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Macroeconomics Policy and Practice 2nd Edition Mishkin Test Bank 1
Macroeconomics Policy and Practice 2nd Edition Mishkin Test Bank 1
https://testbankpack.com/p/test-bank-for-macroeconomics-policy-and-practice-
2nd-edition-mishkin-0133424316-9780133424317/
3) Money is ________.
A) an asset
B) a unit of measure
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C) a tool
D) all of the above
E) none of the above
Answer: D
Topic: 5.1 What Is Money?
AACSB: Reflective Thinking
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5) Wealth ________.
A) may serve the monetary function of store of value
B) means essentially the same as money
C) differs from money in that wealth is more liquid
D) is the flow that corresponds to the stock of income
E) none of the above
Answer: A
Topic: 5.1 What Is Money?
AACSB: Reflective Thinking
6) Someone who has just inherited a "goldmine" has received a great deal of ________.
A) wealth
B) money
C) income
D) currency
E) liquidity
Answer: A
Topic: 5.1 What Is Money?
AACSB: Reflective Thinking
7) Fred has always been known as "the rich kid." Strictly speaking, this must mean that
________.
A) Fred has a lot of cash
B) Fred's income is quite high
C) Fred won the lottery before he was legally eligible
D) Fred has a flashy wardrobe
E) Fred has a lot of wealth
Answer: E
Topic: 5.1 What Is Money?
AACSB: Reflective Thinking
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9) The most liquid asset is ________.
A) stocks
B) bonds
C) cash
D) real estate
E) none of the above
Answer: C
Topic: 5.1 What Is Money?
10) Subject to a few legal and practical restrictions, anything may be exchanged for anything
else. The distinctive advantage of money is that ________.
A) it is likely to retain its value, whether it is kept or exchanged
B) it has little, if any, use other than exchange
C) it can generate income while it is kept
D) it is likely to be accepted by everyone in exchange for anything
E) none of the above
Answer: D
Topic: 5.1 What Is Money?
AACSB: Reflective Thinking
12) A prisoner of war camp seems a likely place for "cigarette money," because ________.
A) nearly all prisoners smoke cigarettes
B) of the absence of better alternatives
C) cigarettes are abundant and easy to count
D) the guards can enforce the practice of accepting cigarettes as a medium of exchange
E) cigarettes retain their value over time
Answer: B
Topic: 5.1 What Is Money?
AACSB: Reflective Thinking
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13) Characteristics that enable an item to serve well as money include each of the following,
except ________.
A) durable
B) abundant
C) divisible
D) portable
E) verifiable
Answer: B
Topic: 5.1 What Is Money?
AACSB: Reflective Thinking
14) Suppose you have a collection of gold coins from the 19th century. Comment on their
suitability to provide for you each of the three functions of money.
Answer: The coins are an exceptional store of value. They would serve well as a medium of
exchange, eagerly accepted by most people. They are a poor unit of account, since their value
fluctuates a great deal relative to other goods. The face value of the coins is not a reliable
indicator of their worth relative to other goods. This is because they are valued primarily as a
store of value (and historical/artistic artifacts), rather than as a medium of exchange.
Topic: 5.1 What Is Money?
AACSB: Reflective Thinking
5.2 The Federal Reserve System and the Control of the Money Supply
1) In modern economies, the supply of money depends mainly on the economy's ________.
A) tax rates
B) mining of precious metals
C) net exports
D) growth of output of goods and services
E) none of the above
Answer: E
Topic: 5.2 The Federal Reserve System and the Control of the Money Supply
AACSB: Reflective Thinking
2) In addition to the chairman of the Board of Governors, the FOMC consists of ________.
A) six rotating members of the Board of Governors and five presidents of Federal Reserve banks
B) six other members of the Board of Governors, four rotating bank presidents and the president
of the New York Federal Reserve
C) six other members of the Board of Governors and five presidents of Federal Reserve banks;
all twelve rotating members
D) twelve Federal Reserve Bank presidents
E) none of the above
Answer: B
Topic: 5.2 The Federal Reserve System and the Control of the Money Supply
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3) The Federal Reserve System consists of ________.
A) eleven district banks and a board of governors
B) ten district banks and the FOMC
C) eleven district banks
D) twelve district banks and a board of governors
E) none of the above
Answer: D
Topic: 5.2 The Federal Reserve System and the Control of the Money Supply
6) When the Fed sells government securities in the open market, the money supply ________
because ________.
