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Lahore University of Management Sciences

ECON3610 Money and Banking

Spring 2015

Quiz 1 (Weight: 5%; Marks: 50)

Student Roll No. ___________

Student Name

Time: 25 Minutes

Question 1: MCQs (44 Marks; 4 marks each)

1. The payments system is
(a) the mechanism for conducting economic transactions.
(b) another name for the system of foreign exchange rates.
(c) the phrase used to describe how transactions are carried out in an economy that does
not use money.
(d) the way in which economic transactions are carried out in a government-controlled
economy, such as the former Soviet Union.
Answer: A
2. A monetary aggregate is a
(a) measure of the inflation rate.
(b) measure of the total economic activity of the country.
(c) measure of money broader than currency.
(d) measure of definitive money.
Answer: C
3. Which of the following are included in M3, but not in M2?
(a) Savings account deposits
(b) Checking account deposits
(c) Small-denomination time deposits
(d) Term repurchase agreements
Answer: D
4. In Friedmans modern quantity theory, velocity is procyclical because

money demand depends on permanent income, which is more stable than actual income.
money demand depends on actual income, which is more stable than permanent income.
velocity depends upon interest rates, which are stable over the business cycle.
velocity depends upon interest rates, which move procyclically.
velocity depends upon the money supply, which is controlled by the Federal Reserve

Answer: A



The more sensitive is the demand for money to interest rates, the _____ unpredictable
velocity will be, and the link between the money supply and aggregate spending will be
_____ clear.
a) more; more
b) more; less
c) less; more
d) less; less
Answer: B
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%
Answer: C
7. If nominal money balances increase from $2 billion to $3 billion, while the price level
increases from 100 to 150, real money balances will
have increased by 50%.
have decreased by 50%.
have increased by 100%.
be unchanged.
Answer: C

8. An important difference between Keyness approach to the demand for money and Friedmans
approach is that
(a) there is no role for the opportunity cost of holding money in Friedmans theory.
(b) in Keyness theory changes in output have no effect on the demand for money.
(c) in Friedmans theory money demand responds only slightly to short-run fluctuations in
(d) in Keyness theory money demand is a function of the real interest rate, rather than the
nominal interest rate.
Answer: C
9. Fluctuations in velocity indicate that
(a) changes in money holdings cannot be completely explained by changes in the price
(b) changes in money holdings cannot be completely explained by changes in the volume
of transactions.
(c) the Fed will have an easier time in hitting monetary aggregate targets than in hitting
interest rate targets.
(d) inflation must be accelerating.
Answer: B

10. Risk sharing service provided by the financial markets means:


risk of borrowers is transferred to savers

financial intermediary bear the risk
risk exposure is completely eliminated
all of the above
none of the above

Answer: E
11. Accordingly to Friedmans Quantity Theory of Money:

return of money increases with interest on bond

return of money increases with return on stock prices
inflation increases with the increase in interest on stock prices
(a) and (c) only
(a) and (b) only
all of the above.

Answer: E

Question 2 (MCQ): (6 Marks)

In MacCallum (1989) model of money demand (overlapping model of money demand), agents
maximize utility by choosing between labour and leisure. Theoretical expectations suggest that
a) increase in labour reduces consumption
b) increase in consumption increases agents utility as it requires higher demand for money
c) increase in leisure increases consumption expenditure and hence agents utility
d) agents optimizes utility up to period t where period t is very long
e) agents decision to consume is indifferent between two periods
f) (a) and (c) of the above
g) (d) and (e) of the above
h) all of the above
i) none of the above
Answer: I