Econ 261 Spring 2006 Dan Mallela Practice Exam 4 Chapter 16, 17, & 20

Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 1. Barter a. requires a double-coincidence of wants. b. is less efficient than money. c. is the trading of goods for goods. d. All of the above are correct. 2. Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate? a. store of value b. medium of exchange c. unit of account d. None of the above is correct. 3. Which list ranks assets from most to least liquid? a. currency, fine art, stocks b. currency, stocks, fine art c. fine art, currency, stocks d. fine art, stocks, currency 4. Fiat currency a. has no intrinsic value. b. is backed by gold. c. has intrinsic value equal to its value in exchange. d. is any close substitute for currency such as checkable deposits. 5. Money market mutual funds are included in a. M1 but not M2. b. M1 and M2. c. M2 but not M1. d. neither M1 or M2. 6. Credit cards are a. used as a method of payment. b. part of the M1 money supply. c. a method of deferring payment. d. a unit of account. 7. The Federal Reserve does all except which of the following? a. control the supply of money b. control the value of money c. make loans to individuals d. regulate the banking system

____

____

____

____

____

____

____

____

____

____

____

8. Which of the following is correct? a. The Federal Reserve has 14 regional banks. The Board of Governors has 12 members who serve 7-year terms. b. The Federal Reserve has 12 regional banks. The Board of Governors has 7 members who serve 14-year terms. c. The Federal Reserve has 12 regional banks. The Board of Governors has 14 members who serve 7-year terms. d. None of the above is correct. 9. When the Fed wants to change the money supply, it most frequently a. changes the discount rate. b. changes the reserve requirement. c. conducts open market operations. d. issues Federal Reserve notes. 10. The Fed can increase the price level 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. 11. Suppose that the reserve ratio is 10 percent and that a bank has $2,000 in deposits. Its required reserves are a. $20. b. $200. c. $1,880. d. $1,800. 12. Suppose a bank has $200,000 in deposits and $190,000 in loans. It has a reserve ratio of a. 5 percent b. 9.5 percent c. 10 percent d. None of the above is correct. Use the balance sheet for the following questions. Table 16-2 Assets Required Reserves Loans First Bank of Mason City Liabilities $20.00 Deposits $80.00

$100.00

____ 13. Refer to Table 16-2. The reserve ratio is a. 0 percent. b. 20 percent. c. 80 percent. d. 100 percent. ____ 14. Refer to Table 16-2. If $400 is deposited into the First Bank of Mason City, a. the bank will be able to make additional loans totaling $320. b. excess reserves initially increase by $320. c. required reserves initially increase by $80. d. All of the above are true.

Use the balance sheet for the following questions. Table 16-3 Assets Reserves Loans Last Bank of Cedar Bend Liabilities $25,000 Deposits $125,000

$150,000

____ 15. Refer to Table 16-3. If the reserve requirement is 10 percent, this bank a. is in a position to make a new loan of $15,000. b. has less reserves than required. c. has excess reserves of less than $15,000. d. None of the above are correct. ____ 16. Refer to Table 16-3. If the reserve requirement is 20 percent, this bank a. has $10,000 of excess reserves. b. needs $10,000 more of reserves to meet its reserve requirements. c. needs $5,000 more of reserves to meet its reserve requirements. d. just meets its reserve requirement. ____ 17. If the reserve ratio increased from 10 percent to 20 percent, the money multiplier would a. rise from10 to 20. b. rise from 5 to 10. c. fall from 10 to 5. d. not change. ____ 18. Which list contains only actions that decrease the money supply? a. lower the discount rate, raise the reserve requirement ratio b. lower the discount rate, lower the reserve requirement ratio c. raise the discount rate, raise the reserve requirement ratio d. raise the discount rate, lower the reserve requirement ratio ____ 19. If the reserve ratio is 10 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million of government bonds, bank reserves a. increase by $20 million and the money supply eventually increases by $200 million. b. decrease by $20 million and the money supply eventually increases by $200 million. c. increase by $20 million and the money supply eventually decreases by $200 million. d. decrease by $20 million and the money supply eventually decreases by $200 million. ____ 20. At one time, the country of Freedonia had no banks, but had currency of $40 million. Then a banking system was established with a reserve requirement of one-third. The people of Freedonia now keep half their money in the form of currency and half in the form of bank deposits. If banks do not hold excess reserves, how much currency do the people of Freedonia now hold? a. $13.33 million b. $20 million c. $30 million d. $36.36 million ____ 21. Inflation can be measured by the a. change in the consumer price index. b. percentage change in the consumer price index. c. percentage change in the price of a specific commodity. d. change in the price of a specific commodity.