A) decreases; banks lose liquidity, they make fewer loans and checking account deposits
decrease
B) increases; banks gain liquidity, they make more loans and checking account deposits increase
C) increases; banks lose liquidity, they make more loans and checking account deposits increase
D) decreases; banks gain liquidity, they make fewer loans and checking account deposits
decrease
E) none of the above
Answer: A
Topic: 5.2 The Federal Reserve System and the Control of the Money Supply
AACSB: Analytical Thinking
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7) When the Fed buys government securities in the open market, the money supply ________
because ________.
A) decreases; banks lose liquidity, they make fewer loans and checking account deposits
decrease
B) increases; banks gain liquidity, they make more loans and checking account deposits increase
C) increases; banks lose liquidity, they make more loans and checking account deposits increase
D) decreases; banks gain liquidity, they make fewer loans and checking account deposits
decrease
E) none of the above
Answer: B
Topic: 5.2 The Federal Reserve System and the Control of the Money Supply
AACSB: Analytical Thinking
9) Which of the following is true for the European Central Bank (ECB)?
A) its executive board meets more often than the FOMC
B) each member country's central bank has similar functions to the Federal Reserve Banks
C) it is housed in Frankfurt, Germany
D) all of the above
E) none of the above
Answer: D
Topic: 5.2 The Federal Reserve System and the Control of the Money Supply
10) Which of the following is true for the European Central Bank (ECB)?
A) its executive board meets less often than the FOMC
B) the members of its executive board have lifetime appointments
C) it is a more decentralized system than the Federal Reserve
D) all of the above
E) none of the above
Answer: C
Topic: 5.2 The Federal Reserve System and the Control of the Money Supply
AACSB: Reflective Thinking
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11) Both the Federal Reserve System in the United States and the European Central Bank are
comprised of geographically dispersed Banks. How might such decentralization contribute to
successful monetary policy?
Answer: The economies of both the U.S. and Europe encompass many regions with distinct
economic specializations, income levels, demographics, etc. Policymakers need to be aware of
this heterogeneity and of how the policies under consideration might impact some regions
differently than others. Having had a role in the design and selection of policies, officials and
citizens at the regional level will be more willing and able to support and to implement the
policies.
Topic: 5.2 The Federal Reserve System and the Control of the Money Supply
AACSB: Reflective Thinking
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4) M1 differs from M2 because ________.
A) M1 is less liquid than M2
B) M1 includes demand deposits and M2 does not
C) M1 includes only the most liquid forms of money and M2 includes all of M1 and some less
liquid items
D) all of the above
E) none of the above
Answer: C
Topic: 5.3 Measuring Money
AACSB: Analytical Thinking
5) M1 does not include cash that is held in ATMs or bank vaults, because ________.
A) no one really owns that money
B) that money is included in M2
C) that money earns no interest
D) the right to access that money is counted already as bank deposits
E) none of the above
Answer: D
Topic: 5.3 Measuring Money
AACSB: Analytical Thinking
6) Financial innovations such as direct deposit of paychecks, electronic payment of bills, and
automated teller machines (ATMs) have likely ________.
A) had minimal effect on M1 and M2
B) reduced the size of M2 relative to M1
C) increased both M1 and M2 relative to GDP
D) caused the growth rates of M1 and M2 to become more stable
E) reduced the size of M1 relative to M2
Answer: E
Topic: 5.3 Measuring Money
AACSB: Reflective Thinking
7) Typically, when someone borrows money from a bank, M2 ________, because ________.
A) increases; the money is held for a while in a liquid form
B) decreases; the money is held for a while in a liquid form
C) does not change; the loan affects only the subcategories within M2
D) decreases; of the decline in the bank's vault cash
E) none of the above
Answer: A
Topic: 5.3 Measuring Money
AACSB: Analytical Thinking
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8) Which of these transactions results in an increase in M1?
A) withdrawal of $100 cash from your checking account
B) certificate of deposit matures, adding $520 to your checking account
C) depositing a bank loan of $400 into your savings account
D) depositing a $300 paycheck into your savings account
E) none of the above
Answer: B
Topic: 5.3 Measuring Money
AACSB: Analytical Thinking
10) If the euro replaces the U.S. dollar as the world's most popular currency, that will likely
________.
A) reduce M1, without affecting M2
B) reduce M2, without affecting M1
C) cause a temporary increase in M1
D) affect neither M1 nor M2
E) none of the above
Answer: E
Topic: 5.3 Measuring Money
AACSB: Reflective Thinking
11) Current Federal Reserve policy focuses on interest rates, rather than on monetary aggregates,
because ________.
