Q: Suppose the required reserve ratio ($$RR) is 10$$%. According to the simple deposit multiplier formula, what is the maximum possible increase in deposits from a $$\1$$,000$ increase in reserves?

$$\10$$,000$$ \text{ (using } \frac{1}{RR} = \frac{1}{0.1} = 10; 10 \times \1$$,000 = \$$10,000)$$

Question 1

Which of the following best describes a major disadvantage of barter as a system of exchange?

Accepted Answer

It requires a double coincidence of wants, making transactions time-consuming and inefficient.

Question 2

Which of the following is NOT a function of money?

Accepted Answer

Means of production

Question 3

Commodity money differs from fiat money in that commodity money:

Accepted Answer

Has intrinsic value, such as gold, while fiat money does not.

Question 4

Which of the following is an advantage of using money as a standard of deferred payment?

Accepted Answer

It is easy to convert into a medium of exchange (liquidity).

Question 5

Suppose the required reserve ratio ($$RR) is 10$$%. According to the simple deposit multiplier formula, what is the maximum possible increase in deposits from a $$\1$$,000$ increase in reserves?

Accepted Answer

$$\10$$,000$$ 	ext{ (using } \frac{1}{RR} = \frac{1}{0.1} = 10; 10 	imes \1$$,000 = \$$10,000)$$

Question 6

Which of the following statements about fiat money is correct?

Accepted Answer

It is paper currency authorized by a central bank and not backed by a commodity like gold.

Question 7

If the required reserve ratio ($$RR) $$increases, what happens to the simple deposit multiplier?

Accepted Answer

It decreases, because $$\frac{1}{RR}$$ becomes smaller.

Question 8

Which of the following best explains why the real-world deposit multiplier is lower than the simple deposit multiplier?

Accepted Answer

Because some currency is held by the public and not deposited in banks.

Question 9

According to the quantity theory of money, if the velocity of money is constant and real GDP grows at 2% per year, what will be the inflation rate if the money supply grows at 6% per year?

Accepted Answer

4%

Question 10

Which formula represents the simple deposit multiplier?

Accepted Answer

$$\frac{1}{RR}$$

Question 11

If banks hold excess reserves instead of loaning out all available funds, what is the effect on the money supply?

Accepted Answer

The money supply increases by less than predicted by the simple deposit multiplier.

Question 12

Which of the following is a correct implication of the quantity theory of money in the long run?

Accepted Answer

Inflation results from the money supply growing faster than real GDP.

Question 13

Which of the following best describes the relationship shown by the short-run Phillips curve?

Accepted Answer

A negative relationship between the inflation rate and the unemployment rate.

Question 14

If expansionary monetary policy is implemented, what is the likely short-run effect according to the Phillips curve?

Accepted Answer

Lower unemployment but higher inflation.

Question 15

Which of the following is a disadvantage of using money as a standard of deferred payment?

Accepted Answer

It loses purchasing power over time due to inflation.

Question 16

A bank receives a $$\5$$,000$ deposit. If the required reserve ratio is 20%, what is the maximum amount the bank can lend out from this deposit?

Accepted Answer

$$\4$$,000$

Question 17

If the velocity of money ($$V) is 5$$, the money supply ($$M) is$$ $$\2$ trillion, and nominal GDP (P$$ 	imes Y$$) is $$\$$10$$ trillion, which equation correctly represents the quantity theory of money?

Accepted Answer

$$M 	imes V = P 	imes Y$$

Question 18

Which of the following is a reason why households and firms have confidence in the value of fiat money?

Accepted Answer

It is authorized by a central bank and widely accepted as legal tender.

Question 19

If the growth rate of the money supply is 8%, the growth rate of real GDP is 3%, and the velocity of money is constant, what is the inflation rate according to the quantity theory of money?

Accepted Answer

5%

Question 20

Which of the following best describes the role of required reserves in the banking system?

Accepted Answer

They are the fraction of deposits that banks are legally required to hold and not loan out.

Money, Banking, and Inflation: Key Concepts in Macroeconomics

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