Question 1

Which of the following is NOT a requirement for something to function effectively as money in a modern economy?

Accepted Answer

It must be unlimited in supply to meet all economic needs.

Question 2

According to the Classical Quantity Theory of Money, if the velocity of money ($$V) $$and the number of transactions ($$T) $$are constant, what happens to the price level ($$P) if $$the money supply ($$M) $$doubles?

Accepted Answer

The price level will double.

Question 3

Which of the following best describes the 'speculative motive' for holding money according to Keynes' Liquidity Preference Theory?

Accepted Answer

Holding money as a financial asset when interest rates are low, expecting bond prices to rise.

Question 4

A bank receives a deposit of N$$1,000. If the reserve requirement is 10%, what is the maximum total increase in demand deposits that can be created in the banking system? (Use the credit multiplier formula: $$	ext{Multiplier} = \frac{1}{	ext{Reserve Requirement}}$)

Accepted Answer

$$N\10$$,000$

Question 5

If the Bank of Namibia wants to implement a restrictive (contractionary) monetary policy, which of the following actions is it most likely to take?

Accepted Answer

Increase the reserve requirement.

Question 6

Which of the following is a function performed by commercial banks but NOT by the central bank?

Accepted Answer

Accepting deposits from the public.

Question 7

Suppose the Bank of Namibia lowers the required reserve ratio from 5% to 4%. What will be the effect on the money supply, ceteris paribus?

Accepted Answer

The money supply will increase.

Question 8

Which of the following is NOT considered part of the narrow money supply ($$M_1) in $$Namibia?

Accepted Answer

Short- and medium-term deposits.

Question 9

If the Bank of Namibia sells government securities on the open market, what is the most likely immediate effect on interest rates and the money supply?

Accepted Answer

Interest rates increase and the money supply decreases.

Question 10

Which of the following best explains why barter is inefficient compared to using money?

Accepted Answer

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

Question 11

A country’s central bank increases the repo rate. What is the most likely effect on borrowing and economic activity?

Accepted Answer

Borrowing becomes more expensive and economic activity slows down.

Question 12

Which of the following is a direct instrument of monetary policy?

Accepted Answer

Credit ceilings imposed on commercial banks.

Question 13

If the Bank of Namibia buys government securities on the open market, what happens to the price of bonds and the interest rate?

Accepted Answer

Bond prices rise and interest rates fall.

Question 14

Which of the following is NOT a function of money?

Accepted Answer

Means of production.

Question 15

If the reserve requirement is 20%, what is the value of the credit multiplier? (Use $$	ext{Multiplier} = \frac{1}{	ext{Reserve Requirement}})$$

Accepted Answer

$$4$$

Question 16

Which of the following statements about the money supply curve ($$MS) is $$correct?

Accepted Answer

It is perfectly inelastic because the central bank controls the supply of money.

Question 17

According to Keynes, which two factors determine the total demand for money?

Accepted Answer

The level of income and the interest rate.

Question 18

Which of the following is a likely consequence if commercial banks decide to hold excess reserves above the required minimum?

Accepted Answer

The total amount of money created in the banking system will decrease.

Question 19

Which of the following is a primary goal of monetary policy in Namibia under the fixed exchange rate regime?

Accepted Answer

To defend the currency peg and indirectly achieve price stability and growth.

Question 20

A household expects interest rates to fall in the near future. According to Keynes’ liquidity preference theory, what is the household most likely to do?

Accepted Answer

Sell bonds and hold more money.

Unit 5: The Monetary Sector – Study Notes

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