ECON 203 Assignment 4

Assignment 4 Questions 1. Which statement best defines barter? a. It is a transaction that requires a double coincidence of wants 2. Which statement best illustrates the medium of exchange function of money? a. You pay for your double latte using currency 3. Which of the following has intrinsic value? a. A gold coin 4. What is the function of debit cards? a. They are used as a method of payment 5. Who owns the BOC? a. The federal government of Canada 6. Suppose that the reserve ratio is 9 percent and that a bank has $2000 in deposits. What are its required reserves? a. $180 7. Suppose a bank has a 6 percent reserve ratio, $4000 in deposits, and it loans out all it can, given the reserve ratio. Which of the following describes the bank’s assets? a. It has $240 in reserves and $3760 in loans 8. If the reserve ratio is 10 percent, how much is the money multiplier? a. 10 9. At one time, the country of Aquilonia had no banks, but had currency of $10 million. Then a banking system was established with a reserve requirement of 10 percent. The people of Aquilonia deposited half of their currency into the banking system. If banks do not hold excess reserves, what is Aquilonia’s money supply now? a. $55 million 10. Suppose the reserve ratio is 25 percent and the public holds $10 million in cash. Then the public decides to withdraw $5 million from the banks. How does the money supply eventually change? a. Falls by $15 million 11. Which list contains only actions that decrease the money supply? a. Raising the bank rate; raising the reserve requirement ratio 12. To increase the money supply, what could the Bank of Canada do? a. Decrease the reserve requirement 13. Which statement best describes the consequences of open-market sales conducted by the Bank of Canada? a. Bank reserves decrease, and the money supply decreases 14. Which of the following is a sterilization operation that supports the Canadian dollar? a. The BOC sells US dollars and buys government bonds 15. Which statement best describes the outcomes of a decrease in reserve requirements? a. The reserve ratio decreases, the money multiplier increases, and the money supply increases 16. Suppose the reserve ratio is 10 percent and banks do not hold excess reserves. Under these circumstances, suppose the Bank of Canada sells $60 million of bonds to the public. Which statement best describes the effects of this open-market operation? a. Bank reserves decrease by $60 million, and the money supply eventually decreases by $600 million

17. Who determine the amount of money in the economy? a. The amount of money in the economy depends in part on the behaviour of banks 18. A bank has (in millions): $200 reserves, $800 loans, $400 securities, $1000 deposits, and $100 debt. How much is the bank’s capital? a. $300 million 19. Which statement best explains the role of the Canadian Deposit Insurance Corporation (CDIC)? a. The CDIC protects depositors in the event of bank failures 20. Since 1994, what was phased out as a tool used by the Bank of Canada to control the money supply? a. Changing reserve requirements 21. When prices are falling, what term do economists use? a. Deflation 22. What does the quantity theory of money try to explain? a. The relationship between the quantity of money and the price level 23. When the number of dollars needed to buy a representative basket of goods falls, what happens to the value of money? a. It rises, and so the price level falls 24. When the money market is represented in a diagram with the value of money on the vertical axis, which statement best describes the effects of an increase in money supply? a. It increases the price level and decreases the value of money 25. In the 14th century, the Western African Emperor Kankan Musa travelled to Cairo where he gave away much gold, which was in use as a medium of exchange. How would we predict this increase in gold would do to the price level and value of gold in Cairo? a. Raise the price level, but decrease the value of gold in Cairo 26. When the money market is depicted in a diagram with the value of money on the vertical axis, what would shift money demand to the right? a. An increase in real GDP 27. Which term refers to economic variables whose values are measured in monetary units? a. Nominal variable 28. An assistant professor of economics gets a $100-a-month raise, but then she figures that with her current monthly salary she can’t buy as many goods as she could last year. What has happened to her real and nominal wage? a. Her real wage has fallen, but her nominal wage has risen 29. According to the classical dichotomy, what is influenced by monetary factors? a. Nominal interest rates 30. Which statement best defines the velocity of money? a. It is the average number of times per year a dollar is spent 31. According to the quantity equation, if Y and M are constant and V doubles, what factor does the price level multiply by? a. 2 32. Velocity in the country of Nemedia is always stable. In 2014, the money supply was $100 billion and real GDP was $300 billion. In 2015, the money supply increased by 10 percent, real GDP increased by 5 percent. By how much did the price level increase between 2014 and 2015? a. 4.76%

