ECO121_FA2024: Quiz 2 sample questions

Content coverage: chapters 26, 29, 30, and 3

Extra material: individual assignment 2
IMPORTANT NOTE: You may expect quite a few similar questions in the quiz 2 from this file.

1. Fed can expand the money supply (ease monetary policy(chính sách tiền tệ nới lỏng)) by:
a. decreasing the discount rate,( giảm tỉ lệ chiết khấu) b. increasing its lending(cho vay) to
banks
c. lowering reserve requirements(hạ thấp yêu cầu dự trữ) d. decreasing the interest rate on reserves.
e. Only a, b, and c f. All of these actions.

2. During unstable socioeconomic conditions people tend to hold more currency relative to bank deposits.
These situations would make(trong điều kiện kinh tế xã hội không ổn định, mn có xh nắm giữ nhiều tiền tệ
hơn so với số tiền gửi ngân hàng )
a. both reserves and MS rise b. both reserves and MS fall.(cả dự trữ và MS đều giảm)
c. reserves rise but leave the MS unchanged d. reserves fall but leave the MS unchanged
3. Fiat money is (tiền định danh)
a. a type of money with intrinsic value. b. a type of money set by government decree.
c. any asset used as the medium of exchange. d. any asset used as the unit of account.
2. the money stock(cổ phiếu) includes all of the following EXCEPT:
a. metal coins. b. paper currency.
c. lines of credit accessible with credit cards. d. bank balances accessible with debit cards.
4. Which of the following is Not true about the Federal Reserve?
a. it was established by the U.S. constitution. b. it regulates the banking system.
c. it lends to banks. d. it conducts open-market operations.
5. Credit cards are:
a. deferred payments b. money c. a store of value
d. part of money supply e. a way to promote the use of currency.
6. if the Fed wants to reduce the money supply (tighten monetary policy), it can
a. raise income tax rates. b. reduce income tax rates.
c. buy bonds in open-market operations. d. sell bonds in open-market operations.
7. Michelle takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds
the entire $100 to reserves, the money supply _________, but if the bank lends out some of the $100, the
money supply _________.
a. increases; increases even more b. increases; increases by less
c. is unchanged; increases d. decreases; decreases by less
8. In an economy, there is an initial amount of $5,000 in currency. All of the currency is then deposited into
the banking system. All the banks with deposits keep total $200 as the minimum reserve requirement.
(i) What is the reserve requirement ratio?
a. 2% b. 4$ c. 6% d. 8% e. 10%
(ii) What is the money supply?
a. 120,000 b. 150,000 c. 125,000 d. 83,333 e. 62,500

