4) Which of the following is an example of fiat money?
A) A cowry shell used as money on a South Pacific island.
B) A gold coin used as money in nineteenth century England.
C) A Federal Reserve Note used as money in the twenty-first century United States.
D) A pound of salt used as money in medieval France.
5) Checks are
A) not acceptable for settling transactions in most industrialized countries.
B) less important than currency as a means of settling transactions.
C) promises to pay on demand money deposited with a financial institution.
D) promises to pay coins minted from precious metals on demand.
6) One advantage of using checks to settle transactions is
A) they are more difficult to use fraudulently than currency or precious metals are.
B) there is effectively no cost to using them.
C) they are as liquid as cash.
D) there is no information cost involved in accepting them.
7) The use of checks in transactions
A) entails lower information costs than the use of currency.
B) entails fewer steps than settling transactions with currency.
C) avoids the cost of shipping currency back and forth.
D) entails lower information and fewer steps than settling transactions with currency.
8) Automatic teller machines and debit cards are examples of
A) electronic funds transfer systems.
B) commodity monies.
C) legal tender in the United States.
D) modern barter systems.
9) All of the following are examples of electronic funds EXCEPT
A) credit cards.
B) debit cards.
C) stored value cards.
D) e-cash.
10) What do many economists blame for the severity of the Great Depression?
A) The collapse of the banking system.
B) A rapid increase in the money supply.
C) The issuing of an excessively large amount of currency by the Federal Reserve.
D) The collapse of the electronic funds transfer system.
11) Why does the payments system continue to change over time?
2.4 Measuring the Money Supply
1) As of July 2010, the amount of money as measured by M2 was about
A) $880 billion.
B) $1700 billion.
C) $8600 billion.
D) $14 trillion.
2) The M2 aggregate
A) includes M1 plus short-term investment accounts.
B) includes M1 plus large-denomination time deposits.
C) equals currency plus checking account deposits at commercial banks.
D) is the best definition of money purely as a medium of exchange.
3) Which of the following is NOT included in M2?
A) currency
B) savings bonds
C) money market deposit accounts
D) overnight repurchase agreements
4) Which of the following statements is true about M2?
A) Its total value is smaller than that of M1.
B) Apart from those assets also included in M1, it includes no assets that offer check-writing
features.
C) Its total value is about five times as large as M1.
D) It includes large-denomination time deposits.
5) Which of the following is included in M1, but not in M2?
A) currency
B) checking account deposits
C) travelers checks
D) Everything in M1 is in M2.
6) Money market deposit accounts are included in
A) only M1.
B) only M2.
C) M1 and M2.
D) neither M1 nor M2.
7) The M1 and M2 aggregates
A) have moved very closely together since 1960.
B) have moved broadly together since 1960.
C) have moved significantly differently during certain periods since 1960.
D) have moved broadly together but have also moved very differently during certain periods
since 1960.
8) The Fed’s current position towards the existing monetary aggregates is
A) it is convinced that M1 is the best measure of the money supply.
B) it is convinced that M2 is the best measure of the money supply.
C) it is an issue of ongoing research.
D) it is reverting to considering currency alone as the best measure of the money supply.
9) In July 2010, what was the total value of US currency in circulation?
A) $500 million
B) $150 billion
C) $886 billion
D) $6 trillion
10) A monetary aggregate is a measure of
A) the inflation rate.
B) the total economic activity of the country.
C) money broader than currency.
D) definitive money.
11) The narrowest money measure is
A) currency plus non-interest bearing checking accounts.
B) currency plus all checking accounts.
C) currency plus all deposits at financial institutions.
D) definitive money.
12) Which of the following is the largest measure of money in the United States?
A) Federal Reserve notes
B) definitive money
C) M1
D) M2
13) Which of the following is NOT included in M1?
A) currency
B) savings account deposits
C) checking account deposits
D) traveler’s checks
14) Approximately what proportion of US dollars are held outside the United States?
A) less than one-tenth
B) one-fourth
C) one-half
D) two-thirds
15) What criteria should be used in deciding the best definition of the money supply?
16) Why would people outside the United States choose to hold U.S. dollars?
2.5 The Quantity Theory of Money: A First Look At the Link Between Money and Prices
1) Suppose the GDP implicit price deflator was 112.7 in 2011 and 116.0 in 2012. Therefore, the
inflation rate in 2012 would be
A) 2.8%.
B) 2.9%.
C) 3.3%.
D) 16%.
2) A hyperinflation occurs when
A) inflation persists for more than two years.
B) inflation persists for more than five years.
C) the inflation rate exceeds 10% per year.
D) the inflation rate exceeds 100% per year
3) When prices rise, the purchasing power of money
A) rises.
B) falls.
C) is unaffected.
D) may rise, fall, or be unaffected depending upon circumstances.
4) The purchasing power of money
A) rises when prices fall.
B) rises when prices rise.
C) is set by the Fed in January of each year.
D) is constant.
5) The velocity of money can best be described as
A) how quickly prices are increasing.
B) how quickly output is increasing.
C) the number of times each dollar in the money supply us used to buy goods and services
included in GDP.
D) the growth rate of the money supply.
6) According to the equation of exchange, the money supply times the velocity of money equals
the
A) price level.
B) growth rate of the money supply.
C) real GDP.
D) nominal GDP.
7) According to the quantity theory of money, the growth rate of which of the following is zero?
A) money supply
B) velocity
C) real GDP
D) price level
8) Suppose nominal GDP is $14 trillion and the money supply is $2 trillion. What is the velocity
of money?
A) 0.143
B) 7
C) 12
D) 28
9) According to the quantity theory of money, if the long-run economic growth rate is 2.5%, by
how much should the Fed increase the money supply if it wants inflation to be 2%?
A) 0.5%
B) 1.25%
C) 4.5%
D) 5%
10) According to the equation of exchange, how can national income grow even though the
amount of money does not?
A) price level increases
B) real GDP decrease
C) velocity increases
D) velocity decreases
11) Hyperinflations are usually caused by large budget deficits financed by
A) selling bonds to private investors.
B) selling bonds to the central bank.
C) raising taxes.
D) borrowing from commercial banks.
12) Which country experiencing hyperinflation in excess of 15 billion percent in 2008?
A) Argentina
B) Canada
C) Iceland
D) Zimbabwe
13) Research has shown that nations with highly independent central banks tend to have low
A) inflation.
B) interest rates.
C) economic growth.
D) unemployment.
14) All of the following were took place during the German hyperinflation in the 1920s
EXCEPT
A) banks reduced lending.
B) some banks only made loans to customers who agreed to repay in terms of foreign currencies
or commodities.
C) Deutsche Bank had to lay off many workers due to lack of business.
D) households and firms increased their demand for loans.
15) The American Civil War lasted from the spring of 1861 to the spring of 1865. During the
war the Confederate government issued substantial amounts of fiat paper currency. What do you
think happened to the price level (measured in Confederate dollars) in the Confederate states
during the final months of the war?
16) Make use of the quantity theory of money to solve the following problem. If the Fed has an
inflation target of 2% and the velocity of money is constant, by how much should it increase the
money supply each year if economic growth is expected to average 3%?
17) Make use of the quantity equation to answer the following problem. If the Fed increases the
money supply by 4%, velocity increases by 1%, and economic growth is 3%, by how much will
the price level increase?
18) What is normally the ultimate cause of hyperinflation?
19) What does research suggest as to the relationship between the independence of the central
bank and inflation? What is the rationale for this relationship?