Deck 24: The Aggregate Demandaggregate Supply Model

Question 1

Which of the following describes the store of value function of money?

A) noting that Audible.com sells downloadable audio books for $10 per book
B) making a monthly payment toward your car loan
C) paying $30 for a haircut
D) putting away $50 each month into your savings account

Answer 1

putting away $50 each month into your savings account

Question 2

Money is any item that

A) serves as a medium of exchange for goods and services.
B) can be converted into silver with relatively little loss in value.
C) can be converted into gold with relatively little loss in value.
D) facilitates a connecting link between credit instruments and debt instruments.

Answer 2

serves as a medium of exchange for goods and services.

Question 3

Which of the following describes the medium-of-exchange function of money?

A) noting that Audible.com sells downloadable audio books for $10 per book
B) making a monthly payment toward your car loan
C) paying $30 for a haircut
D) putting away $50 each month into your savings account

Answer 3

paying $30 for a haircut

Question 4

Keeping a $20 bill in your purse to purchase a movie DVD when it comes out next month means that money functions as a

A) medium of exchange.
B) unit of account.
C) standard of deferred payment.
D) store of value.

Question 5

Which of the following illustrates the medium-of-exchange function of money?

A) writing a check to buy a new Volkswagen
B) noting that the price of a $20,000 Volkswagen is 16,000 euros
C) keeping $20,000 in cash in your mattress instead of buying a new Volkswagen
D) driving your $20,000 Volkswagen to a friend's house

Question 6

You spend $20 to buy a used textbook at the college bookstore. What function does money perform here?

A) medium of exchange
B) store of value
C) unit of account
D) standard of deferred payment

Question 7

Inmates at the federal penitentiary at Lompoc, California, accepted packages of mackerel in exchange for goods and services. What function do these packages of mackerel perform?

A) They function as a store of value.
B) They function as a medium of exchange.
C) They function as a unit of account.
D) They function as a factor of production.

Question 8

When a person makes price comparisons among products, money is being used as a(n)

A) unit of account.
B) standard of quality.
C) medium of exchange.
D) checkable deposit.

Question 9

Which of the following best illustrates the unit of account function of money?

A) You list prices for clothing sold on your Web site, www.nattydresser.com, in dollars.
B) You pay for your cruise tickets with dollars.
C) You keep $50 in your backpack for emergencies.
D) You keep your tips earned from your tour guide job in a separate jar at home.

Question 10

Money is essentially defined by

A) the intrinsic value of what is being used as money.
B) the judicial branch.
C) the government.
D) social usage.

Question 11

The unit-of-account function of money means that money is used

A) as a consistent means of measuring the value of things.
B) as the common denominator of future payments.
C) to pay for goods and services.
D) to accumulate purchasing power.

Question 12

The price of a 32GC iPhone is $299. What is the function of money in this context?

A) a medium of exchange
B) a means of payment
C) a unit of account
D) a measure of quality

Question 13

The function of money illustrated by the prevailing prices of goods and services is the

A) medium of exchange function.
B) unit of account function.
C) standard of deferred payments function.
D) store of value function.

Question 14

Which of the following is an advantage of using money as a medium of exchange?

A) It simplifies purchases because all prices are specified in money values.
B) There is no interest charged on using money for purchases.
C) It is easy to mass produce money.
D) It avoids having to rely on barter, the exchange of one good or service for another.

Question 15

In the federal penitentiary at Lompoc, California, inmates used packages of mackerel to buy items such as haircuts at the prison barber shop and laundry services. What function do these packages of mackerel serve?

A) They functioned as money.
B) They served as a corruption deterrent.
C) They enabled prison officers to monitor illegal money flows.
D) They forced prisoners to engage in barter.

Question 16

Inmates at the federal penitentiary at Lompoc, California, accepted packages of mackerel in exchange for goods and services. Why were they willing to accept mackerel in exchange for goods and services?

A) because mackerel is a good source of protein
B) because prison authorities deemed mackerel legal tender
C) because the inmates know that they could use the packages of mackerel to buy other goods and services
D) because the inmates do not wish to consume mackerel

Question 17

Any item that serves as a medium of exchange is called

A) gold.
B) capital.
C) silver.
D) money.

Question 18

When you discover money in your coat that you placed there last winter, you unexpectedly find you were using money as a(n)

A) medium of exchange.
B) unit of account.
C) factor of production.
D) store of value.

Question 19

The functions of money are

A) a conductor of economic activity, a medium of exchange, and a store of value.
B) a medium of exchange, a store of value, and a factor of production.
C) a store of value, a medium of exchange, and a determinant of investment.
D) a store of value, a unit of account, and a medium of exchange.

