Q: Which of the following is the correct formula for the velocity of money?

$$\text{Velocity} = \frac{\text{Nominal GDP}}{\text{Money Supply}}$$

Question 1

Which of the following is NOT one of the three main functions of money in a modern economy?

Accepted Answer

Source of government revenue

Question 2

Which of the following best describes fiat money?

Accepted Answer

Money that is used as legal tender by government decree and not backed by a physical commodity

Question 3

Suppose the money supply grows at 8% per year and real GDP grows at 3% per year. According to the quantity theory of money, what is the predicted inflation rate?

Accepted Answer

$$5\%$$

Question 4

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

Accepted Answer

Savings deposits

Question 5

If the nominal interest rate is $$6\%$$ and the inflation rate is $$2\%$$, what is the real interest rate according to the Fisher equation?

Accepted Answer

$$4\%$$

Question 6

During the German hyperinflation of 1922–1923, what was the primary cause of the rapid increase in prices?

Accepted Answer

The government printing large amounts of currency to pay its bills

Question 7

Which of the following is a social cost of inflation?

Accepted Answer

Raising logistical costs due to frequent price changes (menu costs)

Question 8

A worker receives a fixed nominal wage that is not indexed to inflation. If unexpected inflation occurs, who benefits?

Accepted Answer

The employer

Question 9

Which of the following actions by the Federal Reserve would most likely decrease the money supply?

Accepted Answer

Open market sale of government bonds

Question 10

If the Federal Reserve wants to lower the federal funds rate, what action should it take?

Accepted Answer

Buy government bonds in the open market

Question 11

Which of the following best explains why barter is less efficient than using money as a medium of exchange?

Accepted Answer

Barter requires a double coincidence of wants

Question 12

Suppose the Federal Reserve keeps the supply of reserves fixed while the demand for reserves increases due to economic expansion. What happens to the federal funds rate?

Accepted Answer

It increases

Question 13

Which of the following is NOT a tool the Federal Reserve uses to influence the money supply?

Accepted Answer

Setting the federal income tax rate

Question 14

If the growth rate of real GDP is $$2\%$$ and the inflation rate is $$3\%$$, what is the growth rate of the money supply according to the quantity theory of money?

Accepted Answer

$$5\%$$

Question 15

Which of the following would cause a rightward shift in the demand curve for bank reserves in the federal funds market?

Accepted Answer

An economic expansion

Question 16

Which of the following is the correct formula for the velocity of money?

Accepted Answer

$$	ext{Velocity} = \frac{	ext{Nominal GDP}}{	ext{Money Supply}}$$

Question 17

A retiree receives a fixed pension that is not indexed to inflation. What is the effect of unexpected inflation on the retiree?

Accepted Answer

The retiree loses because the real value of the pension decreases

Question 18

Which of the following is a primary objective of the Federal Reserve’s dual mandate?

Accepted Answer

Maximum sustainable employment

Question 19

If the Federal Reserve raises the interest rate paid on reserves, what is the likely effect on the demand for reserves?

Accepted Answer

The demand for reserves will increase

Question 20

Suppose the nominal 10-year interest rate is $$4\%$$ and inflationary expectations are $$2\%. $$What is the expected real 10-year interest rate?

Accepted Answer

$$2\%$$

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

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