Chapter 29

True/False
Indicate whether the statement is true or false.

____ 1. Modern banking systems have reserve-deposit ratios of more than 100%, and are called fractional-reserve
banking systems.

____ 2. In spite of bank runs and inflation, money has proven to be a very useful social convention.

____ 3. The Reserve Bank can affect the money supply indirectly through its control of the supply of bank reserves.

____ 4. The gold standard is used as the basis for a nation’s money supply.

____ 5. A relatively narrow measure of money is M3, which includes currency and cheque accounts.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Money is:

a. equivalent to income
b. equivalent to wealth
c. an asset used as a medium of exchange
d. backed by gold
____ 2. When money is used as a means to hold wealth, it serves as a:
a. financial intermediary
b. double coincidence of wants
c. store of value
d. medium of exchange
____ 3. If the RBA purchased government securities, then:
a. the money supply would decrease
b. the money supply would not change
c. the money supply would increase
d. none of the above
____ 4. There is a ____:
a. short-run trade-off between prices and interest rates
b. long-run trade-off between inflation and unemployment
c. short-run trade-off between inflation and unemployment
d. short-run trade-off between inflation and the money supply
____ 5. Under a fractional-reserve banking system, banks:
a. hold only a fraction of their deposits as reserves
b. generally lend out a majority of their deposits
c. can create money by lending out reserves
d. all of the above
____ 6. Use the following balance sheet for the First Bank of Oz:
 Assets Liabilities
Required reserves $15.00 Deposits $100.00
Loans $85.00

If $1000 is deposited into the First Bank of Oz, then:

a. assets will increase by $1000
b. liabilities will decrease by $1000
c. total reserves will initially increase by $150
d. required reserves will increase by $850
____ 7. If reserve requirements are increased:
a. the reserve ratio will increase, the money multiplier will increase and the money supply
will increase
b. the reserve ratio will decrease, the money multiplier will decrease and the money supply
will decrease
c. the reserve ratio will decrease, the money multiplier will increase and the money supply
will increase
d. the reserve ratio will increase, the money multiplier will decrease and the money supply
will decrease
____ 8. The money supply in Econland is 1500, and currency held by the public equals bank reserves. The desired
reserve-deposit ratio is 0.20. Bank reserves equal:
a. 200
b. 250
c. 300
d. 500
____ 9. If the actual reserve-deposit ratio equals eight per cent and the desired reserve-deposit ratio for this bank is 10
per cent, the bank should:
a. do nothing, because this is a profitable situation
b. stop making loans
c. send the extra reserves to the central bank
d. request that customers withdraw deposits from the bank
____ 10. Bank runs:
a. occur when the discount rate rises
b. occur when large numbers of depositors all try to withdraw their deposits at the same time
c. are only a problem in a 100 per cent reserve banking system
d. none of the above
____ 11. When money takes the form of a commodity with intrinsic value, it is called a:
a. barter money
b. legal tender
c. commodity money
d. debased money
____ 12. If the cash rate is increased, the RBA is trying to:
a. address excessive inflation in the economy
b. reduce the demand for money in the economy
c. discourage credit-based spending
d. all of the above
____ 13. Store of value deteriorates when:
a. when only the cost of fruit and vegetables increases
b. when there are inflationary expectations
c. when there are deflationary expectations
d. none of the above
____ 14. The RBA is required to ensure that:
a. prices of all products need to increase by a maximum of 3 per cent per annum
b. target inflation is at 2–3 per cent
c. there is adequate money available for the government’s projects
d. all of the above
____ 15. When the RBA is trying to control rising inflation, it:
a. decreases the interest rate that financial institutions can earn on overnight loans of their
currency
b. targets inflation at two to three percent
c. increases the interest rate that financial institutions can earn on overnight loans of their
currency
d. all of the above
Chapter 30

True/False
Indicate whether the statement is true or false.

____ 1. The volume of computer chips produced is a nominal variable, and the revenue from the sale of computer
chips is a real variable.