A) monetary aggregates do not provide clear or consistent signals to guide policymakers
B) open market operations affect interest rates more directly than they affect monetary
aggregates
C) according to the Fisher effect, the interest rate is a key determinant of the inflation rate
D) all of the above
E) none of the above
Answer: A
Topic: 5.3 Measuring Money
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12) As of 2013, the outstanding U.S. currency is more than $1 trillion, which suggests that the
typical U.S. citizen holds $3,600 in cash. Is this an accurate inference? Why?
A) Yes; because dividing total currency by total U.S. population roughly works out to $3,600 per
person.
B) No; because criminals and foreigners hold large sums of dollars, so the average citizen holds
far less.
C) No; because the average citizen probably does not have $3,600 in her checking account.
D) Yes; because the Fed rarely makes accounting mistakes when computing M1.
E) none of the above
Answer: B
Topic: 5.3 Measuring Money
AACSB: Analytical Thinking
13) The principal reason(s) that so much U.S. currency is held outside the U.S is (are) ________.
A) many people around the world trust the U.S. dollar more than any other currency
B) banks all around the world find it convenient to hold large amounts of U.S. dollars
C) U.S. citizens and corporations spend a lot of dollars abroad
D) all of the above
E) none of the above
Answer: A
Topic: 5.3 Measuring Money
14) Recent financial turmoil has caused many people to increase saving and to prefer assets that
are perceived to be relatively safe and liquid. What are the likely effects on M1 and M2?
Answer: Increased saving implies reduced consumption, so holding of the most liquid assets,
M1, should decline. Instead, people will hold more of the less liquid, interest-bearing assets
within M2. If people are shifting away from illiquid assets like corporate stock in favor of assets
like money market mutual fund shares, then M2 should rise.
Topic: 5.3 Measuring Money
AACSB: Reflective Thinking
15) Credit cards are a popular means of payment. Why are credit card accounts not included in
M1 or M2? Are credit cards of no relevance to these money measures?
Answer: A purchase using a credit card is the same as taking out a loan. In the transaction, no
medium of exchange passes between the buyer and the seller. At a later time, the seller receives a
payment, and the buyer must give a corresponding amount to the credit card issuer. The use of
credit cards does tend to reduce M1 relative to M2, since many transactions can be covered by a
single monthly payment on ones credit card account, reducing the desired quantities of cash and
checking account balances.
Topic: 5.3 Measuring Money
AACSB: Reflective Thinking
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5.4 Quantity Theory of Money
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6) The velocity of money ________.
A) represents the average number of times a dollar is spent in a given year
B) indicates the relative importance of cash versus writing checks for purchases
C) times the money supply should equal real GDP
D) all of the above
E) none of the above
Answer: A
Topic: 5.4 Quantity Theory of Money
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10) According to Irving Fisher, velocity ________.
A) is determined by the way banks alone conduct transactions
B) equals the number of transactions times the average price per transaction all divided by total
money balances
C) can change very quickly on short notice
D) all of the above
E) none of the above
Answer: B
Topic: 5.4 Quantity Theory of Money
13) The quantity theory of money tells us that real money balances are proportional to income,
since ________.
A) velocity is assumed constant in the short run
B) the supply and demand of money are equal in equilibrium
C) changes in the quantity of money lead to proportional changes in the price level
D) all of the above
E) none of the above
Answer: D
Topic: 5.4 Quantity Theory of Money
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14) From the equation of exchange, if both nominal income and the quantity of money (M) have
tripled, while the price level (P) has increased by 50 percent and velocity (V) remains constant,
then real output (Y) ________.
A) also triples
B) increases by 50 percent
C) doubles
D) decreases by 50 percent
E) none of the above
Answer: C
Topic: 5.4 Quantity Theory of Money
AACSB: Analytical Thinking
15) From the equation of exchange, if both nominal income and the quantity of money (M) have
doubled, while the price level (P) has decreased by 50 percent and velocity (V) remains constant,
then real output (Y) ________.
A) also doubles
B) triples
C) quadruples
D) decreases by 50 percent
E) none of the above
Answer: C
Topic: 5.4 Quantity Theory of Money
AACSB: Analytical Thinking
16) From the equation of exchange, if both real income (Y) and the quantity of money (M)
double and the price level (P) remains constant, then velocity (V) ________ and nominal income
________.
A) remains constant; doubles
B) doubles; remains constant
C) doubles; doubles
D) decreases by 50 percent; quadruples
E) none of the above
Answer: A
Topic: 5.4 Quantity Theory of Money
AACSB: Analytical Thinking
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18) In the quantity theory of money, the assumption that aggregate output is fixed is based on the
view that ________.
