influence the
money supply and interest rates
C) meets eight times a year to decide on how to conduct open market operations that influence
the money supply and interest rates
D) meets twelve times a year to decide on how to conduct open market operations that influence
interest rates
E) none of the above
5) Open Market operations consist mainly of ________.
A) the government buying and selling private securities in the open market
B) the Fed buying and selling government securities in the open market
C) the government selling its own securities in the open market
D) the Fed setting rates for securities traded in the open market
E) none of the above
6) When the Fed sells government securities in the open market, the money supply ________
because ________.
A) decreases; banks lose liquidity, they make fewer loans and checking account deposits
decrease
B) increases; banks gain liquidity, they make more loans and checking account deposits increase
C) increases; banks lose liquidity, they make more loans and checking account deposits increase
D) decreases; banks gain liquidity, they make fewer loans and checking account deposits
decrease
E) none of the above
7) When the Fed buys government securities in the open market, the money supply ________
because ________.
A) decreases; banks lose liquidity, they make fewer loans and checking account deposits
decrease
B) increases; banks gain liquidity, they make more loans and checking account deposits increase
C) increases; banks lose liquidity, they make more loans and checking account deposits increase
D) decreases; banks gain liquidity, they make fewer loans and checking account deposits
decrease
E) none of the above
8) Open market operations alter the money supply by ________.
A) influencing banks’ ability to make loans to individuals and corporations
B) adding currency to or withdrawing currency from banks’ vaults
C) adding currency to or withdrawing currency from the checking accounts of individuals and
corporations
D) influencing banks’ ability to make loans to the government
E) none of the above
9) Which of the following is true for the European Central Bank (ECB)?
A) its executive board meets more often than the FOMC
B) each member country’s central bank has similar functions to the Federal Reserve Banks
C) it is housed in Frankfurt, Germany
D) all of the above
E) none of the above
10) Which of the following is true for the European Central Bank (ECB)?
A) its executive board meets less often than the FOMC
B) the members of its executive board have lifetime appointments
C) it is a more decentralized system than the Federal Reserve
D) all of the above
E) none of the above
11) Both the Federal Reserve System in the United States and the European Central Bank are
comprised of geographically dispersed Banks. How might such decentralization contribute to
successful monetary policy?
5.3 Measuring Money
1) The Fed’s narrowest measure of money is ________.
A) M1
B) M2
C) M3
D) all of the above
E) none of the above
2) M1 differs from M2 because ________.
A) M2 includes components that are less liquid than any component of M1
B) M1 does not include savings deposits and M2 does
C) M1 is included in M2 but M2 has more components
D) all of the above
E) none of the above
3) M1 differs from M2 because ________.
A) M1 includes demand deposits and M2 does not
B) M1 includes currency held by the nonbank public and M2 includes only currency held by
banks
C) M2 includes interest bearing time deposit accounts and M1 does not
D) all of the above
E) none of the above
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4) M1 differs from M2 because ________.
A) M1 is less liquid than M2
B) M1 includes demand deposits and M2 does not
C) M1 includes only the most liquid forms of money and M2 includes all of M1 and some less
liquid items
D) all of the above
E) none of the above
5) M1 does not include cash that is held in ATMs or bank vaults, because ________.
A) no one really owns that money
B) that money is included in M2
C) that money earns no interest
D) the right to access that money is counted already as bank deposits
E) none of the above
6) Financial innovations such as direct deposit of paychecks, electronic payment of bills, and
automated teller machines (ATMs) have likely ________.
A) had minimal effect on M1 and M2
B) reduced the size of M2 relative to M1
C) increased both M1 and M2 relative to GDP
D) caused the growth rates of M1 and M2 to become more stable
E) reduced the size of M1 relative to M2
7) Typically, when someone borrows money from a bank, M2 ________, because ________.
A) increases; the money is held for a while in a liquid form
B) decreases; the money is held for a while in a liquid form
C) does not change; the loan affects only the subcategories within M2
D) decreases; of the decline in the bank’s vault cash
E) none of the above
8) Which of these transactions results in an increase in M1?
