Question 1

Which of the following is NOT a primary function of money?

Accepted Answer

Means of production

Question 2

Why is barter considered inefficient compared to using money?

Accepted Answer

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

Question 3

Which characteristic made cigarettes an effective form of money in prisoner-of-war camps, according to Radford's article?

Accepted Answer

They were standardized, portable, and low in value, making transactions easy.

Question 4

Which of the following assets is considered most liquid?

Accepted Answer

Money

Question 5

If the price level doubles, what happens to nominal money demand according to the money demand function?

Accepted Answer

Nominal money demand also doubles.

Question 6

Which equation represents the money demand function in terms of nominal money demand?

Accepted Answer

$$M^d = P 	imes L(Y, i)$$

Question 7

Suppose real income increases by 3% and the income elasticity of money demand is $$\frac{2}{3}. If $$the money supply grows by 10%, what is the predicted inflation rate?

Accepted Answer

8%

Question 8

Which of the following would most likely decrease the demand for money?

Accepted Answer

An increase in the interest rate on nonmonetary assets

Question 9

What is the effect of financial innovations such as credit cards and ATMs on the demand for money?

Accepted Answer

They reduce the demand for money by increasing the liquidity of alternative assets.

Question 10

According to the quantity theory of money, if velocity is constant and real income increases, what must happen to the money supply to keep the price level stable?

Accepted Answer

The money supply must increase at the same rate as real income.

Question 11

Which of the following best describes the relationship between money growth and inflation in countries experiencing high inflation?

Accepted Answer

High inflation is primarily driven by rapid growth in the nominal money supply.

Question 12

If the central bank wants to decrease the money supply, which action should it take?

Accepted Answer

Sell financial assets to the public in an open-market sale.

Question 13

Which of the following is true about the M2 monetary aggregate?

Accepted Answer

M2 includes M1 plus savings deposits, small time deposits, and non-institutional money market mutual fund balances.

Question 14

What does the break-even inflation rate measure?

Accepted Answer

The difference between the nominal interest rate and the real interest rate on TIPS bonds, serving as a rough measure of expected inflation.

Question 15

In asset market equilibrium, which equation determines the price level?

Accepted Answer

$$P = \frac{M}{L(Y, r + i^m)}$$

Question 16

Which of the following is a plausible reason why countries might allow rapid money supply growth despite knowing it causes inflation?

Accepted Answer

Printing money is sometimes the only way to finance government expenditures, especially in poor or politically unstable countries.

Question 17

If the nominal interest rate on nonmonetary assets increases, what is the expected effect on the demand for money?

Accepted Answer

The demand for money decreases as people switch to higher-yielding assets.

Question 18

Which of the following best describes diversification in portfolio allocation?

Accepted Answer

Spreading investments across different assets to reduce risk.

Question 19

If the velocity of money is given by $$V = \frac{PY}{M}$$, what does a decrease in velocity imply, holding $$PY$$ constant?

Accepted Answer

The money supply $$M$$ has increased.

Question 20

Which of the following statements about the income elasticity of money demand is correct?

Accepted Answer

It is positive but less than one, meaning money demand rises less than proportionally with income.

Chapter 7: The Asset Market, Money, and Prices – Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards