Exam 1 Review

Question 1

The fact that US currency is legal tender means:
a. US currency is good anywhere in the world.
b. The only money the government will accept for settlement of debt is US currency.
c. US dollars must be accepted as a means to cancel debt or pay taxes.
d. It cannot be backed by gold or other metals.

Answer 1

c. US dollars must be accepted as a means to cancel debt or pay taxes.

Question 2

To be money, a good must have the following characteristic(s):
a. Means of payments, unit of account, store of value
b. Means of payments
c. Unit of account
d. Store of value

Answer 2

b. Means of payments

Question 3

An important characteristic of commodity money is:
a. It has no non-monetary uses.
b. It has non-monetary uses (consumptions and/or industrial).
c. It can never grow in quantity.
d. It was never widely used.

Answer 3

b. It has non-monetary uses (consumptions and/or industrial).

Question 4

In a free banking regime:
a. Private banks accept deposits in base money (i.e., gold) and issue banknotes
convertible to base money.
b. Private banks accept deposits, but issue inconvertible notes.
c. Private banks issue fiat money.
d. It is a theoretical model that has never been tried in reality.

Answer 4

Private banks accept deposits in base money (i.e., gold) and issue banknotes
convertible to base money.

Question 5

In the gold exchange standard:
a. Only the US dollar is convertible to gold to other central banks.
b. Only the US dollar is convertible to gold to the public.
c. All central bank money is convertible to gold to other central banks.
d. Is like the classic gold standard, but with new parities between each central bank
bill.

Answer 5

a. Only the US dollar is convertible to gold to other central banks.

Question 6

The price of money is:
a. The interest rate
b. The inverse of the interest rate
c. The price level
d. The inverse of the price level

Answer 6

d. The inverse of the price level

Question 7

Inflation refers to growth in an economy’s:
a. Gross Domestic Product (GPD)
b. Interest rates
c. Money
d. Prices

Answer 7

d. Prices

Question 8

With inflation:
a. You need less money to buy the same basket of goods you bought a month or a year
ago.
b. Money is more valuable.
c. There is too little money in circulation.
d. Prices, in general, are increasing over time.

Answer 8

d. Prices, in general, are increasing over time.

Question 9

The core-CPI includes:
a. The price of around 80,000 goods and services consumed by a representative
household.
b. The price of around 80,000 goods and services consumed by a representative
household excluding commodities.
c. The price of all final goods and services (not just 80,000).
d. The average price received by producers, including intermediate goods.

Answer 9

The price of around 80,000 goods and services consumed by a representative
household excluding commodities.

Question 10

The PPI includes:
a. The price of around 80,000 goods and services consumed by a representative
household.
b. The price of around 80,000 goods and services consumed by a representative
household excluding commodities.
c. The price of all final goods and services (not just 80,000).
d. The average price received by producers, including intermediate goods.

Answer 10

d. The average price received by producers, including intermediate goods.

Question 11

Cantillon effects, or money illusion, means that:
a. Relative prices are affected, distorting the information received by investors
and entrepreneurs.
b. There will be a wealth transfer from creditors to debtors.
c. There will be a wealth transfer from debtors to creditors.
d. You will have to pain taxes on nominal (but not real) gains.

Answer 11

Relative prices are affected, distorting the information received by investors
and entrepreneurs.

Question 12

If inflation is higher than expected inflation:
a. Lender loses and borrower gains purchasing power.
b. Lender gains and borrower loses purchasing power.
c. Differences between inflation and expected inflation do not affect borrower and
lender financial relationship.
d. It is undefined if the lender or the borrower will gain some purchasing power.

Answer 12

a. Lender loses and borrower gains purchasing power.