Question 20

When you buy a ticket to the rodeo, you are using money as a

A) source of economic activity.
B) store of value.
C) factor of production.
D) medium of exchange.

Question 21

The ease with which an asset can be converted to money is its

A) liquidity.
B) adaptability.
C) accessibility.
D) rigidity.

Question 22

Which of the following illustrates the store-of-value function of money?

A) writing a check to buy a new Volkswagen
B) noting that the price of a $20,000 Volkswagen is 16,000 euros
C) agreeing to repay a bank $400 a month for the next 48 months for a loan to buy a new Volkswagen
D) keeping $20,000 in cash in your mattress instead of buying a new Volkswagen

Question 23

Money that some authority, generally a government, has ordered to be accepted as a medium of exchange is called _______ money.

A) fiat
B) intrinsic
C) commodity
D) debt

Question 24

Which of the following is part of M1?
I. currency in a bank's vault
II. cash in your wallet
III. checkable deposits
IV. savings deposits

A) I, II, III, and IV
B) I, II, and III
C) II and III
D) II, III, and IV

Question 25

Because commodity money is not uniform in quality, there is a tendency

A) for higher quality commodity money to drive lower quality commodity money out of circulation.
B) for lower quality commodity money to drive higher quality commodity money out of circulation.
C) for stable commodity money to drive unstable commodity money out of circulation.
D) for unstable commodity money to drive stable commodity money out of circulation.

Question 26

Which of the following is the most liquid asset?

A) season tickets to the Yankees' games
B) the cash that your Aunt Ursula stuffs in her mattress
C) a $5,000 6-month certificate of deposit (time deposit)
D) one hundred shares of IBM stock

Question 27

Rank the following items in terms of most liquid to least liquid.

A) checkable deposits, cash, an office building your father owns
B) cash, credit card, money market mutual funds, checkable deposits,
C) cash, checkable deposits, savings deposits, an office building your father owns
D) cash, Microsoft stock certificates you own, checkable deposits

Question 28

Which of the following items serve as a unit of account?
I. $100 cash
II. checkable deposits
III. an original Picasso painting
IV. a $1,000 corporate bond that you own

A) I only
B) I and II
C) I, II, and III
D) I, II, and IV
E) I, II, III, and IV

Question 29

Which of the following items serve as a store of value?
I. cash in your pocket
II. the balance in your checking account
III. an original Picasso painting
IV. a $1,000 corporate bond

A) I and II
B) I, II, and III
C) I, II, and IV
D) I, II, III, and IV

Question 30

Money that some authority has declared legal tender is called

A) fiat money.
B) currency.
C) convertible paper money.
D) commodity money.

Question 31

Gresham's Law

A) deals with the theory of regulatory forces in the economy.
B) is the tendency for good money to drive bad money out of circulation.
C) is the tendency for bad money to drive good money out of circulation.
D) was passed in 1913, as part of the Federal Reserve Act.

Question 32

Currency in the United States today is

A) fiat money.
B) intrinsic money.
C) backed by gold.
D) quasi- intrinsic.

Question 33

The Fed's narrowest measure of money supply is

A) M1.
B) M2.
C) credit card balances.
D) balances held in money market funds.

Question 34

Money that has value apart from its use as money is called

A) fiat money.
B) currency.
C) convertible paper money.
D) commodity money.

Question 35

Which of the following items serve as a medium of exchange in the United States?
I. $100 cash
II. 50 euros
III. the balance in your checking account
IV. a $1,000 corporate stock that you own

A) I only
B) I and II
C) I, II, and III
D) I and III
E) I, II, III, and IV

Question 36

Which of the following statements is true?

A) In Romania under Communist Party rule in the 1980s, Kent cigarettes served as a medium of exchange. This illustrates the use of Kent cigarettes as fiat money.
B) Commodity money has no value apart from its use as money.
C) In Romania under Communist Party rule in the 1980s, Kent cigarettes served as a medium of exchange. This illustrates the use of Kent cigarettes as commodity money.
D) Fiat money must be backed by gold; otherwise it is worthless.

Question 37

Inflation reduces the ability of money to function as a

A) medium of exchange.
B) medium of value.
C) unit of account.
D) store of value.

Question 38

One disadvantage of commodity money is that

A) it cannot be readily converted to gold.
B) its quantity can fluctuate erratically.
C) its value does not change.
D) it has no value apart from its use as money.

Question 39

Which of the following is part of M1?
I. currency in a bank's vault
II. cash in your wallet
III. checkable deposits
IV. traveler's checks

A) I, II, III, and IV
B) I, II, and III
C) II and III
D) II, III, and IV

Question 40

Which of the following is a store of value and a common medium of exchange?

