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MGT411 Money and Banking MCQs

MGT411 Money, Banking and Financial Markets Solved MCQs 30

Q#1 A central bank typically:
A) has a monopoly in issuing currency.
B) use monetary policy in attempts to stabilize economic growth and/or inflation.
C) serves as a "bankers' bank" that provides services to other banks.
D) All of the above are correct.
The Basics: How Central Banks Originated and Their Role Today.

Q#2 The primary reason for the existence of central banks today is to:
A) help finance wars.
B) serve as a bank for the government, accepting deposits and providing the government with checkable deposits.
C) control the money supply.
D) stabilize the prices of specific commodities.
The Basics: How Central Banks Originated and Their Role Today.

Q#3 Monetary policy in the countries that are part of the European Monetary Union is controlled by the:
A) European Central Bank.
B) central banks of each of the member countries.
C) Federal Reserve Board.
D) Bank ofEngland.
The Basics: How Central Banks Originated and Their Role Today.

Q#4 Which of the following tasks is NOT performed by a central bank as part of its role as a "bankers' bank?"
A) providing loans to banks during periods of financial stress
B) managing the payments system
C) controlling stock prices
D) accepting deposits from banks

Q#5 Central banks can serve as a lender of last resort because:
A) they have the ability to create money.
B) they are the only financial institution that is legally allowed to make loans during a financial panic.
C) the interest rates they charge are so high that banks are virtually never willing to borrow from the Fed.
D) banks are more likely to borrow money from their depositors during a financial panic.
The Basics: How Central Banks Originated and Their Role Today.

Q#6 Fedwire:
A) is a financial news network developed by the Federal Reserve Board.
B) is used for interbank transfers.
C) was once heavily used by banks, but is rarely used today since there is little need for interbank transfers now that the internet exists.
D) is used by the Fed solely to make loans to member banks.
The Basics: How Central Banks Originated and Their Role Today.

Q#7 Historical evidence indicates that theU.S. financial system is:
A) always very stable as long as the government does not imposed any regulations.
B) prone to periods of instability that have imposed substantial costs on society.
C) somewhat unstable, but this does not matter much since the social cost of the instability is always low.
D) as unstable today as it was in the late 1800s.
Stability: The Primary Objective of All Central Banks.

Q#8 One of the main objectives of a central bank is to:
A) reduce idiosyncratic risk in financial markets.
B) reduce systematic risk in financial markets.
C) encourage a low and stable rate of economic growth.
D) achieve a high and stable inflation rate.
Stability: The Primary Objective of All Central Banks.

Q#9 Central banks generally place a great deal of emphasis on maintaining a low and stable inflation rate because:
A) inflation lowers the information content of prices.
B) economic growth tends to decline as inflation rates rise.
C) inflation tends to be less predictable when inflation rates rise.
D) All of the above are correct.

Q#10 Central banks usually establish a positive inflation rate target rather than a zero inflation rate target because:
A) economic growth is higher when the inflation rate rises.
B) a positive inflation rate makes it possible for firms to reduce real wages without reducing nominal wages, leading to more efficient labor markets.
C) the Fed is a more profitable operation for the government when the inflation rate is positive.
D) a higher inflation rate results in a higher unemployment rate, and higher unemployment rates are preferred by policymakers.
Stability: The Primary Objective of All Central Banks.

Q#11 Which of the following is not a primary objective of the Fed?
A) low and stable inflation
B) high and stable real growth
C) financial system stability
D) maintaining low interest rates

Q#12 Exchange–rate stability is:
A) a more important goal for the Fed than it is for the central banks of smaller and more trade-oriented economies.
B) a less important goal for the Fed than it is for the central banks of smaller and more trade-oriented economies.
C) equally important as a goal for the Fed as it is for the central banks of smaller and more trade-oriented economies.
D) a primary objective of the Fed.

