exam 3_key_formA by xiangpeng

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									EXAM 3 – Macroeconomic Principles – Spring 2009 – Cutler                                                      A
MULTIPLE-CHOICE – Please, select the letter which best answers each question, and enter it into the space
   provided in front of each question number. Each multiple-choice question is worth 1 point.

1.    Fiat currency
                  a.     has no intrinsic value.
                  b.     is backed by gold.
                  c.     has intrinsic value equal to its value in exchange.
    d. is any close substitute for currency such as checkable deposits.
ANSWER: a.      has no intrinsic value.

2.  Demand deposits are included in
    a. M1 but not M2.
    b. M2 but not M1.
    c. M1 and M2.
    d. neither M1 nor M2.
ANSWER: c.     M1 and M2.

3.  The agency responsible for regulating the money supply in the United States is
                 a.    the Comptroller of the Currency.
                 b.    the U.S. Treasury.
                 c.    the Federal Reserve.
                 d.    the U.S. Bank.
ANSWER: c.     the Federal Reserve.

4.  When the Fed conducts open market sales,
                 a.      it sells Treasury securities, which increases the money supply.
                 b.      it sells Treasury securities, which decreases the money supply.
                 c.      it borrows from member banks, which increases the money supply.
                 d.      it lends money to member banks, which decreases the money supply.
ANSWER: b.    it sells Treasury securities, which decreases the money supply.

5.    There is a
                     a.     short-run tradeoff between inflation and unemployment.
                     b.     short-run tradeoff between an increase in the money supply and inflation.
                     c.     long-run tradeoff between inflation and unemployment.
                     d.     long-run tradeoff between an increase in the money supply and inflation.
ANSWER: a.         short-run tradeoff between inflation and unemployment.

6.  Suppose that the reserve ratio is 5 percent and that a bank has $1,000 in deposits. Its required reserves are
                 a.      $5.
                 b.      $50.
                 c.      $95.
                 d.      $950.
ANSWER: b.     $50.

7.  If the reserve ratio is 5 percent and a bank receives a new deposit of $500, this bank
                   a.       must increase its required reserves by $25.
                   b.       will initially see its total reserves increase by $500.
                   c.       will be able to make a new loan of $475.
                   d.       All of the above are true.
ANSWER: d.       All of the above are true.

Use the balance sheet for the following questions.

                      Last Bank of Cedar Bend
      Assets                         Liabilities
      Reserves         $25,000       Deposits           $150,000
      Loans           $125,000
8.  If the reserve requirement is 10 percent, this bank
                   a.     is in a position to make a new loan of $15,000.
                   b.     has less reserves than required.
                   c.     has excess reserves of less than $15,000.
                   d.     None of the above are correct.
ANSWER: c.       has excess reserves of less than $15,000.

9.  If the reserve requirement is 10 percent and then someone deposits $50,000 into the bank, it will
    a. have $65,000 in excess reserves.
    b. have $55,000 in excess reserves.
                   c.     need to raise reserves by $5,000.
    d. None of the above are correct.
ANSWER: b.       have $55,000 in excess reserves.

10. If the reserve requirement is 20 percent, this bank
                   a.     has $10,000 of excess reserves
                   b.     needs $10,000 more of reserves to meet its reserve requirements.
                   c.     needs $5,000 more of reserves to meet its reserve requirements.
                   d.     just meets its reserve requirement.
ANSWER: c.       needs $5,000 more of reserves to meet its reserve requirements.

11. If the Last Bank of Cedar Bend is holding $10,000 in excess reserves, the reserve requirement is
                  a.     2 percent.
                  b.     5 percent.
                  c.     7 percent.
                  d.     10 percent.
ANSWER: d.       10 percent.

12. As the reserve ratio increases, the money multiplier
                 a.       increases.
                 b.       does not change.
                 c.       decreases.
                 d.       could do any of the above.
ANSWER: c.      decreases.

