Question 1

Which of the following best describes 'fiat money' as used in modern economies?

Accepted Answer

Money that derives its value from government decree and is not backed by a physical commodity.

Question 2

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

Accepted Answer

Source of government revenue

Question 3

Suppose the nominal GDP of a country is $$10 trillion and the money supply is 2 $$trillion. What is the velocity of money? Use the formula $$Velocity = \frac{Nominal\ GDP}{Money\ Supply}.$$

Accepted Answer

$$5$$

Question 4

If the growth rate of the money supply is $$6\%$$, the growth rate of real GDP is $$2\%$$, and the velocity of money is constant, what is the inflation rate according to the quantity theory of money? Use the formula $$Inflation = Growth\ rate\ of\ money\ supply - Growth\ rate\ of\ real\ GDP.$$

Accepted Answer

$$4\%$$

Question 5

Which of the following is an example of a social cost of inflation?

Accepted Answer

Distorting relative prices, making it harder for consumers to compare costs.

Question 6

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

Accepted Answer

Small time deposits (less than $100,000)

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 bonds from private banks.

Question 8

Which of the following best explains why hyperinflation can be so damaging to an economy?

Accepted Answer

It causes a rapid decline in the value of money, making it difficult to use as a medium of exchange or store of value.

Question 9

Which of the following is a direct tool the Federal Reserve uses to influence the money supply?

Accepted Answer

Open market operations (buying and selling government bonds).

Question 10

Suppose the nominal GDP grows at $$7\%$$ per year and the real GDP grows at $$3\%$$ per year. According to the quantity theory of money, if the money supply grows at $$5\%$$ per year, what is the implied change in velocity? Use the formula $$Growth\ rate\ of\ nominal\ GDP = Growth\ rate\ of\ money\ supply + Growth\ rate\ of\ velocity.$$

Accepted Answer

$$2\%$$ increase

Question 11

Which of the following best describes the 'inflation tax'?

Accepted Answer

The decline in the value of cash holdings due to inflation.

Question 12

If the Federal Reserve increases the discount rate, what is the most likely immediate effect on the money supply?

Accepted Answer

The money supply decreases because banks borrow less from the Fed.

Question 13

Which of the following is a likely consequence of deflation?

Accepted Answer

Postponement of purchases by consumers, leading to lower economic activity.

Question 14

Which of the following is NOT a primary activity of the Federal Reserve?

Accepted Answer

Setting the federal income tax rate.

Question 15

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

Accepted Answer

Buy government bonds in the open market.

Question 16

Which of the following best describes the relationship between nominal GDP, real GDP, and the price level?

Accepted Answer

$$Nominal\ GDP = Real\ GDP 	imes Price\ Level$$

Question 17

Which of the following is a potential social benefit of moderate inflation?

Accepted Answer

It can stimulate economic activity when real wages decrease.

Question 18

Which of the following best explains why the Fed cannot perfectly control the money supply?

Accepted Answer

The Fed cannot control the amount of money that households choose to hold as currency or the amount that banks lend.

Question 19

If the inflation rate is higher than expected, who is most likely to benefit?

Accepted Answer

Borrowers who repay loans with fixed nominal interest rates.

Question 20

Which of the following is a direct effect of the Fed conducting an open market sale of government bonds?

Accepted Answer

The reserves in the banking system decrease.

The Monetary System: Money, Inflation, and Monetary Policy

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