Q#13 Which of the following is not generally a characteristic of a successful central bank?
A) Central bank policy must be controlled by the same authorities.
B) Central bank decisions must be made in private and policy should not be publicly announced.
C) Decision making should be made by an individual, not a committee, to ensure consistency of goals.
D) The central bank should operate within a framework in which it has clear goals.

Q#14 Central bank independence is:
A) not very common in industrialized countries today.
B) a practice that was widely adopted by central banks for industrialized countries in the late 1800s.
C) a relatively recent historical phenomenon.
D) a policy that is practiced by the European Central Bank, but not the Fed.

Q#15 Empirical evidence suggests that a higher level of central bank independence results in:
A) higher average inflation rates than occur in countries with less independent central banks.
B) lower average inflation rates than occur in countries with less independent central banks.
C) the same average inflation rates that occur in countries with less independent central banks.
D) lower rates of economic growth than occurs in countries with less independent central banks.

Q#16 A source of conflict between monetary and fiscal policy decision makers is that:
A) fiscal policy decision makers place more emphasis on short-term objectives while monetary policy makers focus on long-term objectives.
B) it is easier, from a political standpoint, to pay for increased government spending by a monetary expansion than by raising taxes.
C) Both of the above are correct.
D) None of the above is correct.

Views: 1044

Replies to This Discussion

Q#11
One key difference between the Fed and the European Central Bank (ECB) in their reserve requirements is that the:

                     

                      A)ECB pays interest on required reserves. 

                      B)    ECB doesn't pay interest on reserves and the Fed does. 

                      C)    reserve requirements of the ECB are determined annually. 

                      D)   reserve requirements of the ECB are at a much higher rate than the Fed's.

                                                        

Feedback:

LOD: 1
Operational Policy at the European Central Bank.

 

Q#12
For the European Central Bank (ECB) the equivalent of the FOMC's target federal funds rate is the:

                     

                      A)target refinancing rate. 

                      B)    European target federal funds rate. 

                      C)    European inter-bank target discount rate. 

                      D)   London Inter-Bank Offer Rate.

                                                        

Feedback:

LOD: 1
Operational Policy at the European Central Bank.

 

Q#13
Which of the following statement is most true regarding monetary policy tools?

 

                      A)    The Fed currently uses a monetary supply quantity tool for monetary policy. 

                      B)    The required reserve rate is the most easily observable monetary policy tool. 

                      C)    The federal funds rate is not the best tool because it fails the controllable test of a good monetary policy tool.

                       D)The central bank may set an interest rate target or a money supply target, but cannot generally achieve both.

                                                        

Feedback:

LOD 2
Linking Tools to Objectives: Making Choices.

 

Q#14
A good definition for intermediate targets of monetary policy would be:

                     

                      A)instruments that are not under the direct control of the central banks but lie between operational instruments and objectives.

 

                      B)    instruments under the direct control of central bankers but one step removed from operational targets.

 

                      C)    the quantity or non-price targets of monetary policy.

 

                      D)   a price but non-quantifiable target that is difficult for the market to anticipate.

                                                        

Feedback:

LOD 2
Linking Tools to Objectives: Making Choices.

 

Q#15
During the 1990s many countries developed a monetary policy framework that focused on inflation targeting. This is an example of policymakers:

 

                      A)    bypassing intermediate targets and focusing directly on an objective.

 

                      B)    focusing exclusively on an intermediate target.

 

                      C)    focusing on a single numerical target.

                     

                      D)a and c

                                                        

Feedback:

LOD 2
Linking Tools to Objectives: Making Choices.

Consider the following formula for the Taylor rule:

Target federal funds rate = 2½ + current inflation + ½(inflation gap) +½(output gap)

  

Q#16
If the current rate of inflation is 3%, the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be:

                     

                      A)7.5%.

 

                      B)    10.0%.

 

                      C)    8.0%.

 

                      D)   3.5%.