13. If the reserve ratio is 20 percent, the money multiplier is
                   a.       2.
                   b.       4.
                   c.       5.
                   d.       8.
ANSWER: c.       5.

14. Which list contains only actions that decrease the money supply?
                  a.      lower the discount rate, raise the reserve requirement ratio
                  b.      lower the discount rate, lower the reserve requirement ratio
                  c.      raise the discount rate, raise the reserve requirement ratio
                  d.      raise the discount rate, lower the reserve requirement ratio
ANSWER: c.      raise the discount rate, raise the reserve requirement ratio

15. If the discount rate is raised, banks choose to borrow
                  a.       more from the Fed so reserves increase.
                  b.       more from the Fed so reserves decrease.
                  c.       less from the Fed so reserves increase.
                  d.       less from the Fed so reserves decrease.
ANSWER: both c and d are accepted/.

16. The Fed can directly protect a bank during a bank run by
                 a.      increasing reserve requirements.
                 b.      selling government bonds to the bank.
                 c.      lending reserves to the bank.
                 d.      doing any of the above.
ANSWER: c.     lending reserves to the bank.

17.   When the value of money rises, the number of dollars needed to buy a representative basket of goods
      a. increases, and so the price level rises.
      b. increases, and so the price level falls.
    c. decreases, and so the price level rises.
    d. decreases, and so the price level falls.
 ANSWER: d.      decreases, and so the price level falls.

18. The supply of money increases when
    a. the value of money increases.
    b. the interest rate increases.
    c. the Fed makes open-market purchases.
    d. None of the above is correct.
 ANSWER: c.      the Fed makes open-market purchases.

19. When the money market is drawn with the value of money on the vertical axis, as the price level increases the
    quantity of money
    a. demanded increases.
    b. demanded decreases.
    c. supplied increases.
    d. supplied decreases.
 ANSWER: a.      demanded increases.

20. When the money market is drawn with the value of money on the vertical axis, the price level increases if
    a. either money demand or money supply shifts right.
    b. either money demand or money supply shifts left.
    c. money demand shifts right or money supply shifts left.
    d. money demand shifts left or money supply shifts right.
 ANSWER: d.     money demand shifts left or money supply shifts right.

21. Open-market purchases by the Fed make the money supply
    a. and the value of money increase.
    b. increase, which makes the value of money decrease.
    c. and the value of money decrease.
    d. decrease, which makes the value of money increase.
 ANSWER: b.      increase which makes the value of money decrease.

Use the figure below for the following questions.




22. If the money supply is MS2 and the value of money is 2,
    a. the value of money is less than its equilibrium level.
    b. the price level is higher than its equilibrium level.
    c. money demand is greater than the money supply.
    d. the money supply is greater than money demand.
 ANSWER: d.       the money supply is greater than money demand.

23.   If the money supply is MS2 and the value of money is 2, there is excess
      a. demand equal to the distance between A and C.
      b. demand equal to the distance between A and B.
      c. supply equal to the distance between A and C.
    d. supply equal to the distance between A and B.
 ANSWER: d.     supply equal to the distance between A and B.

24. When the money supply curve shifts from MS1 to MS2,
    a. the demand for goods and services decreases.
    b. the economy's ability to produce goods and services increases.
    c. the equilibrium price level increases.
    d. the equilibrium value of money increases.
 ANSWER: c.      the equilibrium price level increases.

25. When the money supply curve shifts from MS1 to MS2,
    a. the equilibrium value of money decreases.
    b. the equilibrium price level decreases.
    c. the supply of money has decreased.
    d. the demand for goods and services will decrease.
 ANSWER: a.      the equilibrium value of money decreases.

26. If the current money supply is located at MS1,
    a. there is no excess supply or excess demand if the value of money is 2.
    b. the equilibrium is at point C.
    c. there is an excess supply of money if the value of money is 1.
    d. All of the above are correct.
 ANSWER: a.        there is no excess supply or excess demand if the value of money is 2.