A) corporate bonds
B) stocks
C) checking account balances
D) debit cards

Question 41

Table 9-1

Refer to Table 9-1. The difference between M1 and M2 amounts to

A) $325 billion.
B) $350 billion.
C) $450 billion.
D) $1,275 billion.

Question 42

Table 9-2

Refer to Table 9-2. In Year 2, if the supply of money measured by M2 was $1,000 billion, then the components of M2 not shown in the table must have totaled

A) less than $250 billion.
B) $250 billion.
C) $300 billion.
D) $450 billion.

Question 43

Table 9-2

Refer to Table 9-2. In Year 1, if savings deposits had been $200 billion instead of $150 billion, M1 would have been

A) unaffected.
B) larger by $50 billion.
C) smaller by $50 billion.
D) $100 billion.

Question 44

Which of the following statements is false about M1 and M2?

A) M2 is a broader measure of the money supply than M1.
B) M2 contains assets that are less liquid than those in M1.
C) All the assets included in M1 are also included in M2.
D) All the assets included in M2 are also included in M1.

Question 45

Which of the following is included in M2 but not in M1?

A) currency
B) demand deposits
C) small-denomination time deposits
D) debit cards

Question 46

Freema withdraws $1,000 from her checking account to purchase a $1,000 time-deposit.
As a result of her transaction,

A) M1 and M2 decrease.
B) M1 decreases and M2 increases.
C) M1 decreases and M2 is unaffected.
D) M1 and M2 are unaffected.

Question 47

Table 9-2

Refer to Table 9-2. In Year 1, if the supply of money measured by M2 was $650 billion, then the components of M2 not shown in the table must have totaled

A) less than $100 billion.
B) $100 billion.
C) $200 billion.
D) $250 billion.

Question 48

The largest component of M1 is

A) checkable deposits.
B) credit card balances.
C) currency.
D) savings deposits.

Question 49

If you withdraw currency from your savings account, you are

A) increasing M1, decreasing M2.
B) increasing both M1 and M2.
C) increasing M1 but not affecting M2.
D) decreasing both M1 and M2.

Question 50

Table 9-2

Refer to Table 9-2. In Year 2, if savings deposits had been $250 billion instead of $200 billion, M2 would have been

A) $575 billion.
B) larger by $50 billion.
C) smaller by $50 billion.
D) unaffected.

Question 51

The monetary aggregate, M1, increases when

A) an individual cashes a check written by a business.
B) an individual purchases clothes with a debit card.
C) an individual switches funds from a savings account to a checking account.
D) an individual buys groceries with a credit card.

Question 52

Debit cards are

A) counted as money because they perform the medium of exchange function of money.
B) not considered money because they merely show that their owners have a relationship to money.
C) are counted as a part of M2 but not M1.
D) counted as money because they provide access to their owners' checkable deposits.

Question 53

M1 includes

A) currency only.
B) currency plus checkable deposits.
C) currency in circulation plus checkable deposits.
D) currency in circulation plus checkable deposits plus traveler's checks.

Question 54

Table 9-2

Refer to Table 9-2. In Year 2, the supply of money measured by M1 was

A) $300 billion.
B) $550 billion.
C) $750 billion.
D) $900 billion.

Question 55

Which of the following would lead to a change in the money measure, M1?

A) a customer purchases music downloads with a debit card
B) a customer withdraws funds from her checking account to purchase a 6-month time deposit
C) depositing a paycheck drawn against Bank of America into your checking account in Wells Fargo Bank
D) interest payments by the Treasury on its debt

Question 56

When her $1,000 time deposit expires, Suneeta decides not to renew the time deposit and opts to cash out. As a result of her transaction

A) M1 and M2 increase.
B) M1 increases and M2 decreases.
C) M1 is unaffected and M2 decreases.
D) M1 increases and M2 is unaffected.

Question 57

Table 9-1

Refer to Table 9-1. The money supply measured by M1 is

A) $325 billion.
B) $450 billion.
C) $1,425 billion.
D) $1,875 billion.

Question 58

Table 9-2

Refer to Table 9-2. In Year 1, the supply of money measured by M1 was

A) $150 billion.
B) $300 billion.
C) $450 billion.
D) $950 billion.

Question 59

Table 9-1

Refer to Table 9-1. The money supply measured by M2 is

A) $450 billion.
B) $1,425 billion.
C) $1,725 billion.
D) $2,075 billion.

Question 60

Credit cards are

A) not money.
B) not money, because they can't be used to purchase goods and services.
C) considered to be money.
D) counted as a part of M2 but not M1.

Question 61

A system in which banks hold reserves whose value is less than the sum of claims on those reserves is called

A) speculative banking.
B) leveraged banking.
C) fractional reserve banking.
D) international banking.

