PS10

1. Current U.S. currency is

a. fiat money with intrinsic value.

b. fiat money with no intrinsic value.
c. commodity money with intrinsic value.
d. commodity money with no intrinsic value.

2. Given the following information, what would be the values of M1 and M2?

a. M1 = $400 billion, M2 = $2,475 billion.

b. M1 = $125 billion, M2 = $3,025 billion.
c. M1 = $425 billion, M2 = $2, 450 billion.
d. M1 = $425 billion, M2 = $1,875 billion.

Tazian Banking Statistics: The Monetary Policy of Tazi is controlled by the country's central bank
known as the Bank of Tazi. The local unit of currency is the Taz. Aggregate banking statistics show
that collectively the banks of Tazi hold 300 million Tazes of required reserves, 75 million Tazes of
excess reserves, have issued 7,500 million Tazes of deposits, and hold 225 million Tazes of Tazian
Treasury bonds. Tazians prefer to use only demand deposits and so all currency is on deposit at the
bank.

3. Refer to Tazian Banking Statistics. Assume that banks desire to continue holding the same ratio of
excess reserves to deposits. What is the required reserve ratio and the reserve ratio for Tazian Banks?

a. 5%, 8%
b. 4%, 8%
c. 4%, 5%
d. None of the above is correct.

4. Refer to Tazian Banking Statistics. Assuming the only other thing Tazian banks have on their
balance sheets is loans, what is the value of existing loans made by Tazian banks?

a. 6,900 million Tazes

b. 7,125 million Tazes
c. 7,350 million Tazes
d. None of the above is correct.
5. Refer to Tazian Banking Statistics. Suppose that the Bank of Tazi loaned the banks of Tazi 10 million
Tazes. Suppose also that both the required reserve ratio and the percentage of deposits held as
excess reserves stay the same. By how much would the money supply change?

a. 250 million Tazes

b. 200 million Tazes
c. 125 million Tazes
d. None of the above is correct.

6. Refer to Tazian Banking Statistics. Suppose that the Bank of Tazi purchased 50 million Tazes of
Tazian Treasury Bonds from the banks. Suppose also that both the required reserve ratio and the
percentage of deposits held as excess reserves stay the same. By how much does the money supply
change?

a. 625 million Tazes

b. 1,000 million Tazes
c. 1,250 million Tazes
d. None of the above is correct.

7. Refer to Tazian Banking Statistics. Suppose that the Bank of Tazi changes the reserve requirement
ratio to 3%. Assuming that the banks still want to hold the same percentage of excess reserves what
is the value of the money supply after the change in the reserve requirement ratio?

a. 9,375 million Tazes

b. 10,000 million Tazes
c. 12,500 million Tazes
d. None of the above is correct to the nearest million medits.

8. When the Central Bank (the Fed in the U.S.) wants to change the money supply, it most frequently

a. conducts open market operations.

b. changes the discount rate.
c. changes the reserve requirement.
d. issues Federal Reserve notes.

9. The Fed can increase the money supply by conducting open market

a. sales and raising the discount rate.

b. sales and lowering the discount rate.
c. purchases and raising the discount rate.
d. purchases and lowering the discount rate.

10. Which list contains only actions that increase the money supply?

a. raise the discount rate, make open market purchases

b. raise the discount rate, make open market sales
c. lower the discount rate, make open market purchases
d. lower the discount rate, make open market sales

11. Which list contains only actions that decrease the money supply?

a. make open market purchases, raise the reserve requirement ratio

b. make open market purchases, lower the reserve requirement ratio
c. make open market sales, raise the reserve requirement ratio
 d. make open market sales, lower the reserve requirement ratio

12. In a fractional reserve banking system, a decrease in reserve requirements

a. increases both the money multiplier and the money supply.

b. decreases both the money multiplier and the money supply.
c. increases the money multiplier, but decreases the money supply.
d. decreases the money multiplier, but increases the money supply.

13. The price level (P)

a. refers to the price of individual goods.

b. is the number of dollars needed to buy a basket of goods and services.
c. is measured by a price index like the CPI or GDP deflator.
d. Both b and c are correct.

14. When the price level (P) rises, the number of dollars needed to buy a representative basket of
goods

a. increases, so the value of money (1/P) rises.

b. increases, so the value of money (1/P) falls.
c. decreases, so the value of money (1/P) rises.
d. decreases, so the value of money (1/P) falls.

