9) The table below shows the data (in millions) for Wells Fargo Bank in September 2007 and
September 2008. Suppose that the required reserve ratio is 3 percent.
2007
2008
Loans
79
100
Reserves
11
11
Deposits
247
266
The data show that Wells Fargo
A) the reserve ratio did not change.
B) had fewer excess reserves in 2007.
C) the reserve ratio increased as loans increased.
D) had fewer excess reserves in 2008.
10) The table below shows the data (in millions) for Wells Fargo Bank in September 2007 and
September 2008. Suppose that the required reserve ratio is 3 percent.
2007
2008
Loans
79
100
Reserves
11
11
Deposits
247
266
The data show that
A) the currency drain ratio increased.
B) the Federal Reserve must have increased the required reserve ratio.
C) Wells Fargo had excess reserves and could create money in 2007.
D) Wells Fargo was only able to make more loans in 2008 because it gained more deposits.
11) Between 2008 and 2009, U.S. real GDP decreased from $13.2 trillion to $12.9 trillion. As a
result, the real demand for money ________ and the demand for money curve ________.
A) decreased; shifted leftward
B) did not change; did not shift
C) increased; shifted leftward
D) decreased; shifted rightward.
12) In 2007, interest rates in Germany were 4.7 percent while the inflation rate was 1.7 percent.
In 2008, interest rates increased to 5.3 percent and the inflation rate increased to 2.0. As a result,
there is
A) a leftward shift in Germany’s demand for money curve.
B) a downward movement along Germany’s demand for money curve.
C) a rightward shift in Germany’s money supply curve.
D) an upward movement along Germany’s demand for money curve.
13) In 2006, real GDP in Belgium grew at a 3 percent rate and inflation was 1.8 percent while
the population did not change. As a result, there was ________ demand for money curve in
Belgium.
A) a rightward shift of the
B) a leftward shift of the
C) a movement up along the
D) no change in the
14) The table below shows data for Japan.
2008
2009
M1 growth rate
0.7
0.9
Inflation rate
0.4
-0.3
Assuming the rate of velocity change is constant, real GDP
A) grew by 0.3 percent in 2008.
B) grew by -1.2 percent in 2009.
C) grew by 1.1 percent in 2008.
D) grew by 0.9 percent in 2009.
15) The table below shows data for Brazil.
2006
2007
Real GDP growth rate
3.8
5.4
Inflation rate
4.2
3.7
Assuming the rate of velocity change is constant
A) the growth rate of money increased between 2006 and 2007.
B) the money growth rate was -0.4 percent in 2006.
C) the growth rate of nominal GDP was 1.7 percent in 2006.
D) the demand for money curve shifted leftward in 2006.
16) The table below shows data for Indonesia.
2009
2010
Real GDP growth rate
4.5
6.0
Inflation rate
4.8
5.7
Assuming the rate of velocity change is constant, the money growth rate in Indonesia was
A) 0.3 percent in 2009.
B) 11.7 percent in 2010.
C) -0.3 percent in 2009.
D) 5.7 percent in 2010.
17) The table below shows data for Indonesia between 2005 and 2006.
2005
2006
Money growth rate
21.4
12.0
Real GDP growth rate
5.7
5.5
Assume the rate of velocity change is constant. According to the quantity theory of money,
Indonesia’s inflation rate
A) is higher in 2005 than in 2006.
B) was 17.5 percent in 2006.
C) is 27.1 percent in 2005.
D) will increase over the 12 months.
18) The inflation rate in Venezuela has increased between 2005 and 2010, rising from 14 percent
per year to 31 percent per year. At the same time, the growth rate of real GDP fell from 10
percent per year to -2.6 percent per year. The quantity theory of money
A) states that the inflation rate over the period would average 4 percent.
B) predicts that the velocity of money will decrease over the period.
C) states that the growth rate of money must have increased over the period.
8 Essay Questions
1) Define money and list its functions.
2) What are the three functions of money?
3) What is barter? What is a double coincidence of wants? How does the existence of money
affect barter?
4) Give an example of how money functions as a unit of account.
5) Explain which of the following count as money.
a) a check in Ann’s checkbook
b) currency in Ann’s bank
c) currency in Ann’s purse
d) Ann’s checking deposit
6) “Even though we can convert them into money, deposits at banks are not money.” Is the
previous statement correct or not?
7) Are checks money?
8) “Credit cards are considered money because they serve to purchase goods and services.” Is the
previous statement true or false?
