Tutorial Chapter 5 Money Supply

Multiple choice question

1) Money is
A) the same as income.
B) anything that is generally accepted as a medium of exchange.
C) the value of all coins and currency in circulation at any time.
D) backed by gold in Fort Knox.

2) Any transaction that involves exchanging one good for another without using money is
considered a
A) liquidity transaction.
B) barter transaction.
C) deferred payment.
D) black market exchange.

3) Jacob makes excellent tamales and Amanda is very good at mowing lawns. Amanda
agrees to mow Jacob's lawn, if he makes her a dozen tamales. This is an example of
A) legal tender.
B) barter.
C) commodity money.
D) fiat money.

4) Which of the following factors causes the barter system to be inefficient?

A) Its cost of transaction is too low.
B) The cost associated with information search is too low.
C) It requires a double coincidence of wants.
D) It requires high liquidity.

5) Josie wants to trade swimming lessons for cooking lessons. Maria wants to trade cooking
lessons for swimming lessons. Josie and Maria have
A) the basis for a liquidity exchange.
B) a double incidence of demand.
C) the basis for a double fiat exchange.
D) a double coincidence of wants.

6) The development of money as a medium of exchange has facilitated the expansion of trade
because
A) holding money increases people's wealth.
B) holding money increases people's income.
C) money eliminates the "double coincidence of wants" problem.
D) no other mediums of exchange are available.

7) When money is used as a medium of exchange

A) the need for a barter system diminishes.
B) the cost of transactions increases.
C) the need for a banking system in the economy decreases.
D) it reduces the number of transactions in the economy.
9) When you pay $8 for salad you ordered for lunch, you are using money as a(n)
A) store of value.
B) investment good.
C) medium of exchange.
D) unit of account.

10) Veronica received a federal income tax refund of $600 in May 2016. Veronica put this
money in a saving account so that she could spend it when she went on vacation in July 2016.
This is an example of money serving as a(n)
A) store of value.
B) medium of exchange.
C) unit of account.
D) investment good.

11) When you keep your savings in a saving account, you are using money as a(n)
A) investment good.
B) store of value.
C) medium of exchange.
D) unit of account.

12) The main disadvantage of using money as a store of value is that

A) money is not portable.
B) it requires a double coincidence of wants.
C) currency is intrinsically worthless.
D) the value of money actually falls when the prices of goods and services rise.

13) The liquidity property of money is the property that makes money
A) a good medium of exchange and a good unit of account.
B) a good store of value and a good unit of account.
C) a good medium of exchange and a good store of value.
D) a good store of value and a good standard of deferred payment.

14) When the manager of a department store attaches price tags to his/her products, he/she is
using money as a
A) medium of exchange.
B) store of value.
C) unit of transfer.
D) unit of account.

15) Electro City, a retailer of electronics, has 2,000 different products in inventory. Electro
City reports its inventory is worth $12 million. This is an example of using money as a
A) medium of exchange.
B) unit of account.
C) standard of deferred payment.
D) store of value.

16) Denny's lists the price of a Grand Slam Breakfast at $4.99 a plate. Listing the price on the
menu is an example of money serving as a(n)
A) store of value.
B) unit of account.
C) medium of exchange.
D) investment good.

17) When Mexico experiences a period of high inflation and Mexicans lose confidence in
their peso as a store of value, which of the following would be most likely to occur?
A) The demand for pesos would increase.
B) The buying power of the peso would increase.
C) The value of foreign currencies would depreciate relative to the peso.
D) Mexicans would use a different currency as a medium of exchange.

18) A currency that is not backed by gold, silver, or any other precious commodity equal to
the face value of the money is known as
A) fake money.
B) weak money.
C) token money.
D) commodity money.

19) After World War II, cigarettes were used as money in Germany. This is an example of
A) fiat money.
B) legal money.
C) token money.
D) commodity money.

20) The U.S. dollar is an example of fiat money because

A) it is the strongest currency in the world.
B) it is the most widely used currency in international trade.
C) it is backed by a large reserve of gold and silver.
D) by law, it is decreed as money.

21) Which of the following is an example of fiat money?

A) cigarettes
B) an ounce of gold
C) a U.S. one-hundred dollar bill
D) a government bond

22) Money that a government has required to be accepted in settlement of debts is

A) fiat money.
B) commodity money.
C) barter money.
D) legal tender.

23) To ensure that paper money will be accepted, the U.S. government implicitly promises
the public that
A) it will not print money so fast that it loses its value.
B) it will not change the rate at which the dollar is exchanged for other currencies.
C) it will always remain the strongest currency of all industrialized nations.
D) the U.S. monetary system will always be backed by a precious metal.

24) Currency debasement occurs when

A) the value of money falls as a result of a rapid increase in its supply.
B) the government requires that a certain form of money must be accepted in settlement of
debts.
C) items are designated as money that are intrinsically worthless.
D) items are used as money that also have intrinsic value in some other use.

25) Assume that in the country of Salmon, the government tripled the money supply
overnight. As a result of this action, the price of a loaf of bread increased from 1 bill to 100
bills. This is an example of
A) a change in the legal tender.
B) a change from commodity money to fiat money.
C) currency debasement.
D) deflation.

26) Currency held outside banks + demand deposits + travelers checks + other checkable
deposits =
A) M3.
B) M2 - M1.
C) M3 - M1.
D) M1.

27) Transaction money is

A) M1.
B) M2.
C) M3.
D) M4.

