Question 1

Which of the following best describes the three primary functions of money in a modern economy?

Accepted Answer

Medium of exchange, store of value, and unit of account

Question 2

Why is barter considered inefficient compared to using money as a medium of exchange?

Accepted Answer

Barter requires a double coincidence of wants, making transactions time-consuming and difficult

Question 3

Which of the following is NOT included in the M1 measure of money?

Accepted Answer

Savings deposits

Question 4

Suppose the nominal GDP in a country is $$20 trillion and the money supply is 10 $$trillion. What is the velocity of money?

Accepted Answer

$$2.0$$

Question 5

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

Accepted Answer

$$4\%$$

Question 6

Which equation represents the relationship between real interest rate, nominal interest rate, and inflation rate?

Accepted Answer

$$r = i - \pi$$

Question 7

Who benefits from unexpected inflation?

Accepted Answer

A homeowner paying a mortgage at a fixed nominal rate of interest

Question 8

Which of the following is a social cost of inflation?

Accepted Answer

Menu costs due to frequent price changes

Question 9

What caused the German hyperinflation of 1922–1923?

Accepted Answer

The government printed excessive currency to pay its bills and reparations

Question 10

Which of the following is NOT a goal of the Federal Reserve’s dual mandate?

Accepted Answer

High and unpredictable inflation

Question 11

If the Federal Reserve conducts an open market purchase of government bonds, what happens to the supply of bank reserves and the federal funds rate?

Accepted Answer

Supply of bank reserves increases, federal funds rate decreases

Question 12

Which of the following would shift the demand curve for bank reserves to the right in the federal funds market?

Accepted Answer

Economic expansion leading to increased lending by banks

Question 13

Why can’t the Federal Reserve directly control the money supply or the inflation rate?

Accepted Answer

Because the money supply depends on currency in circulation and deposits, not just bank reserves

Question 14

If the Federal Reserve increases the interest paid on reserves held at the Fed, what is the likely effect on the money supply and inflation rate?

Accepted Answer

Both the money supply and inflation rate decrease

Question 15

A 10-year nominal interest rate is calculated as the average of annual rates. If the federal funds rate is 3% for the first two years and 4% for the next eight years, what is the 10-year nominal interest rate?

Accepted Answer

$$\frac{3\% + 3\% + 4\% + 4\% + 4\% + 4\% + 4\% + 4\% + 4\% + 4\%}{10} = 3.8\%$$

Question 16

If inflationary expectations are 2% and the 10-year nominal interest rate is 4%, what is the 10-year real interest rate?

Accepted Answer

$$4\% - 2\% = 2\%$$

Question 17

Which of the following policies would NOT reduce the growth rate of money and the inflation rate?

Accepted Answer

Open market purchases

Question 18

If the Federal Reserve targets the federal funds rate and the demand for reserves shifts to the right, what must the Fed do to keep the rate constant?

Accepted Answer

Increase the supply of reserves

Question 19

Which of the following best describes the effect of deflation on the real burden of debt?

Accepted Answer

Deflation increases the real burden of debt, which is fixed in nominal terms

The Monetary System: Money, Inflation, and the Federal Reserve

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