New Effective Economics 5A

Chapter 6 Money Market and Monetary Policy

Tuen Mun Government Secondary School

Economics Assessment Exercise #001

Content: Ch.6 Money market & monetary policy Name:

Date: ___________________ Class：S. ( )
Deadline:________________ Marks : 74

Section A: Multiple-choice Questions (Each 2 marks, Maximum 22 marks)

Choose the BEST answer for each question.

Section 6.1
1. Which of the following statements are correct?
(1) Transactions demand for money is positively related to real national income.
(2) Asset demand is the demand for money as a store of value.
(3) The real interest rate is the cost of holding money.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

2. Which of the following will reduce money demand?

A. A rise in real national income
B. A rise in the expected price level
C. A rise in the time interval between successive income receipts
D. None of the above

3. Which of the following will raise the transactions demand or asset demand for money?
(1) Real national income increases.
(2) The interest rate falls.
(3) Other assets have less risk.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

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New Effective Economics 5A
Chapter 6 Money Market and Monetary Policy

Section 6.2
4. Which of the following will shift the money demand curve from Md1 to Md2?
Interest rate (%)

M d1 Md2
Quantity of money
0

A. A fall in the interest rate

B. An advance in payment technology
C. A change from a weekly payroll to a monthly payroll
D. A decrease in the risk of holding other assets

5. Interest rate (%)

Ms

r2
r0
r1

Md Quantity of money
0

Refer to the diagram above. Which of the following statements are correct?
(1) When the interest rate is r0, quantity demanded of money is equal to quantity supplied of
money.
(2) When the interest rate is r1, quantity demanded of money will fall to eliminate the excess
demand for money.
(3) When the interest rate is r2, there is an excess supply of money and the interest rate will
tend to fall.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

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New Effective Economics 5A
Chapter 6 Money Market and Monetary Policy

6. The interest rate may increase when there is

A. a fall in money demand.
B. a rise in money supply.
C. a fall in money demand accompanied by a fall in money supply.
D. a fall in money demand accompanied by a rise in money supply.

Section 6.3
7. Which of the following will increase the money supply?
(1) The government lowers the required reserve ratio.
(2) The government issues more money to finance its infrastructure projects.
(3) Commercial banks decrease their investments to increase their excess reserves.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

8. Which of the following will shift the money supply curve from Ms1 to Ms2?
Interest rate (%)
Ms 2 Ms1

Quantity of money
0

A. A fall in the discount rate

B. A fall in the required reserve ratio
C. An open market purchase
D. None of the above

9. Suppose the central bank of a country lowers the required reserve ratio. Which of the
following will certainly occur as a result?
A. The deposits in banks will increase.
B. The reserves in banks will decrease.
C. The money supply will increase.
D. The maximum banking multiplier will increase.

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New Effective Economics 5A
Chapter 6 Money Market and Monetary Policy

10. Suppose the required reserve ratio is 25%. If the central bank makes an open market sale of
$10 million in government bonds, what is the maximum change in the money supply?
A. An increase of $30 million
B. An increase of $40 million
C. A decrease of $30 million
D. A decrease of $40 million

11. Suppose the required reserve ratio is 20%. If the central bank makes an open market
purchase of $5 million in government bonds, what will the maximum change in the money
supply be?
A. An increase of $20 million
B. An increase of $25 million
C. A decrease of $20 million
D. A decrease of $25 million

12. Which of the following are contractionary monetary policies?

(1) Raising the discount rate
(2) Raising the required reserve ratio
(3) The central bank makes an open market sale
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

13. Which of the following are the possible effects of a contractionary monetary policy?
(1) A fall in the price level
(2) A fall in real national income
(3) A fall in the unemployment rate
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

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New Effective Economics 5A
Chapter 6 Money Market and Monetary Policy

14. Which of the following may help combat inflation?

(1) Raising the minimum required ratio
(2) Open market sale
(3) Raising the discount rate
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

15. Which of the following monetary policies will lead to a rise in the interest rate?
A. The government lowers the minimum reserve ratio.
B. The central bank sells bonds to the public.
C. The central bank issues more banknotes.
D. The central bank lowers the discount rate.

End of Section A

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New Effective Economics 5A
Chapter 6 Money Market and Monetary Policy
Short Questions (44 marks)

Section 6.1
Q1 Distinguish between the following pairs of words.
(a) Money balance and money demand (2 marks)
(b) Nominal money balance and real money balance (2 marks)

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Q2 Explain TWO motives for holding money. (6 marks)

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New Effective Economics 5A
Chapter 6 Money Market and Monetary Policy
Section 6.2
Q3 Assume that the money supply is completely controlled by the central bank. With the aid of
a diagram, explain how an increase in the money supply affects the interest rate. (4 marks)

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*Q4 Assume that the money supply is completely controlled by the central bank and the
equilibrium interest rate is initially r1. Explain the following with the aid of a diagram.
(a) The effect of recessions in overseas markets on the interest rate. (Hints: Consider how
recessions overseas affect local real national income.) (4 marks)
(b) Referring to (a), what can the central bank do to keep the interest rate at r1? (4 marks)

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New Effective Economics 5A
Chapter 6 Money Market and Monetary Policy
Section 6.3
Q5 What is monetary policy? (2 marks)

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Q6 The central bank in Country A sells $2.5 million in government bonds to the public. Suppose
there is no cash drain and banks do not hold excess reserves. Given that the minimum
reserve ratio is 20%.
(a) How will the banks’ reserves change? What is the maximum change in deposits?
(3 marks)
(b) What is the maximum change in the money supply? (1 mark)

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New Effective Economics 5A
Chapter 6 Money Market and Monetary Policy
Q7 Suppose the central bank of Country A purchases government bonds from the public. With
the aid of a diagram, explain how this will affect the country’s interest rate and money
supply. (5 marks)

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Q8 (a) What is the discount rate? (2 marks)

(b) Explain how the government can adjust the discount rate to reduce the money supply.
(3 marks)

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New Effective Economics 5A
Chapter 6 Money Market and Monetary Policy
Q9 (a) What are the policy tools of expansionary monetary policy? State any TWO of them.
(2 marks)
(b) Explain the effect of an expansionary monetary policy on an economy. (4 marks)

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☺Do your best and never give up! ☺

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