                                                        

Feedback:

LOD: 3
A Guide to Central Bank Interest Rates: The Taylor Rule

Quiz # 36

 

Q#1
In selecting a target for monetary policy, the Fed may control:

                     

                      A)the federal funds rate or the monetary base, but not both.

 

                      B)    the federal funds rate, but not the monetary base.

                     

                      C)    both the money supply and the federal funds rate.

 

                      D)   neither the money supply nor the federal funds rate.

                                                        

Feedback:

LOD: 1
The Federal Reserve's Monetary Policy Toolbox.

 

Q#2
The Fed's most commonly used monetary policy tool is:

 

                      A)    the reserve requirement.

                     

                      B)open market operations

 

                      C)    the discount rate.

 

                      D)   capital requirements.

                                                        

Feedback:

LOD: 1
The Federal Reserve's Monetary Policy Toolbox.

 

Q#3
If the Fed wishes to engage in a contractionary monetary policy, it may:

                     

                      A)raise the target federal funds rate.

 

                      B)    lower the target federal funds rate.

 

                      C)    lower the reserve requirement.

 

                      D)   None of the above is correct.

                                                        

Feedback:

LOD: 1
The Federal Reserve's Monetary Policy Toolbox.

 

Q#5
If the Fed raises the target federal funds rate, it may attempt to achieve this by:

 

                      A)    buying government securities.

                     

                      B)selling government securities.

 

                      C)    lowering the reserve requirement

 

                      D)   None of the above is correct.

                                                        

Feedback:

LOD: 2
The Federal Reserve's Monetary Policy Toolbox.

 

Q#5
The federal funds market is a market in which:

                     

                      A)banks with excess reserves loan reserves to other banks that have reserve shortfalls.

 

                      B)    Treasury bonds are bought and sold by households, banks, and other financial institutions.

 

                      C)    the government deficit is financed.

 

                      D)   state and local governments borrow from the federal government.

                                                        

Feedback:

LOD: 2
The Federal Reserve's Monetary Policy Toolbox.

 

Q#6
If the federal funds rate exceeds the target rate, the Fed:

 

                      A)    actively participates in the federal funds market by buying and selling reserves in the federal funds market.

                     

                      B)uses its policy tools to affect the volume of reserves in the banking system.

 

                      C)    requires that all banks charge the target rate when they make loans to other banks in the federal funds market.

 

                      D)   None of the above is correct.

                                                        

Feedback:

LOD: 2
The Federal Reserve's Monetary Policy Toolbox.

 

Q#7
Loans made by banks in the federal funds market are:

 

                      A)    secured by government securities.

 

                      B)    insured by the FDIC.

                     

                      C)unsecured.

 

                      D)   insured by the Fed.

                                                        

Feedback:

LOD: 2
Federal Reserve's Monetary Policy Toolbox.

 

Q#8
If the Fed uses open-market operations to reduce reserves in the banking system, the federal funds rate is expected to:

                     

                      A)rise.

 

                      B)    fall.

 

                      C)    remain unchanged.

 

                      D)   change in an unpredictable manner.

                                                        

Feedback:

LOD: 2
Federal Reserve's Monetary Policy Toolbox

 

Q#9
For most of the Fed's history, its practice of discouraging discount lending tended to:

 

                      A)    help to stabilize the interbank market for reserves.

                     

                      B)destabilize the interbank market for reserves.

 

                      C)    have no effect on the interbank market for reserves.

 

                      D)   sometimes stabilize, but sometimes destabilize the interbank market for reserves.

                                                        

Feedback:

LOD: 2
Federal Reserve's Monetary Policy Toolbox

 

Q#10
Short-term discount loans made to sound banks that have temporary reserve shortfalls are referred to as:

                     

                      A)primary credit.

 

                      B)    secondary credit.

 

                      C)    tertiary credit.

 

                      D)   seasonal credit.

