Sam saved $30 per week from his part-time job to buy a new DVD player. He went t

Question

Sam saved $30 per week from his part-time job to buy a new DVD player. He went to three different electronics stores comparing the prices on various models. He narrowed his choices to a Panasonic model costing $129.99 and a Sony model with a price tag of $139.99. After much consideration, Sam paid the salesperson $139.99 plus tax in $5 bills for the Sony DVD player. He brought his DVD player to his dorm room and he and his roommates watched their favorite movies every day for the rest of the semester.

1. The $5 bills that Sam used to pay for his DVD player is an example of:



A. Commodity money

B. Legal tender

C. Inflationary money

D. Wasted money


2. The money supply in the United States is backed by:


A. Gold

B. Silver

C. Stock certificates

D. People's confidence that they will be able to buy goods and services with the money

E. People's confidence in the ability of the Treasury Department to maintain international economic stability

F. The International Monetary Fund

4. The Federal Open Market Committee makes decisions to:

A. Buy and sell mortgages

B. Buy and sell stocks

C. Buy and sell U.S. government bonds

D. Buy and sell commodities


6. Which of the following events can explain an increase in the interest rate?

I. The money supply decreases.
II. The money supply increases.
III. The money demand decreases.
IV. The money demand increases.




A. I and III only

B. I and IV only

C. I only

D. III only

E. IV only

F. II only

G. II and III only


7. Which of the following correctly describes the effects of a tight monetary policy?


A. A decline in the money supply raises interest rates.

B. An increase in the money supply raises interest rates

C. A decline in the money supply lowers interest rates.

8. Which is of the following is a method for the Federal Reserve to control the supply of money?




A. Buying or selling U.S. government bonds

B. Setting the discount rate, the interest rate at which banks can borrow from the Federal Reserve

C. Setting the required reserve ratio

D. None of these three choices

E. All three choices


The money market, like all markets, consists of a demand side and a supply side. The money demand curve shows that the amount of money that households and firms want to hold is inversely related to interest rates, which means that as interest rates fall, the opportunity cost of holding money falls and people are willing to hold more of it (everything else held fixed).

We assume here that the money supply is determined by the Fed and is independent of the interest rate. It is therefore represented graphically as a vertical line.

9.2. If the Fed buys government securities through open market operations, market interest rates will:


A. Rise

B. Fall

C. Remain unaffected

D. Fall, leading to an immediate shift in the demand for money

Explanation / Answer

1) B 2) D 4) C 6) B 7) A 8) E 9) Be

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