____ 22. The classical theory of inflation a. is also known as the quantity theory of money. b. was developed by some of the earliest economic thinkers. c. is used by most modern economists to explain the long-run determinants of the inflation rate. d. All of the above are correct. ____ 23. When the price level falls, the number of dollars needed to buy a representative basket of goods a. increases, so the value of money rises. b. increases, so the value of money falls. c. decreases, so the value of money rises. d. decreases, so the value of money falls. ____ 24. The supply curve of money is vertical because the quantity of money supplied increases a. when the value of money increases. b. when the value of money decreases. c. only if people desire to hold more money. d. only if the central bank increases the money supply. ____ 25. When the money market is drawn with the value of money on the vertical axis, an increase in the price level causes a a. shift to the right of the money demand curve. b. shift to the left of the money demand curve. c. movement to the left along the money demand curve. d. movement to the right along the money demand curve. ____ 26. When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of money a. increases, so the quantity of money demanded increases. b. increases, so the quantity of money demanded decreases. c. decreases, so the quantity of money demanded decreases. d. decreases, so the quantity of money demanded increases. ____ 27. 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. ____ 28. When the money market is drawn with the value of money on the vertical axis, the price level decreases 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. ____ 29. When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal due to adjustments in the a. the value of money. b. real interest rates. c. nominal interest rates. d. money supply.

Use the figure below for the following questions. Figure 17-1

____ 30. Refer to Figure 17-1. If the money supply is MS2 and the value of money is 2, a. the value of money is less than its equilibrium level. b. the price level is higher than its equilibrium level. c. money demand is greater than the money supply. d. the money supply is greater than money demand. ____ 31. Refer to Figure 17-1. When the money supply curve shifts from MS1 to MS2, a. the equilibrium value of money decreases. b. the equilibrium price level decreases. c. the supply of money has decreased. d. the demand for goods and services will decrease. ____ 32. The price level is a a. relative variable. b. actual variable. c. real variable. d. nominal variable. ____ 33. Interest rates stated in the Wall Street Journal are a. classical variables. b. dichotomous variables. c. nominal variables. d. real variables. ____ 34. The classical dichotomy refers to the idea that the supply of money a. is irrelevant for understanding the determinants of nominal and real variables. b. determines nominal variables, but not real variables. c. determines real variables, but not nominal variables. d. is a determinant of both real and nominal variables. ____ 35. According to the classical dichotomy, when the money supply doubles which of the following double? a. the price level and nominal GDP b. the price level and real GDP c. only real GDP d. only the price level

____ 36. If Y and V are constant, and M doubles, the quantity equation implies that the price level a. more than doubles. b. less than doubles. c. doubles. d. might do any of the above; more information is needed. ____ 37. Governments may prefer an inflation tax to some other kind of tax since the inflation tax a. is easier to impose. b. reduces inflation. c. falls mainly on high-income individuals. d. reduces the real cost of government expenditure. ____ 38. Greta puts money in a savings account at her bank earning 4.5 percent. One year later she takes her money out and notes that while her money was earning interest, prices rose 2.5 percent. Greta now has a. 4.5 percent more money with which she can purchase 7 percent more goods. b. 4.5 percent more money with which she can purchase 2 percent more goods. c. 7 percent more money with which she can purchase 7 percent more goods. d. 7 percent more money with which she can purchase 2 percent fewer goods. ____ 39. Suppose that velocity and output are constant, and that the quantity theory and Fisher effect are both correct. If nominal interest rates are 6 percent and inflation is 2.5 percent, it follows that the a. money supply growth rate is 2.5 percent. b. real interest rate is 8.5 percent. c. real interest rate is 2.5 percent. d. money supply growth rate is 6 percent. ____ 40. The inflation tax a. transfers wealth from the government to households. b. is the increase in income taxes due to lack of indexation. c. is a tax on everyone who holds money. d. All of the above are correct. ____ 41. The shoeleather cost of inflation refers to a. the fall in real income associated with inflation. b. the time spent searching for low prices when inflation rises. c. the waste of resources used to maintain lower money holdings. d. the increased cost to the government of printing more money. ____ 42. During a recession the economy experiences a. rising employment and income. b. rising employment and falling income. c. rising income and falling employment. d. falling employment and income. ____ 43. Business cycles a. are explained mostly by fluctuations in consumption. b. no longer are very important due to government policy. c. are fluctuations in real GDP and related variables over time. d. are easily predicted by competent economists. ____ 44. The decrease in real GDP during a recession is a. mostly a decrease in investment spending. b. mostly a decrease in consumption spending. c. about equally divided between consumption and investment spending. d. sometimes mostly a decrease in consumption and sometimes mostly a decrease in investment.