27. The real GDP is a
    a. relative variable.
    b. actual variable.
    c. real variable.
    d. nominal variable.
 ANSWER: c.       real variable.

28. The classical dichotomy refers to the idea that the supply of money
    a. is irrelevant for understanding the determinants of nominal and real variables.
    b. determines nominal variables, but not real variables.
    c. determines real variables, but not nominal variables.
    d. is a determinant of both real and nominal variables.
 ANSWER: b.       determines nominal variables, but not real variables.

29. The principle of monetary neutrality implies that an increase in the money supply will
    a. increase real GDP and the price level.
    b. increase real GDP, but not the price level.
    c. increase the price level, but not real GDP.
    d. increase neither the price level nor real GDP.
 ANSWER: c.      increase the price level, but not real GDP.

30. Most economists believe the principle of monetary neutrality is
    a. relevant to both the short and long run.
    b. irrelevant to both the short and long run.
    c. mostly relevant to the short run.
    d. mostly relevant to the long run.
 ANSWER: d.      mostly relevant to the long run.

31. According to the quantity equation, if P = 12, Y = 6, M= 8, then V =
    a. 16.
    b. 9.
    c. 4.
    d. None of the above is correct.
 ANSWER: b.      9.
32. If V and M are constant, and Y doubles, the quantity equation implies that the price level
    a. falls to half its original level.
    b. does not change.
    c. doubles.
    d. more than doubles.
 ANSWER: a.       falls to half its original level.

33. Suppose that the United States unexpectedly decided to pay off its debt by printing new money. Which of the
    following would happen?
    a. People who held money would feel poorer.
    b. Prices would rise.
    c. People who owned U.S.-government bonds would feel poorer.
    d. All of the above are correct.
 ANSWER: d.       All of the above are correct.

34. The nominal interest rate is 3 percent and the inflation rate is 2 percent. What is the real interest rate?
    a. 6 percent.
    b. 5 percent.
    c. 1 percent.
    d. 3/2 percent.
 ANSWER: c.       1 percent.

35. The Fisher effect says that
    a. the nominal interest rate adjusts one for one with the inflation rate.
    b. the growth rate of the money supply determines the inflation rate.
    c. real variables are heavily influenced by the monetary system.
    d. All of the above are correct.
 ANSWER: a.       the nominal interest rate adjusts one for one with the inflation rate.

36. In the long run when money is neutral, which of the following increases when the money supply growth rate
    increases?
    a. real output growth
    b. real interest rates
    c. nominal interest rates
    d. the money supply divided by the price level
 ANSWER: c.       nominal interest rates

37. The shoeleather cost of inflation refers to
    a. the fall in real income associated with inflation.
    b. the time spent searching for low prices when inflation rises.
    c. the waste of resources used to maintain lower money holdings.
    d. the increased cost to the government of printing more money.
 ANSWER: c.        the waste of resources used to maintain lower money holdings.

38. If the economy unexpectedly went from inflation to deflation,
    a. debtors and creditors would both have reduced real wealth
    b. debtors and creditors would both have increased real wealth
    c. debtors would gain at the expense of creditors
    d. creditors would gain at the expense of debtors
 ANSWER: d.      creditors would gain at the expense of debtors


39. When prices are falling, economists say that there is
                a.       disinflation.
                b.       deflation.
                c.       a contraction.
                d.       an inverted inflation.
 ANSWER: b.     deflation.
40. Which of the following events in post–World War I Germany likely contributed to the rise of Nazism and
    World War II?
                 a.     deflation that proved detrimental to farmers
                 b.     an aversion to inflation by policymakers that kept wages stagnant
                 c.     an unexpected drop in inflation that hurt borrowers
                 d.     an extraordinarily high rate of inflation
 ANSWER: d.      an extraordinarily high rate of inflation
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