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9. If the reserve ratio is 1/4 and the central bank increases the quantity of reserves in the banking system by
$120, the money supply increases by
a. $90. b. $150. c. $160. d. $480.
10. The Fed’s control of money supply (conducting monetary policy) is imperfect due to:
a. Households keep some of their incomes in currency.
b. Not all banks can loan out all of their loanable deposits.
c. Bank runs in some circumstances.
d. All of these above.
11. Which of the following actions by the Fed would tend to increase the money supply?
a. an open-market sale of government bonds b. a decrease in reserve requirements
c. an increase in the interest rate paid on reserves d. an increase in the discount rate on Fed lending
12. If the Fed raises the interest rate it pays on reserves, it will _________ the money supply by increasing
_________.
a. decrease; the money multiplier b. decrease; excess reserves
c. increase; the money multiplier d. increase; excess reserves
13. In a system of fractional-reserve banking, even without any action by the central bank, the money supply
declines if households choose to hold _________ currency or if banks choose to hold _________ excess
reserves.
a. more; more b. more; less c. less; more d. less; less
14. Most non-monetary assets such as stock and bond have one or some of the following functions of money:
a. a unit of account b. a store of value c. a medium of exchange
d. b and c e. none of them
15. Assume that the reserve requirement is 10 percent. All other things being equal, will the money supply
expand more if the Fed buys $1,000 worth of bonds or if someone deposits in a bank $1,000 that she had
been hiding in her cookie jar?
a. The action of Fed buying bonds creates more money than the other.
b. The action of the person depositing in a bank creates more money than the other.
c. The two actions generate the same amount of money supply increased.
d. It is uncertain to conclude.
16. Using the information from question 15, which of the following statements is true?
a. The action of Fed buying bonds creates up to $1,000 more money than the other.
b. The action of the person depositing in a bank creates up to $1,000 more money than the other.
c. The action of Fed buying bonds creates up to $2,000 more money than the other.
d. The action of the person depositing in a bank creates up to $2,000 more money than the other.
e. None of these above.
17. Suppose a bank’s reserve ratio is 8% and the bank has 2,000 USD in reserve. What is its deposit value?
a. 20,000 b. 22,500 c. 25,000 d. 16,000
18. if the government collects more in tax revenue than it spends, and households consume more than they
get in after-tax income, then
a. private saving and public saving are both positive.
b. private saving and public saving are both negative.
c. private saving is positive, but public saving is negative.
d. private saving is negative, but public saving is positive.
19. A closed economy has income of $1,000, government spending of $200, taxes of $150, and investment of
$250. what is private saving?
a. $100 b. $200 c. $300 d. $400
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20. Jane wants to buy and operate a coffee shop but doesn’t have enough financial resources to start the
business. She borrows $15,000 from her friend Stace, to whom she promises an interest rate of 6 percent, and
gets another $20,000 from her friend Sam, to whom she promises a third of her profits. what best describes
this situation?
a. Stace is a stockholder, and Jane is a bondholder.
b. Stace is a stockholder, and Sam is a bondholder.
c. Sam is a stockholder, and Jane is a bondholder.
d. Three people are all stockholders.
e. Sam is a stockholder, and Stace is a bondholder.
21. A bond tends to pay a high interest rate if it is
a. a short-term bond rather than a long-term bond.
b. a municipal bond exempt from federal taxation.
c. issued by the federal government rather than a corporation.
d. issued by a corporation of dubious credit quality.
22. the main advantage of mutual funds is that they provide
a. an asset that is widely used as the medium of exchange.
b. a way to avoid fluctuations in stock and bond prices.
c. a return insured by the government.
d. an easy way to hold a diversified portfolio.
23. if a popular TV show on personal finance convinces Americans to save more for retirement, the
_________ curve for loanable funds would shift, driving the equilibrium interest rate _________.
a. supply; up b. supply; down c. demand; up d. demand; down
24. if the business community becomes more optimistic about the profitability of capital, the _________
curve for loanable funds would shift, driving the equilibrium interest rate _________.
a. supply; up b. supply; down
c. demand; up d. demand; down e. supply and demand; uncertain
25. which of the following policy actions would unambiguously reduce the supply of loanable funds and
crowd out investment?
a. an increase in taxes and a decrease in government spending
b. a decrease in taxes together with an increase in government spending
c. an increase in both taxes and government spending
d. a decrease in both taxes and government spending
26. from 2008 to 2012, in the aftermath of the financial crisis, the ratio of U.S. government debt to GDP
a. increased markedly.
b. decreased markedly.
c. was stable at a historically high level.
d. was stable at a historically low level.
27. Assuming the economy is closed. Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5
trillion, and public saving is $0.2 trillion. Which of the following statements is true?
a. consumption is $6.5 trillion, b. government purchases are $1.3 trillion
c. national saving is no less than $1 trillion. d. there is neither budget surplus nor deficit.
28. Following up with the question 27, in the next period, government spending rises by $0.5 trillion while
taxes rise by only $0.3 trillion. Assume consumption and private saving remain unchanged, what is the GDP
growth rate?
a. 2.75% b. 3% 3.5% d. 3.75% e. None of these above
29. In a closed economy, consumption is 6,500, taxes are 1,500, and government purchases are 2,000 (billion
USD). If national saving amounts to 1,300, then what is the value of GDP?
a. 10,000 b. 9.800 c. 9,600 d. 9,200 e. 10,500
For Questions 30-34. Suppose economists collect the following data for a closed economy:
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C = 6,000; T = 1,500; G = 1,700 (unit = billion USD).
The economists also estimate that the investment function is: I = 3,200 – 100r (initial period), while the
saving function is: S = 1,000 + 100r, where r is the country’s real interest rate, expressed as a percentage.
30. The equilibrium real interest rate is:
a. 9% b. 10% c. 12% d. 11%
31. The GDP value when the economy is at the equilibrium is:
a. 8,600 b. 8,800 c. 9,000 d. 9,600 e. 9,800
32. In the second period, the new investment function is: I = 2,800 – 100r. Suppose consumption and
government spending remain unchanged. What is the new equilibrium real interest rate?
a. 9% b. 10% c. 12% d. 11%
33. Following up with the question 32, what is the GDP in the second period?
a. 8,600 b. 8,800 c. 9,000 d. 9,600 e. 9,800
34. Following up with the question 32, what is the GDP growth rate in the second period?
a. 2% b. 2.1% c. -2% d. -2.1% e. 2.2%
35. When the government reduced the tax on interest income, interest rates would:
a. Fall b. Rise c. Be unaffected d. Be uncertain
36. What are two of the most important financial intermediaries in the US economy?
a. Banks and financial companies b. Banks and mutual funds
c. Banks and leasing companies d. Banks and insurance companies
e. Suppliers and demanders of funds
37. This year an economy had taxes of 200, government transfers of 80, and government purchases of 160.
Last year it had private saving of 100 and investment of 140. In which year did the country have a budget
deficit of 40?
a. this year but not last year b. last year but not this year
c. both this year and last year d. neither this year nor last year.
38. What is true about the Fed funds rate?
a. The Fed sets monetary policy by choosing a target for the federal funds rate
b. A short-term interest rate at which banks make loans to one another.
c. As the Fed pursues its target, it adjusts the money supply by using open market operations.
d. Only a and c e. Only a and b f. Only b and c g. All of these above.
39. according to the quantity theory of money, which variable in the quantity equation is most stable over
time?
a. money b. velocity
c. price level d. output
40. Assume each item costs 2$ and a person has got 100$. What is the real value of the money that person
holds?
a. 100$. If the item price goes up, the person needs to hold more money (dollars) in order to maintain the real
value of his/her money.
b. 100$. If the item price goes up, the person needs to hold less money (dollars) in order to maintain the real
value of his/her money.
c. 50 units of the item. If the item price goes up, the person needs to hold more money (dollars) in order to
maintain the real value of his/her money.
d. 50 units of the item. If the item price goes up, the person needs to hold less money (dollars) in order to
maintain the real value of his/her money.
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41. the classical principle of monetary neutrality states that changes in the money supply do not influence
_________ variables, and it is thought most applicable in the _________ run.
a. nominal; short
b. nominal; long
c. real; short
d. real; long
42. if nominal GDP is $400, real GDP is $200, and the money supply is $100, then
a. the price level is ½, and velocity is 2.
b. the price level is ½, and velocity is 4.
c. the price level is 2, and velocity is 2.
d. the price level is 2, and velocity is 4.
43. hyperinflation occurs when the government runs a large budget _________, which the central bank
finances with a substantial monetary _________.
a. deficit; contraction b. deficit; expansion
c. surplus; contraction d. surplus; expansion
44. You put money into an account and earn an after-tax real interest rate of 4 percent. If the nominal interest
rate on the account is 8 percent and the inflation rate is 2 percent, then what is the tax rate?
a. 10% b. 15% c. 17.5% d. 20% e. 25%
45. according to the quantity theory of money and the Fisher effect, if the central bank increases the rate of
money growth, then
a. inflation and the nominal interest rate both increase.
b. inflation and the real interest rate both increase.
c. the nominal interest rate and the real interest rate both increase.
d. inflation, the real interest rate, and the nominal interest rate all increase.
46. ongoing inflation does not automatically reduce most people’s incomes because
a. the tax code is fully indexed for inflation.
b. people respond to inflation by holding less money.
c. wage inflation goes together with price inflation.
d. higher inflation lowers real interest rates.
47. Laurence deposits money into an account with a nominal interest rate of 8 percent. She expects inflation
to be 2 percent. Her tax rate is 25 percent. Laurence’s after-tax real rate of interest will be:
a. 3.6% if inflation turns out to be 2 percent; it will be lower if inflation turns out to be higher than 2 percent.
b. 3.6% if inflation turns out to be 2 percent; it will be higher if inflation turns out to be higher than 2 percent.
c. 4% if inflation turns out to be 2 percent; it will be lower if inflation turns out to be higher than 2 percent.
d. 4% if inflation turns out to be 2 percent; it will be higher if inflation turns out to be higher than 2 percent.
48. if an economy always has annual inflation of 10%, which of the following costs of inflation will it not
suffer?
a. shoeleather costs from reduced holdings of money
b. menu costs from more frequent price adjustment
c. distortions from the taxation of nominal capital gains
d. arbitrary redistributions between debtors and creditors
49. because most loans are written in _________ terms, an unexpected decrease in inflation hurts _________.
a. real; creditors b. real; debtors
c. nominal; creditors d. nominal; debtors
50. because saving interest rate is determined in the_________ of a deposit agreement while banks typically
pay interest at the end of each period, a higher-than-expected inflation hurts _________.
a. beginning; savers b. beginning; banks
c. end; savers d. ends; savers