A) wages and prices are perfectly flexible in the long run
B) the velocity of money is constant in the short run
C) the demand for real money balances is proportional to income
D) changes in the quantity of money lead to proportional changes in the price level
E) none of the above
Answer: A
Topic: 5.4 Quantity Theory of Money
21) The proposition that changes in the money supply have no long-run effect on real variables is
known as the ________.
A) classical dichotomy
B) quantity theory of money
C) neutrality of money
D) Fisher effect
E) none of the above
Answer: C
Topic: 5.4 Quantity Theory of Money
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22) The proposition that the amount of goods and services produced in an economy in the long
run is not affected by the price level is known as the ________.
A) neutrality of money
B) classical dichotomy
C) quantity theory of money
D) Fisher effect
E) none of the above
Answer: B
Topic: 5.4 Quantity Theory of Money
23) The proposition that the velocity of money is fairly constant in the long run is known as the
________.
A) neutrality of money
B) classical dichotomy
C) quantity theory of money
D) Fisher effect
E) none of the above
Answer: E
Topic: 5.4 Quantity Theory of Money
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26) The quantity theory of money ________.
A) suggests that inflation is always and everywhere a monetary phenomenon which has been
shown to always be supported by the data
B) validates the classical assumption that wages and prices are completely flexible in the short
run
C) provides a better description of short run fluctuations in inflation and money growth than the
link between these variables in the long run
D) all of the above
E) none of the above
Answer: E
Topic: 5.4 Quantity Theory of Money
27) How have financial innovations such as direct deposit of paychecks, electronic payment of
bills, and automated teller machines (ATMs) affected the velocity of money and the demand for
real money balances?
Answer: Because of these innovations, each unit of money is more quickly and easily available
for transactions. Each unit of money is transacted more frequently, so velocity is increased. A
given volume of transactions can be accomplished with fewer units of money, so the demand for
real balances is reduced.
Topic: 5.4 Quantity Theory of Money
AACSB: Reflective Thinking
28) Suppose Y = 100, P = 80, and V = 3.2. If Y rises to 105, and the inflation rate is 10 percent,
what is the new value of M?
Answer: 105 × 88 = 9,240 = M × 3.2. M = 2,887.5. Equivalently, 100 × 80 = M × 3.2, so M =
2,500. Since P × Y rises from 8,000 to 9,240, an increase of 15.5%, M must rise by 15.5% =
2,500 × 1.155 = 2,887.5
Topic: 5.4 Quantity Theory of Money
AACSB: Analytical Thinking
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5.5 Hyperinflation
3) The direct cause of the hyperinflation that plagued Zimbabwe in the 2000s is ________.
A) printing of too much money by the central bank
B) government expenditures greatly above revenues
C) outlawing of price increases on many commodities
D) allowing the use of foreign currencies
E) the issuance of a $100 billion bank note
Answer: A
Topic: 5.5 Hyperinflation
4) The root cause of the hyperinflation that plagued Zimbabwe in the 2000s is ________.
A) printing of too much money by the central bank
B) government expenditures greatly above revenues
C) outlawing of price increases on many commodities
D) allowing the use of foreign currencies
E) the issuance of a $100 billion bank note
Answer: B
Topic: 5.5 Hyperinflation
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5) The main reason that hyperinflation renders a currency worthless is that ________.
A) the government cannot print money fast enough to keep up with the rising prices
B) laws against raising prices are easily evaded
C) reducing government expenditures is politically unpopular
D) the government's "official" inflation rate is always a gross understatement
E) as soon as inflation seems out of control, everyone knows that the currency will soon lose
whatever value it has today
Answer: E
Topic: 5.5 Hyperinflation
AACSB: Reflective Thinking
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Figure 5.1
5) According to Figure 5.1, the real interest rate is relatively high in ________.
A) Brazil
B) Turkey
C) Argentina
D) Japan
E) Indonesia
Answer: A
Topic: 5.6 Inflation and Interest Rates
AACSB: Analytical Thinking
6) According to Figure 5.1, the real interest rate is relatively low in ________.
A) Brazil
B) Turkey
C) Argentina
D) Japan
E) Indonesia
Answer: B
Topic: 5.6 Inflation and Interest Rates
AACSB: Analytical Thinking
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7) During the Great Inflation of the 1970s, (a) the growth rates of M1 and M2 were higher than
previously, and (b) the growth rate of M2 was much higher than the growth rate of M1. Explain
how the high inflation of the decade relates to each of these facts.
