1. According to classical macroeconomic theory, changes in the money supply affect

a. unemployment and the price level.

b. unemployment but not the price level.

c. the price level, but not unemployment.

d. neither the price level nor unemployment.

2. If the reserve ratio for all banks is 20 percent, then $100 of new reserves can generate ___ new money:

a. $60 of new money in the economy.

b. $250 of new money in the economy.

c. $500 of new money in the economy.

d. $2,000 of new money in the economy.

3. When the Fed buys government bonds,

a. The money supply increases and the federal funds rate increases.

b. The money supply increases and the federal funds rate decreases.

c. The money supply decreases and the federal funds rate increases.

d. The money supply decreases and the federal funds rate decreases.

4. Which of the following statements is correct?

a. Credit cards are important for our system of payments, but they are not important for analyzing the monetary system.

b. Account balances that lie behind debit cards are included in M1 and in M2.

c. People who have credit cards probably hold more money on average than people who do not have credit cards.

d. A debit card is more similar to a credit card than to a check.

5. Which of the following statements is correct?

a. In the special case of 100-percent-reserve banking, the reserve ratio is 1, the money multiplier is 2, and banks create money.

b. In the special case of 100-percent-reserve banking, the reserve ratio is 1, the money multiplier is 1, and banks do not create money.

c. When the reserve ratio is 0.5, then the money multiplier is 1 and banks do not create money.

d. When the reserve ratio is 0.125, then the money multiplier is 8, and each bank loans $8 for every $1 that it accept in deposits.

6. Liquidity refers to

a. the ease with which an asset is converted to the medium of exchange.

b. the measurement of the intrinsic value of commodity money.

c. the measurment of the durability of a good.

d. how many time a dollar circulates in a given year.

7. Treasury Bonds are

a. both a store of value and a medium of exchange.

b. a store of value, but not a medium of exchange

c. a medium of exchange, but not a store of value.

d. neither a store of value nor a medium of exchange.

8. The “yardstick” people use to post prices and record debts is called

a. a medium of exchange.

b. a unit of account.

c. a store of value.

d. liquidity.

9. When a bank loans out $1,000, the money supply

a. does not change.

b. decreases.

c. increases.

d. may do any of the above.

10. According to the classical dichotomy, which of the following is affected by monetary factors?

a. nominal wages

b. the price level

c. nominal GDP

d. All of the above are correct.

Short answers:

11. In what sense do banks, households and firms control the money supply?

12. What tools will the Federal Reserve use after the Great Recession and why?

13. Evaluate the Quantity Theory of Money.