Economics 252 – Review Questions Chapter 13
(1) If you write a check to purchase a car, you are using money primarily as:
(a) a medium of exchange.
(b) a store of value.
(c) a unit of account.
(d) an economic investment.
(2) A $70 price tag on a sweater in a catalog is an example of money as a:
(a) unit of account.
(b) store of value.
(c) medium of exchange.
(d) standard of deferred payments.
(3) When economists say than money serves as a store of value, they mean that it is:
(a) a way to keep wealth in a readily spendable form for future use.
(b) a means of payment.
(c) a monetary unit for measuring and comparing the relative values of goods.
(d) described as legal tender by government.
(4) In the
(a) coins, paper currency, and checkable deposits.
(b) currency and long term government bonds.
(c) coins, paper currency, and time deposits.
(d) gold certificates and time deposits.
(5) The money supply is backed:
(a) dollar-for-dollar with gold bullion.
(b) dollar-for-dollar with gold and silver.
(c) by government bonds.
(d) by the government's ability to manage the money supply and therefore to keep its value relatively stable.
(6) In defining money as M1, economists exclude time deposits because:
(a) the value of time deposits is zero.
(b) the purchasing power of time deposits is less stable than other forms of money.
(c) they are not as easily or readily available as medium of exchange as currency and checkable deposits.
(d) they are more liquid than checkable deposits.
Utilize Table 1 to answer Questions (7) and (8).
Table 1
Year Price Level Value of the Dollar
1 1.00 $1.00
2 1.25 _____
3 0.80 _____
4 0.50 _____
(7) In Table 1, the value of the dollar in year 2 is:
(a) $1.25
(b) $1.33
(c) $0.80
(d) $1.00
(8) In Table 1, the value of the dollar in year 3 is:
(a) $1.25
(b) $1.33
(c) $0.80
(d) $1.00
(9) Checkable deposits are:
(a) included in M1.
(b) not included in either M1 or M2.
(c) the same as credit cards, and both are included in M1.
(d) also called time deposits.
(10) The difference between M1 and M2 is that:
(a) M1 includes time deposits.
(b) time deposits are included in both, but checkable deposits are included in
M2 only.
(c) M2 includes large time deposits.
(d) M1 is a more "active" form of money, which can be used immediately.
(11) Large time deposits of $100,000 or more are:
(a) a component of M1.
(b) a component of M2 but not of M1.
(c) a component of M3, but not of M2.
(d) not a component of M1, M2, or M3.
(12) It is costly to hold money because:
(a) deflation may reduce its purchasing power.
(b) in doing so, one sacrifices interest income.
(c) inflation may increase its purchasing power.
(d) interest income for money is higher than for bonds.
(13) The asset demand for money is downsloping because:
(a) the opportunity cost of holding money increases as the interest rate rises.
(b) it is more attractive to hold money at high interest rates than at low interest
rates.
(c) bond prices rise as interest rates rise.
(d) the opportunity cost of holding money declines as the interest rate rises.
Use the following information to answer Questions (14) and (15). A bond has a price of $1,000, no expiration date, bond fixed annual interest payments are $100, and the interest rate is 10 percent.
(14) If the bond price falls to $800, the effective interest rate for the bond will:
(a) increase to 12.5 percent.
(b) fall to 8 percent.
(c) increase to 15 percent.
(d) remain at 10 percent.
(15) If the bond price rises to $1,250, the effective interest rate for the bond will:
(a) fall to 9 percent.
(b) fall to 8 percent.
(c) rise to 11 percent.
(d) rise to 12.5 percent.
(16) The basic policy-making body in the
(a) Federal Open Market Committee (FOMC).
(b) Board of Governors of the Federal Reserve.
(c) Council of Economic Advisors.
(d) Secretary of the Treasury.
(17) The members of the Federal Reserve Board:
(a) are elected as part of Congressional elections.
(b) are appointed by the Council of Economic Advisors.
(c) are appointed by the President, with Senate approval.
(d) are elected by votes of the 12 presidents of the Federal Reserve Banks.
Utilize Figure 1 below to answer Questions (18), (19), and (20).
(18) In Figure 1, the downward slope of the money demand curve Dm is best explained in terms of the:
(a) transactions demand for money.
(b) asset demand for money.
(c) the real balances effect.
(d) the money market effect.
(19) In Figure 1, the equilibrium interest rate is:
(a) I(1)
(b) I(2)
(c) I(3)
(d) cannot be defined without further information.
(20) In Figure 1, given Dm and Sm, an interest rate of I(3) is not sustainable because the:
(a) supply of bonds in the bond market will decline and the interest rate will rise.
(b) supply of bonds in the bond market will increase and the interest rate will decline.
(c) demand for bonds in the bond market will decline and the interest rate will rise.
(d) demand for bonds in the bond market will rise and the interest rate will fall.
Figure 1
Interest Rate I(1) I(2) I(3) 0 Q Quantity of Money