____ 2. The irrelevance of monetary changes for nominal variables is called monetary neutrality.

____ 3. The phenomenon known as the Fisher effect occurs when inflation causes people to pay an increasing
percentage of their income in taxes, even when their real incomes have not changed.

____ 4. Because of inflation-induced changes in taxes on capital gains and interest income, higher inflation tends to
discourage people from saving and lowers the rate of economic growth.

____ 5. Unexpected inflation has no wealth redistribution effect on the population.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Inflation can be measured by the:

a. absolute change in the CPI
b. percentage change in the CPI
c. absolute change in the GDP deflator
d. percentage change in the price of oil
____ 2. An extraordinarily high rate of inflation is called:
a. disinflation
b. hyperinflation
c. hyperdisinflation
d. adverse inflation
____ 3. An increase in the money supply:
a. increases the ability of the economy to produce goods and services, increases the demand
for goods and services, and increases the price level
b. leaves unchanged the ability of the economy to produce goods and services, increases the
demand for goods and services and increases the price level
c. leaves unchanged the ability of the economy to produce goods and services, increases the
demand for goods and services and decreases the price level
d. leaves unchanged the ability of the economy to produce goods and services, decreases the
demand for goods and services, and decreases the price level
____ 4. Which of the following statements is correct?
a. economic variables measured in physical units are nominal variables, and economic
variables measured in monetary units are real variables
b. economic variables measured in physical units are real variables, and economic variables
measured in monetary units are nominal variables
c. economic variables measured in physical units are actual variables, and economic
variables measured in monetary units are nominal variables
 d. economic variables measured in physical units are real variables, and economic variables
measured in monetary units are actual variables
____ 5. The notion that nominal variables are heavily influenced by the quantity of money, and that money is largely
irrelevant to understanding the determinants of real variables, is called:
a. monetarism
b. the quantity theory
c. the Fisher effect
d. the classical dichotomy
____ 6. According to the classical dichotomy, which of the following is determined by monetary factors?
a. The real wage
b. The nominal wage
c. The real interest rate
d. Real GDP
____ 7. According to the quantity equation, if velocity and real GDP are constant and the Reserve Bank increases the
money supply by five per cent then the price level:
a. decreases by 10 per cent
b. decreases by five percent
c. is also constant
d. increases by five per cent
____ 8. According to the quantity equation, if velocity is constant at 2.5 and real GDP is constant at 8000, then, if the
money supply is increased from 4800 to 5280, the price level:
a. increases to 1.1
b. increases to 1.5
c. increases to 1.65
d. is constant at 1.5
____ 9. The inflation tax:
a. is collected by the government every time people use money for transaction
b. transfers wealth from government to households
c. is paid by everyone who holds money
d. all of the above
____ 10. If between when you purchase an asset and sell it, the general price level and the price of the asset both
double, then you have realised a:
a. capital gain
b. real gain
c. capital loss
d. real loss
____ 11. Expected inflation redistributes wealth from ____.
a. creditors to debtors
b. owners of real property to owners of financial assets
c. debtors to creditors
d. the government to fixed income recipients
____ 12. The quantity equation states that:
a. money times velocity equals nominal GDP
b. money times velocity equals real GDP
c. money times prices equals nominal GDP
 d. money times prices equals real GDP
____ 13. The demand for money depends on:
a. the interest rate
b. the average level of prices in the economy
c. income
d. all of the above
____ 14. If the price level is above the equilibrium level, then:
a. money demand will be greater than money supply
b. money demand will be smaller than money supply
c. money supply will be equal to money demand
d. the price level will rise
____ 15. The Fisher effect is:
a. the one-for-one adjustment of the nominal GDP to the inflation rate
b. the one-for-one adjustment of the nominal interest rate to the nominal GDP
c. the one-for-one adjustment of the nominal interest rate to the inflation rate
d. the one-for-one adjustment of the nominal GDP to the rate of money growth
Chapter 29
Answer Section