9) Are credit cards or debit cards money? Explain your answer.
10) Are checks and credit cards money? Explain why or why not.
11) What makes up M1? Is M1 larger or smaller than real GDP?
12) What assets are included in M1? In M2? Is all of M1 and M2 money? If some assets of M1
or M2 are not money, why are they included in M1 or M2?
13) “By definition, all parts of M2 are money.” Is the previous statement correct or not? Explain
your answer.
14) “Banks make a profit by paying depositors a high rate to attract funds and making loans at a
low rate to encourage borrowing.” Is the previous statement correct or not?
15) “Banks hold 100 percent of their customers’ deposits as reserves.” Is the previous statement
correct or not?
16) What are the economic functions of depository institutions?
17) List and discuss the four economic functions that depository institutions provide their
customers.
18) How do banks create liquidity?
19) Briefly describe the Federal Reserve System, how it is governed, and its roles in the
economy.
20) Does the Federal Reserve conduct both the nation’s monetary policy and its fiscal policy?
21) Are the members of the Board of Governors of the Federal Reserve System elected officials?
22) The president of which Federal Reserve Bank is always a voting member of the FOMC?
23) What is the FOMC? Who are the members of the FOMC? What policy does the FOMC
decide?
24) “Because monetary policy must be approved by the president of the United States, the
president is chair of the Federal Open Market Committee.” Analyze the previous statement—is it
correct or incorrect?
25) What is the interaction between the Federal Reserve districts and the Board of Governors of
the Federal Reserve System?
26) What is the structure of the Federal Reserve Bank System?
27) List the Fed’s main policy tools and briefly explain each one.
28) What is the discount rate?
29) “When the Fed buys securities from a bank, the quantity of money eventually decreases by a
fraction of the initial change in the monetary base.” Is the previous statement correct or
incorrect? Explain your answer.
30) When the Fed buys securities from a bank, what happens to the monetary base and the
quantity of money? Which changes by more or do both change by the same amount?
31) If the Fed sells $100 million of U.S. government securities, what happens to the quantity of
money?
32) Describe how actual reserves are calculated and explain the difference between desired
reserves and excess reserves. How do reserves affect the amount of loans a bank can make?
33) “A bank can only use its excess reserves to make loans, while required reserves can only be
used to buy U.S. government securities.” Explain whether the previous statement is correct or
incorrect.
34) Explain the process by which the banking system creates money.
35) What factors affect the demand for money?
36) How are the nominal and real demands for money related to changes in the price level?
37) What is the opportunity cost of holding money?
38) Why is the nominal interest rate the opportunity cost of holding money?
39) What effect does an increase in the interest rate have on the opportunity cost of holding
money and on the demand for money curve?
40) How does an increase in real GDP affect the demand for money curve?
41) How would a widespread adoption of credit cards affect the demand for money and the
demand for money curve?
42) Describe how financial innovation has affected the demand for money.
43) Explain how the money market determines the equilibrium interest rate.
44) Suppose the quantity of money is greater than the quantity of money demanded. In the short
run, what occurs to set the quantity of money equal to the quantity of money demanded?
45) In the short run, how is the interest rate determined? If the interest rate is less than the
equilibrium interest rate, what occurs?
46) “The velocity of circulation is the average speed with which money is loaned to businesses
and households.” Is the previous statement correct or incorrect?
47) According to the quantity theory of money, what is the effect of an increase in the quantity of
money?
48) Discuss the quantity theory of money. Be sure to mention the velocity of circulation and the
equation of exchange.
49) Define the quantity theory of money and show how it is related to the equation of exchange.
50) What is the equation of exchange? Suppose that real GDP and velocity are constant. In this
case, what effect will an increase in the quantity of money have?
51) How has growth in M2 minus the growth in real GDP compared to the inflation rate in the
United States?
52) What is the relationship between money growth and inflation across countries? Does your
answer support the quantity theory of money?
53) “If the currency drain increases, the monetary base decreases.” Explain whether the previous
statement is correct or incorrect.
54) What is a “currency drain?” How and why does it affect the money multiplier?
55) How does a currency drain affect the money multiplier?
56) Explain how a currency drain affects the size of the money multiplier. In your explanation,
suppose that a bank gains $1 million in new deposits and reserves. Further suppose that the
desired reserve ratio is 10 percent and the currency drain is 50 percent.
57) If the currency drain increases, how can the Fed adjust the monetary base to offset the effect
on the quantity of money?