Money Midterm Exam

1) The less liquid an asset is relative to alternative assets, holding everything else
unchanged, the more desirable it is, and the greater the quantity demanded.
A. True B. False

2) ……….. is used to make purchases while …………… is the total collection of pieces of
property that serve to store value, and ………. Is a flow of earnings per unit of time.
A. Money; income, Wealth B. Wealth; income, Money
C. Income; money Wealth D. Money; wealth, Income

3) When we say that money is a stock variable, we mean that ……… .

A. the quantity of money is measured at a given point in time
B. we must attach a time period to the measure
C. it is sold in the equity market
D. money never loses purchasing power

4) For a commodity to function effectively as money it must be ………. .

A. Easily standardized, making it easy to ascertain its value
B. Difficult to make change
C. Deteriorate quickly so that its supply does not become to large
D. Hard to carry around

5) If there are five goods in a barter economy, one needs to know ten prices in order to
exchange one good for another. If however, there are ten goods in a barter economy,
then one needs to know ……….. prices in order to exchange one good for another.

A. 20 B. 25 C. 30 D. 45

6) If the nominal rate of interest is 2 percent, and prices are expected to fall (deflation)
by 10 percent, the real rate of interest is ………… .

A. 2 percent B. 8 percent. C. 10 percent. D. 12 percent.

7) Compared to an economy that uses a medium of exchange, in a barter economy …

A. Transaction costs are higher B. Transaction costs are lower

C. Liquidity costs are higher D. Liquidity costs are lower

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8) Dennis notices that jackets are on sale for $99. In this case money is functioning as a
………… . Patrick places his pocket change into his savings bank on his desk each
evening. By his actions, Patrick indicates that he believes that money is a …

A. Medium of exchange, unit of account

B. Unit of account, store of value
C. Store of value, unit of specialization
D. Payments-system ruler, medium of exchange

9) …………. Is the relative case and speed with which an asset can be converted into a
medium of exchange. Of the following assets, the least liquid is ……… .

A. Efficiency, stocks B. Liquidity, a house

C. Deflation, travelers cheques D. Specialization, saving deposits

10) Which of the following statements best explains how the use of money in an economy
increases economic efficiency?

A. Money increases economic efficiency because it is costless to produce.

B. Money increases economic efficiency because it discourages specialization.
C. Money increases economic efficiency because it decreases transactions costs.
D. Money cannot have an effect on economic efficiency.

11) An electronic payments system has not completely replaced the paper payments
system because of all of the following reasons except ……… .

A. Expensive equipment is necessary to set up the system

B. Security concerns C. privacy concerns D. Transportation costs

12) Of the four effects on interest rates from an increase in the money supply, the one
that works in the opposite direction of the other three is the:

A. Liquidity effect. B. Income effect.

C. Price level effect. D. Expected inflation effect.

13) Assets with greater risk

A. Usually go unsold relative to those with lower risk.
B. Are generally tax-free to compensate for the increased risk.
C. Tend to have higher yields to compensate for the increased risk.
D. Are avoided by rational people.

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14) In Interest rates are procyclical in that they tend to rise during business cycle
expansions and fall during recessions.

A. True B. False

15) An asset’s interest rate risk …………. As the duration of the asset ………… .

A. Increases; decreases B. decreases: increases

C. Decreases; decreases D. remains constant, increases

16) When the interest rate on a bond …………. Is the equilibrium interest rate, there is
excess ………….. in the bond market and the interest rate will ………… .
A. Below, demand; rise. B. below; demand; fall
C. Below, supply, rise D. above; supply; fall

17) When the market’s required rate of return for a particular bond is much less than its
coupon rate, the bond is selling at:

A. A premium. B. a discount. C. face value.

D. cannot be determined without more information.

18) When the inflation rate is expected to increase, the expected return on bonds relative
to real assets falls for any given interest rate; as a result, the …………. Bonds falls and
the ………… curve shifts to the left.

A. Demand for; demand B. demand for; supply

C. Supply of demand D. supply of, supply

19) In his liquidity preference framework, Keynes assumed that individuals are assumed
to hold their wealth in two forms ………… and …………. That has a zero rate of return;
thus, when interest rates ………….. the expected return on money falls relative to the
expected return on bonds, causing the demand for money to ………….

A. Bonds, money, rise; fall B. Money, bonds, rise, rise

C. Stocks, bonds, fall; fall D. real assets, financial assets, fall; rise

20) Milton Friedman contends that it is entirely possible that when the money supply
rises, interest rates may ……….. if the ……….. effect is more than offset by changes in
income, the price level, and expected inflation.

A. Fall; liquidity B. fall; risk C. Rise; liquidity D. rise; risk