                                                        

Feedback:

LOD: 1
Federal Reserve's Monetary Policy Toolbox

Q#11
Today, the primary use of the reserve requirement is to:

 

                      A)    control the size of the money supply.

                     

                      B)stabilize the demand for reserves.

 

                      C)    provide a low-cost source of funds for the Federal Reserve System (since the Fed does not pay interest on reserve deposits).

 

                      D)   None of the above is correct.

                                                        

Feedback:

LOD: 2
Federal Reserve's Monetary Policy Toolbox

 

Q#12
One difference between the conduct of monetary policy by the European Central Bank (ECB) and the Fed is that:

 

                      A)    the Fed focuses solely on a money supply target while the ECB focuses on an interest-rate target.

                     

                      B)the Fed conducts its monetary policy at one site (the NY Fed) while the ECB conducts monetary policy in a decentralized manner through each member nation's central bank.

 

                      C)    The Fed is independent of the fiscal authorities while ECB policy is dictated by the fiscal policies of the member states.

 

                      D)   None of the above is correct.

                                                        

Feedback:

LOD: 1
Operational Policy at the European Central Bank.

 

Q#13
Desirable characteristics of a monetary policy instrument include:

 

                      A)    it is easily observed.

 

                      B)    it is controllable and may be quickly altered.

 

                      C)    it is tightly linked to the policymakers' objectives.

                     

                      D)All of the above are correct.

                                                        

Feedback:

LOD: 1
Linking Tools to Objectives: Making Choices.

 

Q#14
Interest-rate targets have become more commonly adopted by central banks in recent decades because:

                     

                      A)such a policy tends to be less destabilizing than a monetary aggregate target.

 

                      B)    this policy rule is required by fiscal policymakers in most countries.

 

                      C)    the adoption of a monetary aggregate target always resulted in high rates of money growth.

 

                      D)   None of the above is correct.

                                                        

Feedback:

LOD: 2
Linking Tools to Objectives: Making Choices.

 

Consider the following formula for the Taylor rule:

Target federal funds rate = 2½ + current inflation + ½(inflation gap) + ½(output gap)

 

Q#15
If the current rate of inflation is 4%, the target rate of inflation is 3%, and output is 2% above its potential, the target federal funds rate would be:

 

                      A)    7.5%.

 

                      B)    10.0%.

                     

                      C)8.0%.

 

                      D)   9.0%.

                                                        

Feedback:

LOD: 3
Guide to Central Bank's Interest Rates: The Taylor Rule

Q#11
A country that suffers from bouts of high inflation and wants to fix its exchange rate should tie its currency to the currency of a:

 

                      A)    larger country.

                     

                      B)country with a strong reputation for low inflation.

 

                      C)    country with similar inflation performance.

 

                      D)   country that is still on the gold standard.

                                                        

Feedback:

LOD: 2
The Costs, Benefits, and Risks of Fixed Exchange Rates.

 

Q#12
If the U.S. were to revert to a gold standard, trade deficits would:

 

                      A)    result in gold reserves in the U.S. increasing.

 

                      B)    quickly disappear.

                     

                      C)result in higher domestic interest rates.

 

                      D)   result in high inflation.

                                                        

Feedback:

LOD: 3
The Costs, Benefits, and Risks of Fixed Exchange Rates.

 

Q#13
In 1997 there was a speculative attack on the Thai baht. This resulted from:

                     

                      A)the belief by speculators that the Thai central bank didn't have U.S. dollar reserves to maintain the current fixed rate.

 

                      B)    the belief by speculators that the Thai central bank was run by corrupt officials.

 

                      C)    the revelation that the Thai central bank had depleted its gold eserves.

 

                      D)   the overthrow of the Thai president and the central bank.

                                                        

Feedback:

LOD: 2
The Costs, Benefits, and Risks of Fixed Exchange Rates.

 

Q#14
The Bretton Woods System failed in 1971 due to:

 

                      A)    very low rates of inflation in the U.S.