A) withdrawal of $100 cash from your checking account
B) certificate of deposit matures, adding $520 to your checking account
C) depositing a bank loan of $400 into your savings account
D) depositing a $300 paycheck into your savings account
E) none of the above
9) Which of these transactions results in an increase in M2?
A) certificate of deposit matures, adding $520 to your checking account
B) withdrawal of $100 cash from your checking account
C) depositing a bank loan of $400 into your savings account
D) depositing a $300 paycheck into your savings account
E) none of the above
10) If the euro replaces the U.S. dollar as the world’s most popular currency, that will likely
________.
A) reduce M1, without affecting M2
B) reduce M2, without affecting M1
C) cause a temporary increase in M1
D) affect neither M1 nor M2
E) none of the above
11) Current Federal Reserve policy focuses on interest rates, rather than on monetary aggregates,
because ________.
A) monetary aggregates do not provide clear or consistent signals to guide policymakers
B) open market operations affect interest rates more directly than they affect monetary
aggregates
C) according to the Fisher effect, the interest rate is a key determinant of the inflation rate
D) all of the above
E) none of the above
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12) As of 2013, the outstanding U.S. currency is more than $1 trillion, which suggests that the
typical U.S. citizen holds $3,600 in cash. Is this an accurate inference? Why?
A) Yes; because dividing total currency by total U.S. population roughly works out to $3,600 per
person.
B) No; because criminals and foreigners hold large sums of dollars, so the average citizen holds
far less.
C) No; because the average citizen probably does not have $3,600 in her checking account.
D) Yes; because the Fed rarely makes accounting mistakes when computing M1.
E) none of the above
13) The principal reason(s) that so much U.S. currency is held outside the U.S is (are) ________.
A) many people around the world trust the U.S. dollar more than any other currency
B) banks all around the world find it convenient to hold large amounts of U.S. dollars
C) U.S. citizens and corporations spend a lot of dollars abroad
D) all of the above
E) none of the above
14) Recent financial turmoil has caused many people to increase saving and to prefer assets that
are perceived to be relatively safe and liquid. What are the likely effects on M1 and M2?
15) Credit cards are a popular means of payment. Why are credit card accounts not included in
M1 or M2? Are credit cards of no relevance to these money measures?
5.4 Quantity Theory of Money
1) The quantity theory of money ________.
A) is the product of classical economists
B) links total income to a country’s supply of money
C) is derived from the equation of exchange
D) all of the above
E) none of the above
2) The quantity theory of money ________.
A) is the product of Keynesian economists
B) links total income to a country’s supply of money
C) is also known as the equation of exchange
D) all of the above
E) none of the above
3) The quantity theory of money ________.
A) was best explained by Fisher’s book “The Purchasing Power of Money”
B) links total money supply to a country’s demand for money
C) is also known as the equation of exchange
D) all of the above
E) none of the above
4) The quantity theory of money explains how ________ depends on ________.
A) real GDP; the money supply
B) the price level; the demand for money
C) the money supply; the velocity of money
D) all of the above
E) none of the above
5) The velocity of money ________.
A) represents the average number of times a dollar turns over through the year
B) provides the link between the money supply and nominal income
C) times the money supply should equal total income, according to the equation of exchange
D) all of the above
E) none of the above
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6) The velocity of money ________.
A) represents the average number of times a dollar is spent in a given year
B) indicates the relative importance of cash versus writing checks for purchases
C) times the money supply should equal real GDP
D) all of the above
E) none of the above
7) The equation of exchange ________.
A) states that the quantity of money multiplied by velocity must equal nominal income in a given
year
B) describes a relationship that is true by definition
C) shows that real GDP must equal real money balances times the number of times a dollar turns
over in a year
D) all of the above
E) none of the above
8) The equation of exchange ________.
A) states that the quantity of money divided by velocity must equal nominal income in a given
year
B) is only an identity if we do not understand the determinants of velocity
C) shows that nominal income must equal real money balances times the number of times a
dollar turns over in a year
D) all of the above
E) none of the above
9) According to Irving Fisher, velocity ________.
A) is determined by institutions that affect the way individuals transact
B) is affected by institutions only gradually
C) is assumed constant in the short run
D) all of the above
E) none of the above