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Question 51-54. On the following graph, MS represents the money supply and MD represents money
demand. Assume the money velocity is fixed.

Value of money

MS1 MS2

0.8

0.6

0.5
MD2

0.4 Quantity of
MD1 money

10,000 X

51. Suppose the initial money-demand curve is the one labeled MD1 while the money-supply curve is MS1
(period 1); also suppose the economy’s real GDP is 36,000 for the year. If the money market is in
equilibrium, then how many times per year is the typical dollar bill used to pay for a newly produced good or
service (money velocity)?
a. 4 b. 5 c. 6 d. 8 e. Other number
52. In the second period, the central bank raises money stock shifting the MS curve to MS2. Calculate the
inflation rate and value of X when the output is unchanged:
a. 25% and 15,000 b. 25% and 16,000 c. -25% and 15,000 d. -25% and 16,000 e. Other.
53. In the second period, the central bank raises money stock by 60% shifting the MS curve to MS2.
Calculate the output growth rate between two periods.
a. 6.67%. b. 5.67% c. 7.33% d. 7.67% e. Other.
54. Which of the following events could shift the money demand from MD1 to MD2?
a. an increase in the value of money b. a decrease in the value of money
c. a change in inflation rate d. Fed buys T-bill e. None of these above.
55. Before Jone and Jane engage in trade, each of them
a. consumes at a point inside his or her production possibilities frontier.