 

                      B)    the lack of capital mobility across international borders.

                     

                      C)the desire on the part of participating countries to have an independent monetary policy.

 

                      D)   All of the above.

                                                        

Feedback:

LOD: 2
Fixed Exchange-Rate Regimes.

 

Q#15
Dollarization:

 

                      A)    has the benefit of providing additional revenue in the form of seignorage to the country that dollarizes.

 

                      B)    is the same as a monetary union.

                     

                      C)would enable a small emerging-market country to avoid an exchange-rate crisis.

 

                      D)   Both a and c are correct.

                                                        

Feedback:

LOD: 2

Quiz # 38

 

Q#1
Which of the following statements is correct?

 

                      A)    The Fed engages in foreign currency transactions on a daily basis.

 

                      B)    The Fed engages in foreign currency transactions in conjunction with the meetings of the FOMC.

                     

                      C)The Fed almost never engages in foreign currency transactions.

 

                      D)   The Fed is not permitted to engage in foreign currency transactions.

                                                        

Feedback:

LOD: 1
Linking Exchange-Rate Policy with Domestic Monetary Policy.

 

Q#2
The currency of country A will depreciate relative to that of country B if:

                     

                      A)the inflation rate in country B is higher than that in country A.

 

                      B)    the inflation rate in country A is higher than that in country B.

 

                      C)    the inflation rates in the two countries are the same but country A fixes its exchange rate.

 

                      D)   Both a and c are correct.

                                                        

Feedback:

LOD: 2
Linking Exchange-Rate Policy with Domestic Monetary Policy.

 

Q#3
If the inflation rate in country A is 2.5% and the inflation rate in country B is 2.0% we should expect the percentage change in the number of units of country A's currency per unit of country B's currency to be:

 

                      A)    + 4.5%.

                     

                      B)0.5%.

 

                      C)    +1.25%.

 

                      D)   +.8%.

                                                        

Feedback:

LOD: 3
Linking Exchange-Rate Policy with Domestic Monetary Policy.

 

Q#4
If a country like Mexico, for example, wants its inflation rate to diverge from that of the United States, then:

                     

                      A)if the U.S. inflation rate rises Mexico must be prepared for the peso/dollar exchange rate to decrease.

 

                      B)if the U.S. inflation rate rises Mexico must be prepared for the peso/dollar exchange rate to increase.

 

                      C)    if the U.S. inflation rate falls Mexico must be prepared for the peso/dollar exchange rate to decrease.

 

                      D)   None of the above; it would not be in Mexico's best interests for its inflation rate to diverge from that of the United States.

                                                        

Feedback:

LOD: 3
Linking Exchange-Rate Policy with Domestic Monetary Policy.

 

Q#5
If arbitrage occurs across countries with a fixed exchange rate when the bonds in each country are identical and there are no barriers to capital flows:

                     

                      A)the interest rates on the bonds will be identical.

 

                      B)    the interest rate on the domestic bond will be greater than that on the foreign bond due to differences in inflation.

 

                      C)    the expected return from the foreign bond will be higher.

 

                      D)   the inflation rates in each country will be identical.

                                                        

Feedback:

LOD: 2
Linking Exchange-Rate Policy with Domestic Monetary Policy.

 

Q#6
Consider the following: an investor in the U.S. is pondering a one-year investment. She can purchase a domestic bond for $5,000 that has an interest rate of i; she can also purchase a bond in England for 10,000 British pounds (£) that pays an interest rate of if. The current exchange rate is $2.00/£. She considers the bonds to be of equal risk. Ifi = ifbut the $/£ exchange rate is expected to fall, the investor should:

                     

                      A)buy the U.S. bond.

 

                      B)    buy the British bond.

 

                      C)    buy the British bond and hold it until after the exchange rate falls.

 

                      D)   rely on arbitrage to equalize her return whichever bond she buys.

