EC 202: Introduction to Economic Analysis: Macroeconomics
Prof. Piger
Week 6 Practice Problems
Choose the one alternative that best completes the statement or answers the question.
1) The most direct way in which money eliminates the need for a double coincidence of wants is
through its use as a:
A) medium of exchange.
B) standard of deferred payment.
C) store of value.
D) unit of account.
Answer: A
2) Which of the following is the best example of using money as a store of value?
A) paying for a new dress with a credit card.
B) paying cash for a new automobile.
C) paying rent with a check on a checking deposit.
D) keeping $200 on hand for an emergency.
Answer: D
3) A $45,000 price tag on a new car is an example of money as:
A) medium of exchange.
B) a unit of account.
C) a store of value.
D) a time deposit.
Answer: B
4) If an economy tried to use bananas as money, which function would bananas likely have the
most difficult time fulfilling?
A) a store of value
B) a unit of account
C) a medium of exchange
D) a means of payment
Answer: A
5) In the United States today, money consists of
A) currency only.
B) deposits at banks only.
C) coins only.
D) currency and deposits at banks.
Answer: D
6) Given the list of assets below, which is the most liquid?
A) $500 worth of General Motors common stock.
B) $500 worth of General Motors bonds.
C) $500 in a savings account.
D) An automobile worth $500.
Answer: C
7) When a depository institution pools risk, it
A) buys short and lends long.
B) borrows reserves from the Federal Reserve.
C) spreads loan losses across many depositors so that no one depositor faces a high degree of risk.
D) makes loans to just one firm.
Answer: C
8) For a commercial bank, the term “reserves” refers to:
A) a banker’s concern (“reservation”) in making loans to an individual without a job.
B) the profit that the bank retains at the end of the year.
C) the cash in its vaults and deposits at the Federal Reserve.
D) the net interest that it earns on loans.
Answer: C
9) Which of the following statements concerning commercial banks is true?
A) Banks need to maintain cash reserves equal to their deposits.
B) Most banks maintain cash reserves equal to a fraction of deposits.
C) Cash reserves earn the highest rate of return of any asset for a bank.
D) Since the advent of the Federal Reserve, banks do not need to maintain cash reserves.
Answer: B
10) Which of the following institutions is NOT a depository institution?
A) a thrift institution, such as a savings and loan association
B) a commercial bank
C) a money market mutual fund
D) the U.S. Treasury
Answer: D
11) The major role of a commercial bank is to:
A) sell shares and use the proceeds to buy stocks.
B) receive deposits and make loans.
C) make mortgage loans.
D) restrain the growth of the quantity of money.
Answer: B
12) Commercial banks do NOT
A) make loans to creditworthy individuals and businesses.
B) buy U.S. government Treasury bills.
C) determine what assets are money.
D) accept deposits from their customers.
Answer: C
13) Of the following, the riskiest assets held by commercial banks are:
A) U.S. government bonds
B) loans to businesses
C) loans to other banks
D) reserves
Answer: B
Component Amount (billions of dollars)
Currency 310
Checking Deposits 600
Other Liquid Deposits 450
Time Deposits 1,200
Money Market Mutual Funds 1,100
Available Credit on Credit Cards 900
14) According to the table above, the value of M2 is ________.
A) $4,560 billion
B) $1,960 billion
C) $2,750 billion
D) $3,660 billion
Answer: D
15) The Bank of Japan is Japan’s central bank. As part of its duties, the Bank of Japan would
A) provide banking services to Japan’s citizens and firms.
B) provide banking services to foreigners.
C) adjust the quantity of money in circulation in Japan.
D) change tax rates.
Answer: C
16) The United States is divided into ____ Federal Reserve districts, each having a Federal Reserve
Bank.
A) 10
B) 52
C) 12
D) 7
Answer: C
17) This group consists of seven members appointed by the President of the United States for 14-
year terms:
A) the presidents of the Federal Reserve Banks.
B) the members of the Federal Open Market Committee.
C) the members of the Board of Governors.
D) None of the above answers are correct.
Answer: C
18) Which Federal Reserve Bank president is always on the Federal Open Market Committee?
A) New York.
B) Chicago.
C) St. Louis.
D) Boston.
Answer: A
19) One role of monetary policy is to control ____ by changing the ____.
A) inflation; price level
B) the price level; government spending
C) unemployment; level of taxation
D) inflation; quantity of money in circulation
Answer: D
20) The current chair of the Federal Reserve’s Board of Governors is
A) Alan Greenspan.
B) Jerome Powell
C) Janet Yellen.
D) Milton Friedman.
Answer: B
21) Regional Federal Reserve banks:
A) are located in each of the 50 states.
B) are run by the governors of the states in which they are located.
C) provide general banking services to the public.
D) None of the above answers is correct.