28) Traveler's checks are

A) not money.
B) included in M1 and M2.
C) not included in M2.
D) not included in M1.

29) Which of the following is included in M2, but not included in M1?
A) currency held outside banks
B) travelers checks
C) demand deposits
D) savings accounts

1) As the interest rate falls, people hold ________ money in non-interest-bearing checking
accounts instead of savings accounts because the opportunity cost of holding money has
________.
A) more; fallen
B) less; fallen
C) less; risen
D) more; risen

2) If interest rates increase to a very high level, people will most likely hold
A) more money in savings accounts and less cash.
B) less money in savings accounts and less cash.
C) less money in savings accounts and more cash.
D) more money in savings accounts and more cash.

3) Which of the following will most likely cause a decrease in the quantity of money
demanded?
A) an increase in the price level
B) an increase in the interest rate
C) an increase in nominal income
D) a decrease in the interest rate

Refer to the information provided in Figure 10.1 below to answer the questions that follow.

Figure 10.1

4) Refer to Figure 10.1. A movement from Point D to Point A can be caused by

A) a decrease in the interest rate.
B) an increase in nominal income.
C) a decrease in nominal income.
D) an increase in the interest rate.

5) Refer to Figure 10.1. A movement from Point B to Point A can be caused by

A) a decrease in nominal income.
B) an increase in the price level.
C) a decrease in the interest rate.
D) an increase in the interest rate.

6) Refer to Figure 10.1. A movement from Point B to Point D can be caused by

A) a decrease in nominal income.
B) an increase in the interest rate.
C) a decrease in the interest rate.
D) an increase in nominal income.

7) Refer to Figure 10.1. The money demand curve will shift from to if
A) the price level increases.
B) nominal income decreases.
C) interest rates fall.
D) interest rates rise.

8) Refer to Figure 10.1. The movement from C to B could be cause by

A) a decrease in the interest rate.
B) an increase in the interest rate.
C) a decrease in nominal income.
D) an increase in nominal income.

9) Refer to Figure 10.1. A movement from Point D to Point E can be caused by

A) a decrease in the interest rate.
B) an increase in nominal income.
C) a decrease in nominal income.
D) an increase in the interest rate.

10) Refer to Figure 10.1. A movement from Point A to Point C can be caused by
A) a decrease in nominal income.
B) an increase in nominal income.
C) a decrease in the interest rate.
D) an increase in the interest rate.

11) Refer to Figure 10.1. A movement from Point A to Point D can be caused by
A) a decrease in nominal income.
B) an increase in the interest rate.
C) a decrease in the interest rate.
D) an increase in nominal income.

12) Refer to Figure 10.1. The money demand curve will shift from to if
A) the price level increases.
B) nominal income decreases.
C) interest rates fall.
D) interest rates rise.

13) Refer to Figure 10.1. The movement from A to B could be caused by

A) a decrease in the interest rate.
B) an increase in the interest rate.
C) a decrease in nominal income.
D) an increase in the price level.

24) As the interest rate rises, people hold ________ money in non-interest-bearing checking
accounts instead of savings accounts because the opportunity cost of holding money has
________.
A) more; fallen
B) less; fallen
C) less; risen
D) more; risen

25) If interest rates decrease to a very low level, people will most likely hold
A) more money in savings accounts and less cash.
B) less money in savings accounts and less cash.
C) less money in savings accounts and more cash.
D) more money in savings accounts and more cash.

26) Which of the following will most likely cause an increase in the quantity of money
demanded?
A) a decrease in nominal income
B) a decrease in the interest rate
C) an increase in nominal income
D) an increase in the interest rate

Structure question

1. List and explain the three characteristics of money.

- Medium of exchange ( What sellers generally accept and buyers generally use to pay for
goods and services.

- Store of value ( An assets that can be used to transport purchasing power from one time
period to another)

- Unit of account ( A standard unit that provides a consistent way of quoting prices )

2. Compare and contrast fiat money and commodity money.

- Commodity money is a sort of money that is considered as a present good. Whereas, fiat
money is a future obligation as it is simply a promise to pay in future. Payment is never
made when it comes to fiat money, instead it is only discharged. But commodity money,
on the other hand, completes the transaction.

3. Write out in equation form the four major components of M1.

- M1 = currency held outside banks + demand deposits + traveler’s checks + other checkable
deposits

4. Why are savings deposits and money market accounts classified as near monies ?

- Near money refers to non cash assets that can be easily converted to cash. Financial analysts
view near money as an important concept for testing liquidity. Central banks utilize th
concept of near money in classifying assets as either M1, M2 or M3.

5. The demand for money in a country A is given by

Md = 10000 -1000r + Y

where Md is money demand, r is the interest rate and Y is national income. Assuming
Y is equal RM5,000.

i. Graph the relationship between the amount of money demand against the interest.
Ms

r1
r0
r2
Md
Kuantiti wang
 ii. Suppose the money supply set by Central Bank at 10,000. What is the equilibrium
rate of interest?

Ms = Md
10000 = 10000 – 1000r + 5000
1000r = 5000
r=5

iii. Suppose the income rises from 5000 to 7,500. What happen to the equilibrium
interest rate if money supply is unchanged?

Ms = Md
10000 = 10000 – 1000r + 7500
1000r = 7500
r = 7.5

- Relatively liquid financial assets that are not used as medium of exchange, but quickly
converted to money with little or no loss of value.