                                                        

Feedback:

LOD: 2
Linking Exchange-Rate Policy with Domestic Monetary Policy.

 

Q#7
Capital controls consist of:

 

                      A)    restrictions on the ability of foreigners to invest in a country.

 

                      B)    obstacles that prevent the selling of investments and taking funds out of the country.

 

                      C)    fixed interest rates.

 

                      D)Only a and b are correct.

                                                        

Feedback:

LOD: 2
Linking Exchange-Rate Policy with Domestic Monetary Policy.

 

Q#8
If the Fed decides to maintain a fixed euro/dollar exchange rate, and buys euros:

 

                      A)    its dollar liabilities will decrease.

                     

                      B)its dollar liabilities will increase.

 

                      C)    there will be pressure on domestic interest rates to increase.

 

                      D)   Both b and c are correct.

                                                        

Feedback:

LOD: 2
Mechanics of Exchange-Rate Management.

 

Q#9
Which of the following statements is correct?

                     

                      A)To sterilize a foreign exchange intervention in which it purchased a foreign bond, the Fed would sell a U.S. Treasury bond.

 

                      B)    To sterilize a foreign exchange intervention in which it purchased a foreign bond, the Fed would buy a U.S. Treasury bond of the same face value.

 

                      C)    To sterilize a foreign exchange intervention in which it sold a foreign bond, the Fed would sell a U.S. Treasury bond of the same face value.

 

                      D)   The Fed will sterilize foreign exchange interventions that increase reserves but not those that decrease reserves.

                                                        

Feedback:

LOD: 2
Mechanics of Exchange-Rate Management.

 

Q#10
All of the following are benefits of fixed exchange rates except:

 

                      A)    international trade is simplified.

 

                      B)    the risk associated with foreign investment is reduced.

 

                      C)    policymakers' hands are tied.

                     

                      D)it means adopting another country's interest-rate policy.

                                                        

Feedback:

LOD: 2
The Costs, Benefits, and Risks of Fixed Exchange Rates.

Q#11
Speculative attacks are more likely if a country has:

 

                      A)    a flexible interest rate.

 

                      B)    capital controls.

                     

                      C)a fixed exchange rate.

 

                      D)   All of the above.

                                                        

Feedback:

LOD: 2
The Costs, Benefits, and Risks of Fixed Exchange Rates.

 

Q#12
If the U.S. were to revert to a gold standard, a U.S. current account deficit would result in:

 

                      A)    gold reserves in the U.S. decreasing.

 

                      B)    higher domestic interest rates.

 

                      C)    deflation.

                     

                      D)All of the above.

                                                        

Feedback:

LOD: 3
The Costs, Benefits, and Risks of Fixed Exchange Rates.

 

Q#13
Floating exchange rates:

                     

                      A)act as automatic macroeconomic stabilizers.

 

                      B)    require higher levels of foreign exchange reserves than do fixed exchange rates.

 

                      C)    means a country cannot control its domestic interest rates.

 

                      D)   All of the above are true.

                                                        

Feedback:

LOD: 2
The Costs, Benefits, and Risks of Fixed Exchange Rates.

Q#14
Under the Bretton Woods System:

 

                      A)    each country pegged its currency to the U.S. dollar.

 

                      B)    countries held U.S. dollar reserves.

 

                      C)    there were complex capital controls.

                     

                      D)All of the above.

                                                        

Feedback:

LOD: 2
Fixed Exchange-Rate Regimes.

 

Q#15
In a country that has a currency board, its central bank:

 

                      A)    has only one job: to maintain the exchange rate.

 

                      B)    loses its role as lender of last resort.

 

                      C)    will gradually be phased out.

                     

                      D)Both a and b are correct.

                                                        

Feedback:

LOD: 2
Fixed Exchange-Rate Regimes

Q#11
The portfolio demand for money reflects:

 

                      A)    the money we hold for our everyday transactions.

 

                      B)    the money we hold to purchase stocks and bonds and other financial securities.