Answer: By the quantity theory of money, rapid growth of the money supply (relative to the
growth rate of aggregate output) causes the inflation rate to be high. When inflation is high,
holding cash and non-interest bearing deposits is costly, so people shift as much money as
possible into interest-bearing accounts, so the narrow monetary aggregate M1 does not grow as
fast as the broader aggregate M2. By the Fisher effect, nominal interest rates rise with expected
inflation, so interest-bearing accounts provide some compensation for inflation.
Topic: 5.6 Inflation and Interest Rates
AACSB: Reflective Thinking
1) Inflation ________.
A) is costly because the classical dichotomy may not always hold
B) that is anticipated (or expected) can be costly
C) is costly for many reasons but chief among them is that inflation makes it more difficult to
plan for the future
D) all of the above
E) none of the above
Answer: D
Topic: 5.7 The Cost of Inflation
AACSB: Reflective Thinking
2) With increases in inflation demand for money that does not earn a return decreases. Carrying
less cash in our pockets means higher ________.
A) shoe-leather costs
B) menu costs
C) capital gain tax bills
D) all of the above
E) none of the above
Answer: A
Topic: 5.7 The Cost of Inflation
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4) Inflation might lead to ________ because ________.
A) lower demand for stocks; of tax distortions
B) lower demand for cash; money does not typically yield interest
C) uncertain or uneven demand for goods; higher fluctuations in relative prices make it harder
for consumers to compare among goods and make rational consumption decisions
D) all of the above
E) none of the above
Answer: D
Topic: 5.7 The Cost of Inflation
AACSB: Reflective Thinking
6) Inflation ________.
A) is more costly when it is anticipated than when it comes as a surprise
B) makes it more difficult to plan for the future, whether it is a surprise or not
C) induces distortions in the money and goods market but not the labor market
D) all of the above
E) none of the above
Answer: B
Topic: 5.7 The Cost of Inflation
AACSB: Reflective Thinking
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8) Inflation may impose little, if any, cost on the economy, if ________.
A) laws against excessive price increases are enforced effectively
B) the government subsidizes menu costs
C) price increases are fully anticipated
D) the Fisher effect holds true
E) the rate of price increase is so slow that people do not feel compelled to alter their behavior
Answer: E
Topic: 5.7 The Cost of Inflation
AACSB: Reflective Thinking
9) Inflation interferes with the functions of money. Which of the three functions is impaired,
even when the inflation rate is quite low? Considering higher rates of inflation, which function is
affected next? Which function of money is the last to suffer substantial damage from inflation?
Answer: A consequence of even low inflation is to undermine money's function as a store of
value. At somewhat higher rates, inflation complicates the use of money as a unit of account,
because of increased variability of relative prices. As the inflation rate goes higher, money loses
its ability to serve as a medium of exchange.
Topic: 5.7 The Cost of Inflation
AACSB: Reflective Thinking
10) How might inflation, even if fully anticipated, prevent the classical dichotomy from holding,
even in the long run?
Answer: The classical dichotomy asserts that output is determined solely by the aggregate
production function and the quantities of factors available. Inflation is like a negative technology
shock that lowers productivity. Shoe-leather and menu costs represent uses of resources that add
nothing to aggregate output. Because price increases throughout the economy are spread out over
time, it is rational to react to the temporary changes in relative prices, even if the changes are
known to be temporary. This causes distortions in the allocation of resources, and temporary,
rational distortions are distortions, nonetheless.
Topic: 5.7 The Cost of Inflation
AACSB: Reflective Thinking
11) Unanticipated inflation always benefits somebody, so the overall cost cannot be higher than
it is for anticipated inflation. Comment.
Answer: It is true that mistaken expectations of inflation cause one party to a transaction to get a
better deal than intended, at the expense of the other party. But the true value of that better deal
is reduced by the fact that neither party knows, in advance, who will win. Few workers, for
example, would prefer to be paid on the basis of a lottery in which losing is as likely as winning.
Moreover, unanticipated inflation is difficult to recognize, even after the fact. If the size of your
nominal wage increase exceeds your expectation of inflation, does that mean your real wage is
higher, or that your expectation was mistaken? By the time you figure it out, you may have made
a wrong decision.
Topic: 5.7 The Cost of Inflation
AACSB: Reflective Thinking
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