1) When money provides a yardstick that allows individuals to compare the relative values of goods and services, it is functioning as a
A) medium of exchange.
B) unit of account.
C) store of value.
D) None of the above.
2) Liquidity refers to
A) the ease with which an asset can be converted into goods and services.
B) the expected return from an asset.
C) the amount of indebtedness held against an asset.
D) the net worth of the individual in question.
3) The cost of holding money is best described as
A) the cost of printing money.
B) the cost which price level decreases impose on money holders.
C) the interest which is paid to money holders by the U.S. government.
D) the interest that could have been earned had the asset been held in another form.
4) What type of intrinsic value or backing does U.S. currency have today?
A) gold
B) government bonds/securities
C) none (except our faith in its value)
D) silver
5) Which of the following is NOT part of M1 but is included in M2?
A) Currency
B) money market mutual fund shares
C) Traveler's checks
D) Cash
6) The part of the Federal Reserve System (the Fed) that directs the buying and selling of U.S. government securities is
A) the Federal Open Market Committee.
B) the Federal Advisory Committee.
C) the Federal Reserve district banks.
D) the Board of Governors.
7) The reserve ratio is 10% and a bank has $600,000 in transaction deposits. The amount of reserves equals
A) $6,000.
B) $60,000.
C) $600,000.
D) none of the above
8) If a bank receives a new transaction deposit of $100,000 and the reserve ratio is 20 percent, then the bank could lend
A) $20,000.
B) $80,000.
C) $100,000.
D) $400,000.
9) When the Fed sells government securities,
A) deposits and reserves increase, leading to a decrease in the money supply by an amount more than the sale of the government securities.
B) deposits and reserves increase, leading to an increase in the money supply by an amount more than the sale of the government securities.
C) deposits and reserves decrease, leading to an increase in the money supply by an amount more than the sale of the government securities.
D) deposits and reserves decrease, leading to a decrease in the money supply by an amount more than the sale of the government securities.
10) If the FOMC decides that the Fed should buy bonds it
A) makes the price attractive to large bond investors; and therefore provides the incentive banks need to expand the money supply through loan making activities.
B) asks large banks to buy the bonds from the Fed and this increases the amount of bonds banks have and can offer their customers
C) requires the U.S. President's signature on the buy order, which causes a time lag, since the Fed works directly with the Department of Treasury
D) reduces the money supply in the economy, interest rates rise, and the economy slows down
11) Open market operations by the Fed cause
A) the prices of bonds to change, which changes interest rates in the opposite direction.
B) changes in the required reserve ratio, which cause the price of bonds to change in the opposite direction.
C) changes in the difference between the discount rate and the federal funds rate (one goes up the other down).
D) aggregate supply to change, which causes aggregate demand to change.
12) Expansionary monetary policy during periods of underutilized resources (ie a recessionary gap in the AD/AS model) can cause
A) real Gross Domestic Product (GDP) to increase without an increase in the price level.
B) real Gross Domestic Product (GDP) to increase with a decrease in the price level.
C) real Gross Domestic Product (GDP) to increase with an increase in the price level.
D) nominal Gross Domestic Product (GDP) to increase but cannot affect real Gross Domestic Product (GDP).
13) According to the quantity theory of money, the price level would decrease in equal proportion to ______________________, if velocity and real GDP don't change.
A) an increase in exchange rates.
B) a decrease in taxes.
C) an increase in the real interest rate.
D) a decrease in the money supply.
14) According to the equation of exchange, if V = 5, P = 3, and Y = $50, then the money supply equals
A) $10.
B) $30.
C) $150.
D) $300.
15) The principle of comparative advantage essentially states that
A) there are some goods for which the opportunity costs of production are the same regardless of who produces them.
B) some goods have high opportunity costs and low absolute costs.
C) specialization can reduce output rather than increase it.
D) total output of an economic system is greatest when each good is produced by those who have the lowest opportunity cost of producing the good.
16) John and Zia run a summer camp for creative kids. Suppose John can produce 80 rhymes or 1 short story per hour. Zia, on the other hand, can produce 60 rhymes or 1 short story per hour (of equal length and quality to any story written by John). It can be concluded that
A) John has a comparative advantage in writing short stories.
B) Zia has an absolute advantage in writing rhymes.
C) Zia has a comparative advantage in writing short stories.
D) John has an absolute advantage in writing short stories.
17) What is an acceptable terms of trade for John and Zia?
A) 1 story = 90 rhymes
B) 1 story = 70 rhymes
C) 1 rhyme = 1 story
D) 1 rhyme = 0.1 stories
18) According to international trade theory,
A) trade is based on absolute advantage.
B) comparative advantage is based on absolute advantage.
C) every country has a comparative advantage in something.
D) less developed countries cannot trade successfully with developed countries.
19) Which of the following is NOT a benefit of international trade?
A) It increases overall output.
B) It results in a transmission of ideas.
C) It promotes self-sufficiency.
D) It results in higher standards of living.
20) Selling a good abroad below the price charged in the home market, or at a price below the cost of production is called
A) dumping.
B) import substitution.
C) a quota.
D) a tariff.
21) Which of the following is an argument against free trade?
A) Protecting infant industries
B) Protecting against dumping
C) Protecting domestic jobs
D) All of the above
22) Which of the following is a subtraction (an outflow/deficit item) in the U.S. balance of payments accounts?
A) A U.S. firm sells a product to a Mexican firm.
B) An Italian tourist in Miami purchases a beach ball.
C) A Spaniard buys 100 shares of Ford stock.
D) A U.S. resident buys property in Japan
23) When there is a current account deficit, it is likely that
A) exports exceed imports for the country.
B) the country is an exporter of capital.
C) the capital account has a surplus.
D) the country has a budget surplus.
24) Official reserve assets include all of the following EXCEPT
A) foreign currencies.
B) gold.
C) special drawing rights.
D) gifts to foreign countries.
25) Refer to the above table. The current account balance is
A) $140.
B) $155.
C) $170.
D) -$45.
26) Refer to the above table. The capital account balance is
A) 0.
B) -$260.
C) -$200.
D) -$155.
27) Under flexible exchange rates, the exchange rate is set by
A) the International Monetary Fund.
B) the U.S. Federal Reserve's Board of Governors.
C) the intersection of demand and supply curves in the currency markets.
D) negotiations among central banks of the major industrial powers.
28) If interest rates in the European Union decrease,
A) the demand for U.S. dollars will fall in the foreign exchange market.
B) the supply of U.S. dollars will fall in the foreign exchange market.
C) the demand for euros will rise in the foreign exchange market.
D) nothing will change in the foreign exchange market.
29) If the dollar used to buy 360 yen and now buys 100 yen, there has been
A) a decrease in the demand for yen.
B) depreciation of the yen.
C) depreciation of the dollar.
D) appreciation of the dollar.
30) Refer to the above figure, reflecting the market for Japanese Yen. Suppose E is the original equilibrium. An increase in the U.S. demand for Japanese-made goods will lead to
A) a depreciation of the yen and an increase in the quantity of yen sold per week.
B) a depreciation of the yen and a decrease in the quantity of yen sold per week.
C) an appreciation of the yen and an increase in the quantity of yen sold per week.
D) an appreciation of the yen and a decrease in the quantity of yen sold per week.