15. The supply of money increases when

a. the value of money increases.

b. the interest rate increases.
c. the Central Bank makes open-market purchases.
d. None of the above is correct.

16. When the money market is drawn with the value of money on the vertical axis, an increase in the
money supply causes the equilibrium value of money

a. and equilibrium quantity of money to increase.

b. and equilibrium quantity of money to decrease.
c. to increase, while the equilibrium quantity of money decreases.
d. to decrease, while the equilibrium quantity of money increases.

17. When the money market is drawn with the value of money on the vertical axis, an increase in the
price level causes

a. a movement to the left along the money demand curve, so the quantity of money demanded
decreases.
b. a movement to the right along the money demand curve, so the quantity of money
demanded increases.
c. a shift to the right of the money demand curve, so the quantity of money demanded
increases.
d. a shift to the left of the money demand curve, so the quantity of money demanded
decreases.

18. When the money market is drawn with the value of money on the vertical axis, the value of
money increases if
 a. either money demand or money supply shifts right.
b. either money demand or money supply shifts left.
c. money demand shifts right or money supply shifts left.
d. money demand shifts left or money supply shifts right.

19. A decrease in the money supply creates

a. an excess supply of money that is eliminated by rising prices.

b. an excess supply of money that is eliminated by falling prices.
c. an excess demand for money that is eliminated by rising prices.
d. an excess demand for money that is eliminated by falling prices.

Figure 21

20. Refer to Figure 21. If the money supply is MS2 and the value of money is 2, there is excess

a. demand equal to the distance between A and C.

b. demand equal to the distance between A and B.
c. supply equal to the distance between A and C.
d. supply equal to the distance between A and B.

21. Eve gives her employees a $1 increase in their hourly wage. However, the employees figure that,
even with the increase, their wage buys fewer goods than a year ago. It follows that

a. the workers' real and nominal wages have risen.

b. the workers' real wage rose and their nominal wage fell.
c. the workers' real wage fell and their nominal wage rose.
d. Both the real and nominal wages fell.

22. According to the classical dichotomy, which of the following is not influenced by monetary
factors?

a. nominal GDP
b. price level
c. real wage Correct
 d. nominal wage

23. Monetary neutrality implies that an increase in the quantity of money will

a. increase employment.
b. increase the price level.
c. increase the incentive to save.
d. All of the above are correct.

24. Based on the quantity equation, if P = 20, Y = 40, and M = 400, then V =

a. 80.
b. 20.
c. 2.
d. 1/2.

25. If velocity and output were nearly constant,

a. the inflation rate would be much higher than the money supply growth rate.
b. the inflation rate would be about the same as the money supply growth rate.
c. the inflation rate would be much lower than the money supply growth rate.
d. any of the above would be possible.

26. The inflation tax

a. is an alternative to income taxes and borrowing.

b. taxes most those who hold the most money.
c. is the revenue created when the government prints money.
d. All of the above are correct.

27. Greta puts money in a savings account at her bank earning 6.5 percent (the inflation rate is zero
now). One year later she takes her money out and notes that while her money was earning interest,
prices rose 3.5 percent. Greta now has

a. 10 percent more money with which she can purchase 6.5 percent more goods.
b. 10 percent more money with which she can purchase 3.5 percent more goods.
c. 6.5 percent more money with which she can purchase 3 percent more goods.
d. 6.5 percent more money with which she can purchase 3.5 percent fewer goods.

28. When deciding how much to save, people care most about

a. before-tax nominal interest rates.

b. after-tax nominal interest rates.
c. before-tax real interest rates.
d. after-tax real interest rates.

29. Kelly purchased ten shares of Gentech stock for $200 in year 1 and sold all the shares in year 2 for
$220 a share. Between year 1 and year 2, the price level increased by 5%. The tax on capital gains is
50%. If the capital gains tax is on nominal gains, how much tax does Sally pay on her gain?

a. $90
b. $95
c. $100
d. None of the above is correct.
30. If inflation is less than expected,

a. debtors receive a higher real interest rate than they had anticipated.
b. debtors pay a higher real interest rate than they had anticipated.
c. creditors pay a higher real interest rate than they had anticipated.
d. both a and c are correct.