1) The problem of "double coincidence of wants" is eliminated when money has the quality of being a(n):
a. store of value
b. measure of value
c. medium of exchange
d. asset

2) When the reserve ratio is 5%, which situation allows the biggest money supply increase:
a. when consumers hold no cash (i.e. all their transactions money is held in a checking acct)
b. when consumers hold 10% of their transactions money as cash (90% in a checking acct)
c. when consumers hold 25% of their transactions money as cash (75% in a checking acct)
d. when consumers hold 50% of their transactions money as cash (50% in a checking acct)

3) Increasing the discount rate leads to which of the following effects:
a. decrease AS
b. decrease the money supply
c. increase investment expenditure
d. lowers interest rates

4) Higher interest rates cause:
a. a decrease in the precautionary demand for money
b. a decrease in the speculative (asset) demand for money
c. a decrease in the transactions demand for money

5) Higher income causes people to demand (hold) more money because of an increase in their:
a. precautionary demand for cash
b. speculative (asset) demand for cash
c. transactions demand for cash

6) The Federal Open Market Committee is directly responsible for which activity:
a. purchase and sale of government bonds with financial intermediaries
b. changes in the discount rate
c. changes in the reserve ratio
d. all of the above

7) Which is the best example of a monetary transmissions mechanism:
a. An open market purchase causes interest rates to fall. This leads to greater investment expenditure and eventually to an increase in GDP.
b. Rising GDP causes AD to rise, leading to a higher price level. As a result, the money supply is decreased.
c. A rising price level lowers consumption, and then AD. This leads to a decrease in the discount rate.
d. A lower tax rate increases the amount of transactions money available.

8) Gresham's law states:
a. "every 1% rise in unemployment causes a 2.5% fall in income"
b. "bad money chases out good"
c. "supply creates its own demand"
d. "the price level changes proportionately with the money supply"

9) Which of the following is not a monetary instrument:
a. discount rate
b. open market operations
c. reserve requirement ratio
d. tax rate cut

10) What distinctive feature did money on the Island of Yap have that would make it impractical for use in the United States economy?
a. it's not very portable
b. it isn't very scarce, too many exist in the United States already
c. it was a fiat currency, which wouldn't work in the United States
d. it was too small for use in the United States

11) Does the United States ever have to be debt free?
a. yes, our government is like a household in that it must eventually pay its bills
b. no, our government is assumed to have an infinite life when it borrows money
c. yes, because more debt always represents a burden on future generations
d. no, because more debt never has an adverse effect on private sector markets

12) Which of the following situations represents a "burden" that is created on future generations from government borrowing:
a. IBM purchases $2 million in government bonds
b. the Fed purchases $4 million in Treasury bills
c. a Canadian citizen purchases $5 million in government bonds
d. all of the above represent a future "burden"

13) What effect would a (annually) balanced budget amendment have on the economy?
a. it would keep the economy closer to Potential output
b. it will likely cause fewer off-budget government expenditures to occur
c. it will create incentives to limit the size of government, in terms of net expenditure
d. all of the above

14) Which budget balancing philosophy causes the economy to remain closer to Potential output?
a. Functional Finance
b. Balancing over the Business Cycle
c. Balancing annually
d. both a and b

15) In which type of money demand is liquidity most important:
a. M2 demand
b. M3 demand
c. speculative (asset) demand
d. transactions demand

16) In what setting is crowding out most likely:
a. far from Potential output
b. near Potential output
c. when unemployment is high
d. when inflation is low

In lecture, we discussed two groups of economic policymakers, the Passive group and the Active group. The former believes in a less active role for government, the latter a more active role. Questions #17-20 address the distinction between these two groups.

17) What effect would the Passive group predict for debt-financed government expenditure:
a. output would rise in the long run
b. private sector investment would increase
c. crowding out might occur
d. inflation would remain unchanged from the short run to the long run

18) Which is the closest statement to what the Passive group believes about AS curves:
a. both the short run and long run AS curves are horizontal
b. both the short run and long run AS curves are vertical
c. the short run AS curve is horizontal and the long run AS curve is vertical
d. the short run AS curve is vertical and the long run AS curve is horizontal

19) Which is the closest statement to what the Passive group believes about unemployment:
a. there is always frictional, and possibly some brief periods of involuntary too
b. there is always frictional and cyclical, and some occasional (brief) structural too
c. there is always frictional, but never any other types
d. there is no unemployment of any type

20) On which of the following statements would the Passive and Active groups agree:
a. expansionary monetary and fiscal policy will increase interest rates in the short run
b. expansionary monetary and fiscal policy will increase output in the long run
c. expansionary monetary and fiscal policy will decrease unemployment in the long run
d. expansionary monetary and fiscal policy will increase inflation in the long run