                     

                      C)the portion of wealth people desire to hold in the form of money.

 

                      D)   b and c

                                                        

Feedback:

LOD: 2
The Demand for Money.

 

Q#12
The Lucas critique focuses specifically on:

                     

                      A)the role that economic policymaking has on people's economic behavior.

 

                      B)    the relationship between Fed policy and the money supply.

 

                      C)    the inability to measure economic time lags accurately.

 

                      D)   the moving away from the gold standard to flexible exchange rates.

                                                        

Feedback:

LOD: 2
Targeting Money Growth in a Low-Inflation Environment.

 

Q#13
To use money growth as a short-term monetary policy instrument, a central bank must:

 

                      A)    believe the deposit expansion multiplier is volatile and unpredictable.

 

                      B)    believe that only money matters.

 

                      C)    believe that there is an unpredictable relationship between money aggregates and inflation.

                     

                      D)believe there is some stable link between the monetary base and the money aggregates.

                                                        

Feedback:

LOD: 2
Targeting Money Growth in a Low-Inflation Environment.

 

Q#14
One cost that potentially could result from central banks targeting money growth is:

                     

                      A)volatile interest rates.

 

                      B)    a slowdown in financial innovation.

 

                      C)    high inflation.

 

                      D)   a very stable interest rate.

                                                        

Feedback:

LOD: 2
Targeting Money Growth in a Low-Inflation Environment.

 

Q#15
If a central bank set an explicit inflation target it would require that it:

 

                      A)    put more emphasis on the interest rate target and less on a money target.

 

                      B)    shift its focus entirely to a nominal interest rate target.

                     

                      C)be willing to live with more volatility in the interest rate.

 

                      D)   give up control of targeting the monetary base.

                                                        

Feedback:

LOD: 3
Targeting Money Growth in a Low-Inflation Environment.

Quiz # 40

 

Q#1
The single most important fact in monetary economics is the:

                     

                      A)positive relationship between money growth and inflation rates.

 

                      B)positive relationship between money growth and the real interest rate.

 

                      C)    negative relationship between money growth and the real interest rate.

 

                      D)   negative relationship between money growth and inflation rates.

                                                        

Feedback:

LOD: 1
Why We Care About Monetary Aggregates.

 

Q#2
When a country has a high inflation rate:

 

                      A)    people tend to spend money more quickly, which helps to reduce inflation.

                     

                      B)people tend to spend money more quickly, which has the same effect on inflation as an increase in money growth.

 

                      C)    people tend to spend money more slowly, which has the same effect on inflation as an increase in money growth.

 

                      D)   there is also typically a high unemployment rate.

                                                        

Feedback:

LOD: 2
Why We Care About Monetary Aggregates.

 

Q#3
Inflation can be thought of as:

                     

                      A)a decrease in the value of money.

 

                      B)    an increase in the value of money.

 

                      C)    no change in the value of money, just in the supply of money.

 

                      D)   no change in the value of money, just in the demand for money.

                                                        

Feedback:

LOD: 2
The Quantity Theory and the Velocity of Money.

 

Q#4
If M = the money supply; Y = real output, P = the price level, and V = velocity, which of the following represents nominal GDP?

 

                      A)    (P·Y) +M

 

                      B)    (P·M)/Y

 

                      C)    (Y·M)/P

                     

                      D)(P·Y)

                                                        

Feedback:

LOD: 2
The Quantity Theory and the Velocity of Money.

 

Q#5
If the equation of exchange is MV=PY and we assume that velocity is constant and that real output is determined solely by economic resources and production technology, then a change in M will result in a change in:

                     

                      A)P.

 

                      B)    Y.

 

                      C)    PV.

 

                      D)   VY.

                                                        

Feedback:

LOD: 1
The Quantity Theory and the Velocity of Money.

 

Q#6
Which of the following is not a key assumption behind the quantity theory of money?

