Vietnam National University, Hanoi

UNIVERSITY OF ECONOMICS AND BUSINESS

Macroeconomics

Homework 5. The Monetary System, Money Growth and Inflation

Section 1: Multiple choice questions
1.

Barter exchange tends to be inefficient because

a. gold is difficult to transport.
b. it limits the time and effort required for trade.
c. it can be a very time-consuming process to find a double coincidence of wants.
d. a standardized unit of value can be difficult to find in a primitive economy.

2.

In order for something to function well as a medium of exchange, it must be

a. issued by a central government.
b. readily and widely accepted in trade.
c. backed by a valuable commodity.
d. All of the above are correct.

3.

If a society chooses fiat money as its money form, it

a. must guarantee its convertibility into gold.

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b. must worry about its liquidity.

c. cannot make use of a banking system.
d. must worry about controlling its quantity.
4.

Given the following information, what would be the values of M1 and M2?
Small time deposits
$650 billion
Checking deposits
$300 billion
Savings-type deposits
$750 billion
Money market mutual funds $600 billion
Travelers checks
$ 25 billion
Large time deposits
$600 billion
Cash in hand
$100 billion
a. M1 = $400 billion, M2 = $2,450 billion.
b. M1 = $100 billion, M2 = $1,075 billion.
c. M1 = $425 billion, M2 = $2, 425 billion.
d. M1 = $425 billion, M2 = $1,850 billion.

5.

Which of the following would not be used by the Fed to influence interest rates?
a. selling securities
b. buying stocks
c. setting reserve requirements
d. changing the discount rate

6.

The most effective and frequently used tool the Fed has at its disposal to change the economys
money supply is

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a.
b.
c.
d.

open market operations.

the discount rate.
the reserve requirement.
the federal funds rate.

7.

An open market purchase occurs when

a. the Fed buys government securities from a bank.
b. a bank buys government securities from the Fed.
c. a securities dealer buys shards of stock from the Fed.
d. the Treasury buys government securities from the Fed.

8.

Given an initial deposit of $5,000 and a legal reserve requirement of 25%, the amount of
money potentially created by the banking system is
a. $15,000.
b. $20,000.
c. $25,000.
d. $10,000.

9.

If a bank keeps some of its excess reserves, the actual money multiplier
a. increases.
b. stays the same.
c. goes to zero.
d. decreases.

10. If there is a recession, the Fed would most likely

a. encourage banks to provide loans by lowering the discount rate.

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b. encourage banks to provide loans by raising the discount rate.

c. restrict bank lending by lowering the discount rate.
d. restrict bank lending by raising the discount rate.
11. Within the context of the equation of exchange, the higher the equilibrium price level is
a. the higher is the nominal money supply.
b. the lower is the nominal interest rate.
c. the higher is real GDP.
d. the lower is velocity.
12. If real output in an economy is 1000 goods per year, the money supply is $300, and each dollar
is spent 3 times per year, then the average price of goods is
a. $0.90.
b. $1.11.
c. $1.50.
d. $1.33.
13. If real GDP falls and the nominal interest rate rises, then the equilibrium price level
a. must fall.
b. must rise.
c. will fall if the effect of the decline in real GDP dominates.
d. will fall if the effect of the increase in the nominal interest rate dominates.
14. Since classical economists believe that both velocity and real output are constants, the equation
of exchange becomes a theory in which
a. the quantity of money explains prices.
b. the quantity of money explains real GDP.

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c. changes in the money supply cause changes in velocity.

d. prices are fixed.
15. The irrelevance of monetary changes for real variables is called
a. the classical dichotomy.
b. the equation of exchange.
c. monetary neutrality.
d. hyperinflation.
16. Hyperinflation occurs because governments want to __________ spending but they ignore the
fact that increasing the money supply will __________ .
a. decrease, require greater government spending
b. increase, also increase the price level
c. increase, put upward pressure on interest rates
d. decrease, put downward pressure on interest rates
17. The inflation tax is
a. a tax on windfall profits.
b. a special tax imposed on owners of shares of stock.
c. a special tax imposed on profits when inflation is over 10% per year.
d. the loss incurred when inflation reduces the purchasing power of assets.
18. If the nominal interest rate is 10%, the expected rate of inflation is 7%, and the growth rate of
the money supply is 6%, then the real interest rate is
a. 4%.
b. 3%.
c. 3%.
d. 4%.
19. Studies of money demand indicate that the nominal demand for money
a. does not depend on interest rates.
b. does not depend on the price level.
c. is proportional to the price level.
d. is proportional to the nominal interest rate.
20. Unanticipated inflation helps
a. investors at the expense of savers.
b. proprietorships at the expense of partnerships.
c. borrowers at the expense of lenders.
d. taxpayers at the expense of government.

Section 2: Exercises
Chapter 29 (M): Problems 5, 11.
Chapter 30 (M): Problems 1, 7.
Required reading
Chapter 29. Mankiw, N.G. Principles of Economics, 5th ed., Thomson South-Western.
Chapter 30. Mankiw, N.G. Principles of Economics, 5th ed., Thomson South-Western.

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