TRUE/FALSE

1. ANS: F PTS: 1 DIF: Moderate

TOP: Money creation with fractional-reserve banking
2. ANS: T PTS: 1 DIF: Moderate
TOP: Case Study: Bank runs and the money supply
3. ANS: T PTS: 1 DIF: Moderate TOP: The Reserve Bank of Australia
4. ANS: F PTS: 1 DIF: Easy TOP: Kinds of money
5. ANS: F PTS: 1 DIF: Easy TOP: Kinds of money

MULTIPLE CHOICE

1. ANS: C PTS: 1 DIF: Easy TOP: The functions of money

2. ANS: C PTS: 1 DIF: Easy TOP: The functions of money
3. ANS: C PTS: 1 DIF: Moderate TOP: Open-market operations
4. ANS: C PTS: 1 DIF: Moderate TOP: Changes in the RBA’s role
5. ANS: D PTS: 1 DIF: Difficult
TOP: Money creation with fractional-reserve banking
6. ANS: A PTS: 1 DIF: Difficult TOP: The money multiplier
7. ANS: D PTS: 1 DIF: Difficult TOP: The money multiplier
8. ANS: B PTS: 1 DIF: Moderate TOP: The money multiplier
9. ANS: B PTS: 1 DIF: Moderate TOP: The money multiplier
10. ANS: B PTS: 1 DIF: Moderate
TOP: Case Study: Bank runs and the money supply
11. ANS: C PTS: 1 DIF: Easy TOP: Kinds of money
12. ANS: D PTS: 1 DIF: Difficult TOP: Changes in the RBA’s role
13. ANS: B PTS: 1 DIF: Easy TOP: The functions of money
14. ANS: B PTS: 1 DIF: Easy
TOP: In the news: The Importance of the RBA
15. ANS: C PTS: 1 DIF: Moderate TOP: In the news: RBA policy decision
Chapter 30
Answer Section

TRUE/FALSE

1. ANS: F PTS: 1 DIF: Moderate

TOP: The classical dichotomy and monetary neutrality
2. ANS: F PTS: 1 DIF: Moderate
TOP: The classical dichotomy and monetary neutrality
3. ANS: T PTS: 1 DIF: Moderate TOP: The Fisher effect
4. ANS: T PTS: 1 DIF: Difficult TOP: Inflation-induced tax distortions
5. ANS: F PTS: 1 DIF: Easy TOP: Confusion and inconvenience

MULTIPLE CHOICE

1. ANS: B PTS: 1 DIF: Easy TOP: Introduction

2. ANS: B PTS: 1 DIF: Moderate TOP: Introduction
3. ANS: B PTS: 1 DIF: Difficult
TOP: Money supply, money demand and monetary equilibrium
4. ANS: B PTS: 1 DIF: Moderate
TOP: The classical dichotomy and monetary neutrality
5. ANS: D PTS: 1 DIF: Difficult
TOP: The classical dichotomy and monetary neutrality
6. ANS: B PTS: 1 DIF: Difficult
TOP: The classical dichotomy and monetary neutrality
7. ANS: D PTS: 1 DIF: Difficult TOP: Velocity and the quantity equation
8. ANS: C PTS: 1 DIF: Moderate TOP: Velocity and the quantity equation
9. ANS: C PTS: 1 DIF: Difficult TOP: The inflation tax
10. ANS: A PTS: 1 DIF: Moderate TOP: Inflation-induced tax distortions
11. ANS: C PTS: 1 DIF: Moderate
TOP: A special cost of unexpected inflation: Arbitrary redistributions of wealth
12. ANS: A PTS: 1 DIF: Difficult TOP: Velocity and the quantity equation
13. ANS: D PTS: 1 DIF: Moderate
TOP: Money supply, money demand and monetary equilibrium
14. ANS: A PTS: 1 DIF: Moderate
TOP: Money supply, money demand and monetary equilibrium
15. ANS: C PTS: 1 DIF: Moderate TOP: The Fisher effect