Q: According to the quantity theory of money, what is the formula relating the growth rate of the money supply, the growth rate of real GDP, and the inflation rate?

$$\text{Inflation Rate} = \text{Growth Rate of the Money Supply} - \text{Growth Rate of Real GDP}$$

Question 1

Which of the following is NOT one of the primary functions of money?

Accepted Answer

Source of economic growth

Question 2

Suppose you deposit $2,000 in currency into your checking account at Bank of America. If the bank loans out 80% of this deposit, what is the immediate effect on the money supply after the loan is made and the borrower spends the money, which is then deposited in another bank? Ignore any currency withdrawals.

Accepted Answer

The money supply increases by $1,600

Question 3

Which of the following best describes 'fiat money'?

Accepted Answer

Money that has value only because a government says it does and is not exchangeable for a commodity

Question 4

According to the quantity theory of money, what is the formula relating the growth rate of the money supply, the growth rate of real GDP, and the inflation rate?

Accepted Answer

$$	ext{Inflation Rate} = 	ext{Growth Rate of the Money Supply} - 	ext{Growth Rate of Real GDP}$$

Question 5

Which of the following is a characteristic that a good must have to serve as an effective medium of exchange?

Accepted Answer

It must be valuable relative to its weight

Question 6

If the Federal Reserve wants to increase the money supply, which of the following actions would it most likely take?

Accepted Answer

Buy U.S. Treasury securities in the open market

Question 7

Which of the following is included in the M1 measure of the money supply?

Accepted Answer

Checking account deposits

Question 8

A bank run occurs when:

Accepted Answer

Many depositors simultaneously try to withdraw their money because they lose confidence in the bank

Question 9

Which of the following is an example of commodity money?

Accepted Answer

Gold coins

Question 10

If the reserve requirement is 10% and a customer deposits $1,000 in cash into a checking account, what is the maximum amount the banking system can increase the money supply through new loans, assuming no currency is held by the public?

Accepted Answer

$$9,000$$

Question 11

Which of the following is NOT counted in either M1 or M2?

Accepted Answer

Funds in your mobile wallet (e.g., Apple Pay, PayPal)

Question 12

What is the main risk associated with the government insuring all bank deposits, even those above the FDIC limit, as happened during the Silicon Valley Bank crisis?

Accepted Answer

It creates moral hazard, encouraging risky behavior by banks

Question 13

Which of the following best explains why banks are able to create money in a fractional reserve banking system?

Accepted Answer

Banks lend out a portion of deposits, which creates new deposits elsewhere in the system

Question 14

During a period of hyperinflation, which of the following is most likely to be true?

Accepted Answer

The central bank is increasing the money supply much faster than real GDP is growing

Question 15

Which of the following is a key reason why banks are subject to government regulation?

Accepted Answer

Bank failures can have systemic effects on the economy

Question 16

If the Federal Reserve conducts an open market sale of Treasury securities, what is the likely effect on bank reserves and the money supply?

Accepted Answer

Bank reserves decrease and the money supply decreases

Question 17

Which of the following is a plausible reason why some countries use U.S. dollars in addition to or instead of their own currency?

Accepted Answer

There is low confidence in the value of the local currency

Question 18

Which of the following is a direct effect of securitization in the banking system?

Accepted Answer

Loans are transformed into securities that can be traded in financial markets

Question 19

If the velocity of money is not constant, what implication does this have for the predictions of the quantity theory of money?

Accepted Answer

The relationship between money supply growth and inflation becomes less predictable

Question 20

Which of the following is a reason why banks reduce transactions costs for borrowers and lenders?

Accepted Answer

Banks use economies of scale to specialize in evaluating loans and processing payments

Money, Banking, and the Financial System: Principles of Macroeconomics Study Notes

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