Q: A bank receives a new deposit of $$\1$$,000$ and the required reserve ratio is 20%. What is the maximum possible increase in the money supply according to the simple deposit multiplier?

$$\1$$,000 \times \frac{1}{0.20} = \$$5,000$$

Q: Which equation represents the long-run relationship in the quantity theory of money?

$$\%\ \text{Change in } M + \%\ \text{Change in } V = \%\ \text{Change in } P + \%\ \text{Change in } Y$$

Question 1

Which of the following best describes the 'double coincidence of wants' problem in a barter economy?

Accepted Answer

It refers to the need for both parties to want what the other has in order to trade.

Question 2

Commodity money differs from fiat money in which of the following ways?

Accepted Answer

Commodity money has intrinsic value, while fiat money's value is based on trust and government authority.

Question 3

Which function of money is most directly related to facilitating borrowing and lending over time?

Accepted Answer

Standard of deferred payment

Question 4

What is a disadvantage of using money as a standard of deferred payment?

Accepted Answer

It loses purchasing power over time due to inflation.

Question 5

If the required reserve ratio ($$RR) is 10$$%, what is the simple deposit multiplier?

Accepted Answer

$$\frac{1}{0.10} = 10$$

Question 6

A bank receives a new deposit of $$\1$$,000$ and the required reserve ratio is 20%. What is the maximum possible increase in the money supply according to the simple deposit multiplier?

Accepted Answer

$$\1$$,000 	imes \frac{1}{0.20} = \$$5,000$$

Question 7

Why is the real-world deposit multiplier typically lower than the simple deposit multiplier?

Accepted Answer

Because people hold some currency outside the banking system and banks may hold excess reserves.

Question 8

According to the quantity theory of money, if the velocity of money is constant, what causes inflation in the long run?

Accepted Answer

Money supply grows faster than real GDP.

Question 9

Which equation represents the long-run relationship in the quantity theory of money?

Accepted Answer

$$\%\ 	ext{Change in } M + \%\ 	ext{Change in } V = \%\ 	ext{Change in } P + \%\ 	ext{Change in } Y$$

Question 10

If the money supply grows at 5% per year and real GDP grows at 2% per year, what is the implied inflation rate assuming constant velocity?

Accepted Answer

$$5\% - 2\% = 3\%$$

Question 11

Which statement best describes the short-run Phillips curve?

Accepted Answer

It shows a negative relationship between the inflation rate and the unemployment rate.

Question 12

What is the effect of expansionary policies on the short-run Phillips curve?

Accepted Answer

Lower unemployment but higher inflation (leftward movement).

Question 13

Which of the following is NOT a function of money?

Accepted Answer

Increasing the required reserve ratio

Question 14

If a country switches from commodity money to fiat money, what is a likely challenge it faces?

Accepted Answer

Establishing public confidence in the value of the currency

Question 15

Which of the following best explains why standardized money increases efficiency in an economy?

Accepted Answer

It allows goods and services to be valued using a common unit, reducing transaction costs.

Question 16

A household decides to keep cash at home instead of depositing it in a bank. What is the impact on the money multiplier?

Accepted Answer

The money multiplier decreases because less money is available for banks to loan out.

Question 17

If the required reserve ratio is 5%, and a bank receives a deposit of $$\2$$,000$, what is the maximum possible increase in deposits in the banking system?

Accepted Answer

$$\2$$,000 	imes \frac{1}{0.05} = \$$40,000$$

Question 18

Which of the following is an implication of inflation according to the quantity theory of money?

Accepted Answer

Inflation results from money growing at a faster rate than real GDP.

Question 19

If contractionary policies are implemented, what is the expected movement along the short-run Phillips curve?

Accepted Answer

Lower inflation but higher unemployment (rightward movement).

Money, Banking, and Inflation: Key Concepts in Macroeconomics

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