Question 1

Which of the following best describes the three principal uses of money in a modern economy?

Accepted Answer

Medium of exchange, unit of account, store of value

Question 2

Suppose the central bank lowers the required reserve ratio from 20% to 10%. What is the effect on the money multiplier $$m$$?

Accepted Answer

$$m$$ increases

Question 3

If the central bank conducts an open market sale of government bonds, what is the immediate effect on the monetary base and the money supply?

Accepted Answer

Both the monetary base and the money supply decrease

Question 4

Which of the following assets is included in M2 but NOT in M1?

Accepted Answer

Savings deposits

Question 5

Suppose the reserve ratio is 0.2 and all currency is held as bank reserves. If the central bank injects $$500$$ into the banking system, what is the maximum possible increase in the money supply?

Accepted Answer

$$2500$$

Question 6

If the nominal interest rate increases, what happens to the quantity of money demanded according to the money demand function $$MD = L(Y, i)$$?

Accepted Answer

It decreases

Question 7

A new financial technology allows people to pay for goods using their smartphones, reducing the need to hold cash. What is the likely effect on the money demand curve and the equilibrium nominal interest rate?

Accepted Answer

The money demand curve shifts left; the equilibrium nominal interest rate falls

Question 8

Which of the following best describes the relationship between the money supply curve and monetary policy?

Accepted Answer

The money supply curve is vertical and shifts with changes in monetary policy

Question 9

Suppose the central bank wants to decrease the nominal interest rate. Which policy action should it take?

Accepted Answer

Purchase government bonds in the open market

Question 10

If the central bank sells foreign currency in the foreign exchange market, what is the likely effect on the domestic money supply and the exchange rate?

Accepted Answer

The money supply decreases and the domestic currency appreciates

Question 11

Given the following: currency in circulation ($$CiC$$) = $$500$$, bank reserves ($$BR$$) = $$500$$, required reserve ratio ($$RR$$) = $$0.1. $$What is the money supply ($$MS$$)?

Accepted Answer

$$MS = CiC + \frac{BR}{RR} = 500 + \frac{500}{0.1} = 500 + 5000 = 5500$$

Question 12

If the public decides to hold more of their money as currency and less as bank deposits, what is the likely effect on the money multiplier and the money supply, all else equal?

Accepted Answer

The money multiplier decreases and the money supply decreases

Question 13

Suppose the money demand curve shifts to the right. Which of the following could have caused this shift?

Accepted Answer

An increase in real GDP

Question 14

If the central bank increases capital recycling (makes more short-term loans to commercial banks), what is the effect on the money supply and the nominal interest rate?

Accepted Answer

The money supply increases and the nominal interest rate decreases

Question 15

If the nominal interest rate is below the equilibrium value, what will happen in the money market?

Accepted Answer

The quantity demanded of money exceeds the quantity supplied, asset prices rise, and the nominal interest rate rises

Question 16

Which of the following is a direct tool the central bank uses to influence the money supply?

Accepted Answer

Open market operations

Question 17

Suppose Judy transfers $$1000$$ from her savings account to her demand deposit account. What is the effect on M1 and M2?

Accepted Answer

M1 increases; M2 remains unchanged

Question 18

If the central bank wants to contract the money supply using the required reserve ratio, what should it do?

Accepted Answer

Increase the required reserve ratio

Question 19

Which of the following best explains why the money demand curve slopes downward?

Accepted Answer

A lower nominal interest rate reduces the opportunity cost of holding money

Question 20

Suppose the money supply in a country is $$20,000$$ and currency held by the public equals bank reserves. If the reserve ratio is $$0.25$$, what are bank reserves?

Accepted Answer

$$4,000$$

Money and Monetary Policy: Study Notes for Macroeconomics

Study Guide - Practice Questions

Study Guide - Flashcards