Question 1

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

Accepted Answer

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

Question 2

Suppose the required reserve ratio is 10%. If a customer deposits $$\1$$,000$ in cash into a checking account at a bank, what is the maximum possible increase in the money supply as a result of this deposit, assuming banks lend out all excess reserves and there are no currency leakages?

Accepted Answer

$$\9$$,000$

Question 3

Which of the following is included in the M2 measure of the money supply but NOT in M1?

Accepted Answer

Savings deposits

Question 4

A bank has \$5 million in deposits and a required reserve ratio of 20%. What is the minimum amount of reserves the bank must hold?

Accepted Answer

$$\2$$,000,000$

Question 5

Which of the following is NOT a tool used by the Federal Reserve to conduct monetary policy?

Accepted Answer

Setting the federal income tax rate

Question 6

According to the Quantity Theory of Money, if the velocity of money ($$V) $$and real output ($$Y) $$are constant, what happens to the price level ($$P) if $$the money supply ($$M) $$doubles?

Accepted Answer

The price level doubles

Question 7

If the Federal Reserve wants to decrease the federal funds rate, which of the following actions is it most likely to take?

Accepted Answer

Buy government securities in the open market

Question 8

Suppose the economy is experiencing a recession. Which of the following monetary policy actions would the Federal Reserve most likely take to stimulate economic activity?

Accepted Answer

Lower the target for the federal funds rate

Question 9

In the dynamic aggregate demand and aggregate supply (AD-AS) model, an expansionary monetary policy will most likely result in which of the following in the short run?

Accepted Answer

An increase in real GDP and an increase in the price level

Question 10

During the 2007-2009 financial crisis, the Federal Reserve implemented several unconventional monetary policy tools. Which of the following best describes one of these tools?

Accepted Answer

Large-scale asset purchases (quantitative easing)

Question 11

Which of the following best defines fiscal policy?

Accepted Answer

Changes in federal government spending and taxes to achieve macroeconomic objectives

Question 12

If the government increases its purchases by $$\200$ million and the marginal propensity to consume (MPC) is 0.8$, what is the total change in real GDP according to the government purchases multiplier?

Accepted Answer

$$\1$$,000$ million

Question 13

Which of the following is a limitation of using fiscal policy to stabilize the economy?

Accepted Answer

Time lags in recognizing and implementing policy changes

Question 14

Suppose the government runs a budget deficit for several years. Which of the following is a likely consequence?

Accepted Answer

An increase in the federal government debt

Question 15

Which of the following best describes the long-run effect of persistent government budget deficits?

Accepted Answer

They can reduce economic growth by crowding out private investment

Question 16

If the marginal propensity to consume (MPC) is $$0.75$$, what is the value of the tax multiplier?

Accepted Answer

$$-3$$

Question 17

Which of the following scenarios best illustrates the concept of the 'crowding out' effect?

Accepted Answer

Government borrowing increases interest rates, reducing private investment

Question 18

If the Federal Reserve wants to reduce inflation without causing a recession, which of the following policy actions is most appropriate?

Accepted Answer

Gradually increase the federal funds rate

Question 19

Which of the following equations represents the Quantity Theory of Money?

Accepted Answer

$$M 	imes V = P 	imes Y$$

Question 20

Suppose the government increases transfer payments by $$\100$ million, and the marginal propensity to consume (MPC) is 0.6$. What is the total change in real GDP, using the transfer payments multiplier?

Accepted Answer

$$\150$ million

Money, Banking, Monetary Policy, and Fiscal Policy: Core Concepts in Macroeconomics

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