9. In Wellville, the money supply is $80,000 and reserves are $12,800. Assuming that people hold only deposits and no currency, and that banks hold only required reserves, what is the required reserve ratio? a. 16% 10. Suppose the banking system has $10 million in reserves and the reserve ratio is 25 percent. Then bankers decide to decrease the reserve ratio to 20 percent. How does this decision eventually change the money supply? a. Increases by $10 million 11. Which list contains only actions that increase the money supply? a. Making open-market purchases; lowering the reserve requirement ratio 12. Which of the following is NOT a tool of monetary policy? a. Increasing the tax rate 13. When the Bank of Canada conducts open-market purchases, how do commercial banks’ assets most likely change? a. Reserves increase, and banks increase lending 14. How may the Bank of Canada influence the price level? a. By conducting open-market purchases and lowering the bank rate 15. What is a bank’s capital? a. The bank’s equity 16. In a fractional reserve banking system with no excess reserves and no currency holdings, suppose the central bank buys $100 million of bonds. Which statement best describes the effects of this open-market operation? a. Reserves increase by $100 million, and the money supply increases by more than $100 million 17. During recessions, banks typically choose to hold more excess reserves relative to their deposits. Which statement best describes the effects of the increase in reserves? a. The money multiplier decreases, and the money supply decreases 18. A bank has (in millions): $200 reserves, $800 loans, $400 securities, $1200 deposits, $100 debt, and $200 capital. How much is the bank’s leverage ratio? a. 7 19. Which statement best describes bank runs today? a. Banks runs are uncommon because of CDIC deposit insurance 20. Why was changing of reserve requirements phased out as a tool used by the Bank of Canada to control the money supply? a. To make the rules the same for all financial institutions since only commercial banks were required to hold reserves 21. How can inflation be measured? a. By the % change in CPI 22. What does the classical theory of inflation try to explain? a. The long-run determinants of the price level and the inflation rate 23. When the value of money rises, what happens to the number of dollars needed to buy a representative basket of goods? a. It decreases, so the price level falls

24. When the money market is depicted in a graph with the value of money on the vertical axis, as the price level increases, how does the quantity of money demanded or supplied change? a. The quantity of money demanded increases 25. Which statement best describes the impact of open-market purchases by the Bank of Canada? a. The money supply increases, which makes the value of money decrease 26. When a graph of the money market is drawn with the value of money on the vertical axis, what will happen if the value of money is below the equilibrium level? a. The value of money will rise 27. Refer to the Figure 11-1. If the current money supply is located at MS1 and the value of money is 2, what is the excess demand or supply? a. 0 28. What is the price of an Apple iPhone divided by the price of a Samsung Galaxy smart phone called? a. A real variable 29. There is an idea that nominal variables are heavily influenced by the quantity of money and that money is largely irrelevant for understanding the determinants of real variables. What is this idea called? a. The classical dichotomy 30. When do most economists believe the principle of monetary neutrality can be relevant? a. Mostly in the long run 31. According to the quantity equation, if P = 6 and Y = 800, which of the following pairs could M and V be? a. 800, 6 32. Assuming that velocity is stable, if real GDP grows by 10 percent this year, and if the money supply does not change this year, how does the price level and nominal GDP change? a. The price level will decrease by 10% and nominal GDP will stay the same 33. What does the evidence gained from studying hyperinflation indicate? a. Inflation rates parallel money supply growth rates 34. Suppose that the Government of Canada unexpectedly decided to pay off its debt by printing new money. What would happen? a. People who borrowed money at a fixed interest rate would feel richer 35. If a country had deflation of 2 percent while the nominal interest rate increased by 1 percentage point, how would the real interest rate change? a. The real interest rate would increase by 3% points 36. Suppose that velocity and output are constant, the quantity theory and Fisher effect are correct, the nominal interest rate is 7 percent, and money growth is 3 percent. Which statement is consistent with these facts? a. The real interest rate is 4% and nominal wages are rising 37. Which of the following best defines menu costs? a. The cost of more frequent price changes induced by higher inflation 38. Given a nominal interest rate of 10 percent, when would you earn the highest after-tax real interest rate? a. Inflation is 2% and the tax rate is 50%