Question 13

The equation of exchange is represented by the following identity:
a. MV=Py
b. MP=Vy
c. My=VP
d. PV=My

Answer 13

a. MV=Py

Question 14

Money velocity stands for:
a. How fast, on average, money is spent (the inverse of money demand)
b. How fast prices move
c. How fast Py moves
d. How fast money supply is changing

Answer 14

a. How fast, on average, money is spent (the inverse of money demand)

Question 15

Hyperinflation is typically defined as:
a. An abnormally high inflation rate.
b. When inflation remains high for a long period of time.
c. When the yearly inflation is 50%.
d. When the monthly inflation is 50%

Answer 15

d. When the monthly inflation is 50%.

Question 16

If there is a positive shock to money-stock demand (i.e., a new country joins the gold
standard)
a. There is a transitory positive shock to the price level.
b. There is a transitory negative shock to the price level.
c. There is a permanent positive shock to the price level.
d. There is a permanent negative shock to the price level.

Answer 16

b. There is a transitory negative shock to the price level.

Question 17

If there is a positive shock to money-flow supply (i.e., a new technology discovery allows for
more gold mining efficiency):
a. There is a transitory positive shock to the price level.
b. There is a transitory negative shock to the price level.
c. There is a permanent positive shock to the price level.
d. There is a permanent negative shock to the price level.

Answer 17

c. There is a permanent positive shock to the price level.

Question 18

A bank, at a fundamental level, facilitates borrowing and lending between which parties?
a. The bank’s depositors are lenders, and the bank is the borrower.
b. People seeking loans from the bank are the borrowers while the bank is the lender.
c. Thank bank’s depositors are the lenders, while those seeking loans from the
bank are the borrowers.
d. Those seeking loans from the bank are the borrowers, while the bank’s stockholders
are the lenders.

Answer 18

Thank bank’s depositors are the lenders, while those seeking loans from the
bank are the borrowers.

Question 19

Let rr be the required reserve ratio, re be the excess reserves (ratio), and l (lambda) be the
currency-to-deposit ratio. The simple money multiplier (m) can be expressed as:

Answer 19

m=1/rr

Question 20

Let rr be the required reserve ratio, re be the excess reserves (ratio), and l (lambda) be the
currency-to-deposit ratio. The simple money multiplier (m) can be expressed as:

Answer 20

m=(1+L)/rr+re+L

Question 21

In a free-banking regime, banks will know if they under-issue convertible banknotes
because:
a. The price level will increase (inflation).
b. The price level will decrease (deflation).
c. Bank reserves will increase.
d. Bank reserves will decrease.

Answer 21

c. Bank reserves will increase.

Question 22

. Some benefits of a Clearing House are:
a. Quality control of members, reduces transaction costs and information
asymmetries.
b. Serves as quality control of its members, but increases transaction costs and
information asymmetries.
c. Reduces transaction costs and information asymmetries, but it does not provide
quality control on its membership.
d. It reduces the geographic scope of note circulation, facilitating monopolies in
different geographic areas.

Answer 22

Quality control of members, reduces transaction costs and information
asymmetries.

Question 23

According to the productivity norm:
a. Under monetary equilibrium, the inflation rate is zero.
b. Under monetary equilibrium, the inflation rate is the inverse of the growth rate
of the economy.
c. Under monetary equilibrium, the inflation rate equals the growth rate of the
economy.
d. The inflation rate depends only on productivity changes, not on money supply or
demand

Answer 23

Under monetary equilibrium, the inflation rate is the inverse of the growth rate
of the economy.

Question 24

At the end of the Free Banking era in Scotland, the bank with the largest banknote
circulation was:
a. The Bank of Scotland.
b. The Royal Bank of Scotland.
c. An industry-specific bank, the British Linen Company.
d. Free Banks were almost extinct.

Answer 24

c. An industry-specific bank, the British Linen Company.

Question 25

Federal Reserve notes are:
a. A liability in the balance sheet of the Fed.
b. An asset in the balance sheet of the Fed.
c. Part of the Fed’s equity.
d. Bank and government deposits at the Fed.

Answer 25

a. A liability in the balance sheet of the Fed.