Question 1

Which of the following best describes the three main functions of money?

Accepted Answer

Medium of exchange, unit of account, store of value

Question 2

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

Accepted Answer

Savings deposits

Question 3

Under the gold standard, what guaranteed the value of currency?

Accepted Answer

Currency could be exchanged for a fixed amount of gold

Question 4

If the required reserve ratio $$r is 0.1 $$and the change in reserves $$\Delta R is$$ $$100, what is the maximum possible change in deposits $$\Delta D$?

Accepted Answer

$$\1$$,000$

Question 5

Which of the following best explains why holding cash stops the deposit creation process?

Accepted Answer

Cash held outside banks cannot be used for multiple deposit expansion

Question 6

During the Great Depression, which of the following was a major cause of the collapse in aggregate demand?

Accepted Answer

Wealth effect from the stock market crash

Question 7

Which institutional reform was introduced after the Great Depression to separate commercial and investment banking?

Accepted Answer

Glass-Steagall Act

Question 8

What is the formula for the required reserves $$RR if $$the required reserve ratio is $$r$$ and checkable deposits are $$D$$?

Accepted Answer

$$RR = r 	imes D$$

Question 9

Which of the following best describes a liquidity crisis in banking?

Accepted Answer

A bank fails to meet liability withdrawals

Question 10

According to Keynesian economics, what is the recommended policy response to a sharp decline in aggregate demand?

Accepted Answer

Increase government spending to boost aggregate demand

Question 11

Which of the following is a characteristic of fiat money?

Accepted Answer

It has no intrinsic value but is decreed by the government as legal tender

Question 12

If banks decide to hold more excess reserves, what is the likely effect on the money supply?

Accepted Answer

The money supply will increase less than predicted by the simple deposit multiplier

Question 13

Which of the following was NOT a direct effect of the New Deal policies during the recovery from the Great Depression?

Accepted Answer

Immediate return to the gold standard

Question 14

What is the main purpose of open market operations conducted by the Federal Reserve?

Accepted Answer

To influence the money supply by buying or selling government bonds

Question 15

During the Great Depression, what happened to the M1 money supply and the monetary base?

Accepted Answer

M1 fell sharply while the monetary base remained relatively stable

Question 16

Which of the following best describes the 'wealth effect' as it relates to aggregate demand shocks during the Great Depression?

Accepted Answer

A decline in household wealth led to reduced consumer spending

Question 17

If the required reserve ratio is $$r$$, and the total change in reserves is $$\Delta R$$, what is the formula for the total change in deposits $$\Delta D$$?

Accepted Answer

$$\Delta D = \frac{1}{r} 	imes \Delta R$$

Question 18

Which of the following was a key feature of the Banking Act of 1933 (Glass-Steagall Act)?

Accepted Answer

Separation of commercial and investment banking

Question 19

What is the main implication of the statement by Keynes, 'In the long run we are all dead,' for economic policy during a depression?

Accepted Answer

Active government intervention is necessary to address unemployment and falling output

AS/AD, Money Supply, and the Great Depression: Macroeconomic Study Notes

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