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b. consumes at a point on his or her production possibilities frontier.
c. consumes at a point outside his or her production possibilities frontier.
d. consumes the same amounts of meat and potatoes as the other.
56. After Jone and Jane engage in trade, each of them
a. consumes at a point inside his or her production possibilities frontier.
b. consumes at a point on his or her production possibilities frontier.
c. consumes at a point outside his or her production possibilities frontier.
d. consumes the same amounts of meat and potatoes as the other.
57. in an hour, Jack can wash 2 cars or mow 1 lawn, and Sophia can wash 3 cars or mow 1 lawn. Who has the
absolute advantage in car washing, and who has the absolute advantage in lawn mowing?
a. Jack in washing, Sophia in mowing
b. Sophia in washing, Jack in mowing
c. Jack in washing, neither in mowing
d. Sophia in washing, neither in mowing
58. Between Jack and Sophia, who has the comparative advantage in car washing, and who has the
comparative advantage in lawn mowing?
a. Jack in washing, Sophia in mowing
b. Sophia in washing, Jack in mowing
c. Jack in washing, neither in mowing
d. Sophia in washing, neither in mowing
59. When Jack and Sophia produce efficiently and make a mutually beneficial trade based on comparative
advantage,
a. Jack mows more and Sophia washes more.
b. Jack washes more and Sophia mows more.
c. Jack and Sophia both wash more.
d. Jack and Sophia both mow more.
60. A nation will typically import those goods in which
a. the nation has an absolute advantage.
b. the nation has a comparative advantage.
c. other nations have an absolute advantage.
d. other nations have a comparative advantage.
61. Suppose that a worker in Boatland can produce either 10 units of wheat or 50 units of fish per year, and a
worker in Farmland can produce either 50 units of wheat or 10 units of fish per year. There are 60 workers in
each country. No trade occurs between the two countries. Boatland produces and consumes 150 units of
wheat and 750 units of fish per year while Farmland produces and consumes 750 units of wheat and 150 units
of fish per year. If trade were to occur, Boatland would trade 180 units of fish to Farmland in exchange for
160 units of wheat. If Boatland now completely specializes in fish production, how many units of fish could
it now consume along with the 160 units of imported wheat?
a. 680 b. 780 c. 980 d. 1220 e. Other
62. Suppose that in the United States, producing an aircraft takes 10,000 hours of labor and producing a shirt
takes 2 hours of labor. in China, producing an aircraft takes 40,000 hours of labor and producing a shirt takes
4 hours of labor. What will these nations trade?
a. China will export aircraft, and the United States will export shirts.
b. China will export shirts, and the United States will export aircraft.
c. both nations will export shirts.
d. there are no gains from trade in this situation.
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63. Lisa can cook dinner in 30 minutes and wash the laundry in 20 minutes. Her roommate takes twice as
long to do each task. How should the roommates allocate the work?
a. Lisa should do more of the cooking based on her comparative advantage.
b. Lisa should do more of the cooking based on her absolute advantage.
c. Lisa should do more of the washing based on her comparative advantage.
d. Lisa should do more of the washing based on her absolute advantage.
e. Lisa are no gains from trade in this situation.
64. Absolute advantage is found by comparing various firms’
a. opportunity costs b. production costs
c. input requirements per worker d. locational and logistical circumstances
e. payments to land, labor, and capital. f. payments to all related inputs.
65. Assume that Jack and Jane can switch between producing pork and bread at a constant rate as below:

Minutes needed to make one unit of

Pork bread

Jack 16 9.6

Jane 12 8

What is Jack’s opportunity cost of producing one unit of pork?

a. 5/4 units of bread b. 5/3 units of bread
c. 6/5 units of bread d. 6/4 units of bread e. Other.
66. Suppose that France and Italy can switch between producing chicken and producing beef at a constant
rate:

Labor hours needed to make 1 unit of

Chicken Beef

France 2 8
Italy 8 16

Which country ------ has a comparative advantage in the production of chicken and which country -----------
has a comparative advantage in the production of beef?
a. France; Italy b. Italy; France
c. France; France d. Italy; Italy e. Uncertain to conclude.