____ 45. Investment is a a. small part of real GDP, so it accounts for a small share of the fluctuation in real GDP. b. small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP. c. large part of real GDP, so it accounts for a large share of the fluctuation in real GDP. d. large part of real GDP, yet it accounts for a small share of the fluctuation in real GDP. ____ 46. The classical dichotomy refers to the separation of a. variables that move with the business cycle and variables that do not. b. changes in money and changes in government expenditures. c. endogenous and exogenous variables. d. real and nominal variables. ____ 47. The variables on the vertical and horizontal axes of the aggregate supply and demand curve are a. the price level, real output. b. real output, employment. c. employment, the inflation rate. d. the value of money, the price level. ____ 48. The aggregate demand curve a. slopes downward for the same reasons that market demand curves slope downward. b. is vertical in the long run. c. shows an inverse relation between the price level and the quantity of all goods and services demanded. d. All of the above are correct. ____ 49. The effect of an increase in the price level is represented by a a. shift to the right of the aggregate demand curve. b. shift to the left of the aggregate demand curve. c. movement to the left along a given aggregate demand curve. d. movement to the right along a given aggregate demand curve. ____ 50. Ceteris paribus, as the price level falls, a country's exchange rate a. and interest rates rise. b. and interest rates fall. c. fall and interest rates rise. d. rise and interest rates fall. ____ 51. People will spend more if the price level a. rises, making the dollars they hold worth more. b. rises, making the dollars they hold worth less. c. falls, making the dollars they hold worth more. d. falls, making the dollars they hold worth less. ____ 52. When the price level falls interest rates a. rise, so firms increase investment. b. rise, so firms decrease investment. c. fall, so firms increase investment. d. fall, so firms decrease investment. ____ 53. An increase in the price level causes the aggregate quantity of goods and services demanded to decrease because a. wealth rises, interest rates rise, and the dollar appreciates. b. wealth rises, interest rates fall, and the dollar depreciates. c. wealth falls, interest rates rise, and the dollar appreciates. d. wealth falls, interest rates fall, and the dollar depreciates.

____ 54. Which of the following shifts aggregate demand to the left? a. an increase in the price level b. a decrease in the money supply c. an increase in net exports d. an investment tax credit ____ 55. Which of the following shifts aggregate demand to the right? a. Congress reduces purchases of new weapons systems. b. The Fed buys bonds in the open market. c. The price level falls. d. Net exports fall. ____ 56. The long-run aggregate supply curve a. is vertical. b. is an application of the classical dichotomy. c. indicates monetary neutrality in the long run. d. All of the above are correct. ____ 57. The misperceptions theory of the short-run aggregate supply curve says that output supplied will increase if the price level a. increases less than expected so that firms believe the relative price of their output has increased. b. increases less than expected so that firms believe the relative price of their output has decreased. c. increases more than expected so that firms believe the relative price of their output has increased. d. increases more than expected so that firms believe the relative price of their output has decreased. ____ 58. The sticky wage theory of the short-run aggregate supply curve says that when prices fall unexpectedly, the real wage a. rises, so employment rises. b. rises, so employment falls. c. falls, so employment rises. d. falls, so employment falls. ____ 59. The sticky price theory of the short-run aggregate supply curve says that when prices fall unexpectedly, some firms will have a. lower than desired prices which increases their sales. b. lower than desired prices which depresses their sales. c. higher than desired prices which increases their sales. d. higher than desired prices which depresses their sales. ____ 60. An increase in the expected price level shifts short-run aggregate supply to the a. right, and an increase in the actual price level shifts short-run aggregate supply to the right. b. right, and an increase in the actual price level does not shift short-run aggregate supply. c. left, and an increase in the actual price level shifts short-run aggregate supply to the left. d. left, and an increase in the actual price level does not shift short-run aggregate supply.