Question 62

The non-bank public chooses among various financial assets in deciding in what form it wants to hold liquidity. It thereby increases or decreases
I. the M1 measure of money supply.
II. the reserves of commercial banks.
III. the reserves that commercial banks are required to hold.

A) none of the above since only the Fed can alter the money supply
B) I, II, and III
C) I and II only
D) I only

Question 63

Which of the following is an example of a bank's assets?

A) reserves borrowed from the Fed
B) checkable deposits
C) vault cash
D) savings deposits

Question 64

In the banking system today, the reserves banks hold against their deposit liabilities must take one of two forms. They are

A) vault cash and deposits at the Fed.
B) vault cash and checkable deposits.
C) currency in circulation and checkable deposits.
D) gold and vault cash.

Question 65

The principle of fractional reserve banking makes it possible for a

A) bank to make loans.
B) bank to print currency.
C) bank to avoid reserve requirements.
D) bank to sell securities.

Question 66

Why might monetary policy authorities be concerned when non-bank financial intermediaries account for a growing share of an economy's financial assets?

A) Monetary policy authorities fear that this situation might erode the value of the U.S. dollar in foreign exchange markets.
B) Monetary policy authorities are concerned that this situation might promote income inequality since high income individuals are more likely to use the services of non-bank financial intermediaries, compared to low-income individuals.
C) Monetary policy authorities fear that this situation might lessen their ability to control money supply because non-bank financial intermediaries are not as heavily regulated as banks.
D) It will be more difficult for monetary policy authorities to monitor those assets that are most closely related to the level of economic activity.

Question 67

An institution that collects funds from lenders and distributes these funds to borrowers is called

A) a financial intermediary.
B) the Federal Reserve System.
C) a mercantile exchange.
D) a currency market.

Question 68

In 2008, commercial banks' share of the U.S. credit market changed as a result of

A) commercial banks that experienced significant difficulties resulting from real estate investments applied for status as investment banks.
B) investment banks that experienced significant difficulties resulting from real estate investments applied for status as commercial banks.
C) increasing returns on real estate investments led commercial banks to expand.
D) increasing returns on real estate investments led investment banks to expand.

Question 69

If banks were required to keep 100% of deposits in reserves, they could

A) make more loans.
B) make no loans.
C) create more deposits.
D) only use required reserves for loans.

Question 70

How does the Fed decide which monetary measure should be the focus of its monetary policy choices?

A) The Fed would like to track a monetary measure that is most closely related to the market interest rate.
B) The Fed would like to track a monetary measure that is most closely related to the quantity of money demanded by economic agents.
C) The Fed would like to track a monetary measure that is most closely related to the level of real GDP and the price level.
D) The Fed would like to track a monetary measure that is most closely related to government spending.

Question 71

The law requires banks to maintain

A) fractional reserves in the form of deposit liabilities against their liquid assets.
B) fractional reserves in the form of federal securities against their outstanding loans.
C) fractional reserves in the form of cash in their vaults or deposits with the central bank against their deposit liabilities.
D) legal reserves in the form of gold against their outstanding loans.

Question 72

Which of the following is not an example of a financial intermediary?

A) a pension fund
B) an insurance company
C) a commercial bank
D) the New York Stock Exchange

Question 73

An activity performed by commercial banks that is not performed by insurance companies is

A) functioning as financial intermediaries.
B) creating financial obligations against themselves.
C) accepting deposits and offering checking accounts.
D) allocating financial resources between borrowers and lenders.

Question 74

Which of the following is an example of a bank's liabilities?

A) its reserves
B) its loans
C) checkable deposits
D) its holdings of U.S. government bonds

Question 75

Which of the following is an example of a bank's reserves?

A) demand deposits with other banks
B) deposits with the Federal Reserve
C) Treasury bonds and bills
D) state bonds of the state in which the bank is located but not state bonds of other states.

Question 76

A financial institution that accepts deposits, makes loans, and offers checking accounts is

A) an insurance company.
B) the Federal Deposit Insurance Corporation.
C) the Federal Reserve System.
D) a commercial bank.

Question 77

Which of the following equations is correct?

A) assets = liabilities − net worth
B) assets = liabilities + net worth
C) liabilities = assets + net worth
D) net worth = liabilities + assets

Question 78

Which of the following is an example of a bank's assets?

A) reserves borrowed from the Fed
B) loans made to customers
C) checkable deposits
D) savings deposits

Question 79

A bank's reserves are

A) the minimum value of assets it must have.
B) the amount of gold it is required to have as reserves against loans.
C) the value of federal securities it is required to have as reserves against loans.
D) deposits that banks have accepted from customers but have not loaned out.

Question 80

Which of the following is an example of a bank's reserves?

A) currency held in the vaults of the bank
B) demand deposits with other member banks
C) U.S. Treasury bills
D) U.S. Treasury bonds