Answer: D
22) Which of the following is TRUE regarding the Federal Open Market Committee (FOMC)?
A) It is the main policy-making group of the U.S. Congress.
B) Representatives from each state control its operation.
C) It meets eight times a year to decide on monetary policy.
D) Both answers A and C are correct.
Answer: C
23) Unplanned Reserves are
A) desired reserves minus actual reserves.
B) required reserves minus actual reserves.
C) liquidity funds minus actual reserves.
D) actual reserves minus desired reserves.
Answer: D
24) Whenever actual reserves exceed desired reserves, the bank
A) can lend out additional funds.
B) needs to call in loans.
C) will go out of business.
D) must increase the amount of its required reserves by obtaining more cash.
Answer: A
25) Which of the following is not part of the monetary base?
A) paper currency
B) bank deposits of reserves at the Fed
C) the public’s checking deposits at commercial banks
D) coins
Answer: C
26) If the Federal Reserve buys U.S. Treasury bonds through an open market operation,
A) the quantity of money will increase.
B) the nominal interest rate will rise.
C) bank reserves will decrease.
D) the real interest rate will rise.
Answer: A
27) The sale of financial assets by the Fed leads to
A) a decrease in bank reserves.
B) a contraction in bank lending.
C) a decrease in the monetary base.
D) All of the above answers are correct.
Answer: D
28) When the monetary base increases by $2 billion, the quantity of money increases by $10
billion. Thus, the money multiplier equals
A) 0.2.
B) 5.
C) 20.0.
D) 0.5.
Answer: B
29) The quantity of real money that people choose to hold depends on which of the following?
I. The nominal interest rate.
II. The real interest rate.
III. The inflation rate.
A) I and II
B) II
C) I, II, and III
D) I and III
Answer: C
30) By holding real money we give up:
A) the level of wage and rental income.
B) the ease with which an asset can become money.
C) the price of goods and services.
D) the nominal interest rate.
Answer: D
31) When the nominal interest rate rises, the quantity of real money demanded decreases because
A) people shift funds from money holdings to interest-bearing assets, like bonds.
B) people will buy more goods.
C) people move funds from interest-bearing assets into money.
D) the price level also rises and people decrease their demand for money.
Answer: A
32) If people are holding more real money than they would like to be holding, they will ________
bonds. The price of a bond will ________ and the nominal interest rate will ________.
A) sell; fall; rise
B) purchase; fall; rise
C) sell; rise; fall
D) purchase; rise; fall
Answer: D
33) Real money demand is ________ related to the nominal interest rate.
A) positively
B) negatively
C) not
D) None of the above answers is correct because the relationship between the demand for money
and the nominal interest rate changes with the inflation rate.
Answer: B
34) The real interest rate
A) can never be negative.
B) is equal to the nominal interest rate plus the inflation rate.
C) is equal to the nominal interest rate minus the inflation rate.
D) is positively related to the inflation rate.
Answer: C
35) The nominal interest rate minus the real interest rate equals the
A) rate of increase in the amount of investment.
B) inflation rate.
C) the rate of increase in the income.
D) the rate the bank receives to cover lending costs.
Answer: B
36) Suppose that you took out a $1000 loan in January and had to pay $75 in annual interest.
During the year, inflation was 6 percent. Which of the following statements is correct?
A) The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent.
B) The nominal interest rate is 7.5 percent and the real interest rate is 13.5 percent.
C) The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent.
D) The real interest rate is 6 percent and the nominal interest rate is 7.5 percent.
Answer: A
37) If an economy has a Velocity of 3, then
A) the nominal money supply is 3 times real GDP.
B) in a year the average dollar is exchanged 3 times to purchase goods and services in GDP.
C) nominal GDP is 1/3 the size of the quantity of money.
D) the quantity of money is $3 for every dollar of GDP.
Answer: B
38) In the longer-run, inflation can be controlled by regulating the longer-run growth in:
A) the nominal money supply.
B) potential real GDP.
C) the natural rate of unemployment.
D) nominal wage rates.
Answer: A
Quantity of real Quantity of real
Interest rate money demanded money supplied
(percent per year) (trillions of dollars) (trillions of dollars)
1.0 30 24
1.5 29 24
2.0 28 24
2.5 27 24
3.0 26 24
3.5 25 24
4.0 24 24
4.5 23 24
5.0 22 24
5.5 21 24
6.0 20 24
6.5 19 24
7.0 18 24
39) The table shows the demand and supply schedules for real money. If the Federal Reserve
increases the quantity of money by 6 trillion dollars, the interest rate changes from _______ percent
per year to ______ percent per year.
A) 4.0, 1.0
B) 4.0, 7.0
C) 1.0, 7.0
D) 4.0, 1.5
Answer: A