Practice Exam 4 Chapter 16, 17, & 20 Answer Section

MULTIPLE CHOICE 1. ANS: OBJ: 2. ANS: OBJ: 3. ANS: OBJ: 4. ANS: OBJ: 5. ANS: OBJ: 6. ANS: OBJ: 7. ANS: OBJ: 8. ANS: OBJ: 9. ANS: OBJ: 10. ANS: OBJ: 11. ANS: OBJ: 12. ANS: OBJ: 13. ANS: OBJ: 14. ANS: OBJ: 15. ANS: OBJ: 16. ANS: OBJ: 17. ANS: OBJ: 18. ANS: OBJ: 19. ANS: OBJ: 20. ANS: OBJ: 21. ANS: OBJ: 22. ANS: D TYPE: M A TYPE: M B TYPE: M A TYPE: M C TYPE: M C TYPE: M C TYPE: M B TYPE: M C TYPE: M D TYPE: M B TYPE: M A TYPE: M B TYPE: M D TYPE: M C TYPE: M C TYPE: M C TYPE: M C TYPE: M A TYPE: M C TYPE: M B TYPE: M D DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 3 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 2 DIF: 1 DIF: 3 DIF: 1 DIF: 1 REF: SECTION: 16.1 REF: SECTION: 16.1 REF: SECTION: 16.1 REF: SECTION: 16.1 REF: SECTION: 16.1 REF: SECTION: 16.1 REF: SECTION: 16.2 REF: SECTION: 16.2 REF: SECTION: 16.2 REF: SECTION: 16.2 REF: SECTION: 16.3 REF: SECTION: 16.3 REF: SECTION: 16.3 REF: SECTION: 16.3 REF: SECTION: 16.3 REF: SECTION: 16.3 REF: SECTION: 16.3 REF: SECTION: 16.3 REF: SECTION: 16.3 REF: SECTION: 16.3 REF: SECTION: 17.0 REF: SECTION: 17.0

23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46.

OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS:

TYPE: M C TYPE: M D TYPE: M D TYPE: M D TYPE: M D TYPE: M C TYPE: M A TYPE: M D TYPE: M A TYPE: M D TYPE: M C TYPE: M B TYPE: M A TYPE: M C TYPE: M A TYPE: M B TYPE: M A TYPE: M C TYPE: M C TYPE: M D TYPE: M C TYPE: M A TYPE: M B TYPE: M D

DIF: 1 DIF: 1 DIF: 1 DIF: 2 DIF: 1 DIF: 1 DIF: 2 DIF: 2 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 2 DIF: 1 DIF: 1 DIF: 1 DIF: 2 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1 DIF: 1

REF: SECTION: 17.1 REF: SECTION: 17.1 REF: SECTION: 17.1 REF: SECTION: 17.1 REF: SECTION: 17.1 REF: SECTION: 17.1 REF: SECTION: 17.1 REF: SECTION: 17.1 REF: SECTION: 17.1 REF: SECTION: 1 REF: SECTION: 17.1 REF: SECTION: 17.1 REF: SECTION: 17.1 REF: SECTION: 17.1 REF: SECTION: 17.1 REF: SECTION: 17.1 REF: SECTION: 17.1 REF: SECTION: 17.2 REF: SECTION: 17.2 REF: SECTION: 20.1 REF: SECTION: 20.1 REF: SECTION: 20.1 REF: SECTION: 20.1 REF: SECTION: 20.2

47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ: ANS: OBJ:

TYPE: M A TYPE: M C TYPE: M C TYPE: M B TYPE: M C TYPE: M C TYPE: M C TYPE: M B TYPE: M B TYPE: M D TYPE: M C TYPE: M B TYPE: M D TYPE: M D TYPE: M

DIF: 1 DIF: 1 DIF: 1 DIF: 2 DIF: 1 DIF: 2 DIF: 2 DIF: 2 DIF: 2 DIF: 1 DIF: 2 DIF: 2 DIF: 2 DIF: 3

REF: SECTION: 20.2 REF: SECTION: 20.3 REF: SECTION: 20.3 REF: SECTION: 20.3 REF: SECTION: 20.3 REF: SECTION: 20.3 REF: SECTION: 20.3 REF: SECTION: 20.3 REF: SECTION: 20.3 REF: SECTION: 20.4 REF: SECTION: 20.4 REF: SECTION: 20.4 REF: SECTION: 20.4 REF: SECTION: 20.4