Economics 100.

1 Introduction to Macroeconomic Theory and Policy

Exercise Set No. 3 Deadline: July 23, 2013
E. de Dios Abesamis/Arellano/Libre
I. Multiple Choice: Encircle the letter corresponding to the best answer.

1. One purpose of money is to transfer purchasing power from the present into the future. This
function of money is called:
a. store of value. c. medium of exchange
b. index of inflation d. unit of account.

2. Which of the following is NOT an example of fiat money?

a. the U.S. dollar c. the British pound
b. the Japanese yen d. gold coins

3. In order for trade to be completed in a purely barter economy, which of the following
conditions must be satisfied?
a. Inflation must equal zero.
b. Scarcity must not exist.
c. Money must be accepted by both sides of the bargaining table.
d. There must be a double coincidence of wants.

4. The central bank's control over the money supply is called:

a. money market equilibrium. c. monetary policy.
b. fiscal policy d. interest rate policy.

5. Which of the following is a part of M1?

a. currency c. savings deposits
b. demand deposits d. currency and demand deposits

6. According to the classical dichotomy, which of these magnitudes is affected by monetary

policy?
a. the price level c. the real interest rate
b. the real wage d. the rate of growth of real GDP

7. In the quantity equation MV=PT, V represents the:

a. total number of transactions during some period of time.
b. price of a typical transaction.
c. rate at which each unit of money circulates in the economy.
d. quantity of money.

8. In the quantity equation, the total output of the economy Y is used instead of transactions T
because:
a. income is harder to measure than transactions.
b. transactions are harder to measure than income.
c. transactions grow at a faster rate than income.
d. transactions grow at a slower rate than income.
9. According to the quantity equation, if M increases by 3 percent and V increases by 2 percent,
then:
a. real income increases by approximately 5 percent.
b. the price level increases by approximately 5 percent.
c. the nominal interest rate increases by approximately 5 percent.
d. nominal income increases by approximately 5 percent.

10. Using the quantity equation MV = PY, which of the following might happen if the money
supply increases?
a. Velocity is constant, prices rise, and total output is constant.
b. Velocity increases, prices are constant, and total output is constant.
c. Velocity is constant, prices fall, and total output is constant.
d. Velocity rises, prices fall, and total output is constant.

11. Consider an economy where the only goods traded are coconuts and pineapples. Last year,
100 coconuts were sold at 1 apiece, and 200 pineapples were sold at 2.50 apiece. If the money
supply was 100, what was velocity?
a. 30 c. 6
b. 1 d. 5

12. According to the QTM, real money demand is influenced by

a. interest rates only. c. interest rate and real income.
b. real income and nominal income. d. nominal income.

13. The Fisher effect states that a 1 percent rise in the rate of inflation causes a 1 percent rise in
the:
a. real interest rate. c. money supply.
b. nominal interest rate. d. number of transactions.

14. An increase in the expected rate of inflation will:

a. lower the demand for real balances because the real interest rate will rise.
b. lower demand for real balances because the nominal interest rate will rise.
c. increase the demand for real balances because the real interest rate will fall.
d. increase the demand for real balances because the nominal interest rate will rise.

15. Bangko Sentral ng Pilipinas wants to increase money supply. This can be achieved by:
a. increase interest rates. c. increase reserve requirement ratio.
b. purchase government bonds. d. forcing price level to rise.