                     

                      A)The change in nominal GDP is zero.

 

                      B)    The percentage change in the price level equals the percentage change in the money supply.

 

                      C)    The velocity of money is constant.

 

                      D)   Real growth is determined by resources and technology.

                                                        

Feedback:

LOD: 2
The Quantity Theory and the Velocity of Money.

 

Q#7
If we let Md represent money demand and the money market is in equilibrium, then:

 

                      A)    M=VY.

 

                      B)    M= V(PY).

                     

                      C)MV =PY.

 

                      D)   M= V(Y/P).

                                                        

Feedback:

LOD: 2
The Quantity Theory and the Velocity of Money.

 

Q#8
A central bank policy to stabilize inflation by keeping money growth constant would be viable only if:

 

                      A)    the velocity of money was decreasing over time.

 

                      B)    the velocity of money was increasing over time.

                     

                      C)velocity of money was constant.

 

                      D)   nominal GDP were constant.

                                                        

Feedback:

LOD: 2
The Quantity Theory and the Velocity of Money.

 

Q#9
Increases in velocity in the late 1970s and early 1980s can be attributed to financial innovations that:

 

                      A)    made holding money very costly.

 

                      B)    allowed individuals to economize on the amount of money they held.

                     

                      C)Both of the above are correct.

 

                      D)   None of the above is correct.

                                                        

Feedback:

LOD: 2
The Quantity Theory and the Velocity of Money.

 

Q#10
As the monetary policy strategy of the European Central Bank has evolved over time, the role of money:

 

                      A)    has become more prominent.

                     

                      B)has become less prominent.

 

                      C)    has not changed.

 

                      D)   has changed in that there is more emphasis on the equivalent of M1 than M2.

                                                        

Feedback:

LOD: 2
The Quantity Theory and the Velocity of Money.

Q#11
The higher the nominal interest rate:

 

                      A)    the higher the opportunity cost of holding money.

 

                      B)    the less money people will hold for any given level of transactions.

 

                      C)    the higher the velocity of money.

                     

                      D)All of the above are correct.

                                                        

Feedback:

LOD: 2
The Demand for Money.

 

Q#12
The precautionary demand for money is usually included in the:

                     

                      A)transactions demand for money.

 

                      B)    portfolio demand for money.

 

                      C)    both the transactions demand and the portfolio demand for money.

 

                      D)   None of the above; it is a separate category.

                                                        

Feedback:

LOD: 2
The Demand for Money.

 

Q#13
Controlling inflation:

 

                      A)    is made more difficult in a high-inflation environment due to changes in velocity.

                     

                      B)is made more difficult in a low-inflation environment due to changes in velocity.

 

                      C)    depends more on the resolve of the central bank in a low-inflation environment.

 

                      D)   is simpler in the short run because velocity is constant.

                                                        

Feedback:

LOD: 2
Targeting Money Growth in a Low-Inflation Environment.

Q#14
Changes in mortgage refinancing rates have affected the velocity of M2 because:

 

                      A)    people who are refinancing take out equity in their home and deposit funds in liquid deposit accounts.

 

                      B)    as mortgages are refinanced flows of funds from holders of both old and new mortgages flow through accounts that are part of M2.

                     

                      C)Both of the above are correct.

 

                      D)   None of the above is correct.

                                                        

Feedback:

LOD: 2
Targeting Money Growth in a Low-Inflation Environment.

 

Q#15
Comparing the ECB and the Fed, it is accurate to say that:

 

                      A)    the ECB puts more emphasis on the interest rate target and less on a money target.

                     

                      B)the ECB and the Fed differ in their emphasis on money growth but both use interest rates as their operating targets.

 

                      C)    the ECB only uses a money growth target while the Fed only uses an interest rate target.

 

                      D)   None of the above is correct.

                                                        

Feedback:

LOD: 2
Targeting Money Growth in a Low-Inflation Environment.

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