PRINCIPLES OF MACROECONOMICS
Exam #3 Quiz prep ( LATEST
UPDATE2025)
Explain the difference between commodity monies, fiat money, and
legal tender. - CORRECT ANSWERS ✔✔*Commodity monies are
those tangible items that are used as monies that also have an intrinsic
value in other forms of use. Examples include gold, precious stones,
jewelry, cigarettes, and countless other items.
*Fiat or token money is intrinsically worth less than its face value and
has full face value only because it is universally accepted as money. The
dollar is intrinsically worthless and acquires value only because it is
accepted in performing the functions of money.
*Legal tender represents money that a government declares to be
accepted to perform the various functions of money. It is used to fulfill
debt obligations.
Explain what will happen to the size of both M1 and M2 in each of the
following situations:
(a) Bill withdraws $500,000 from his money market account to buy a
famous painting.
(b) Paul transfers $10,000 from his NOW account to his savings
account.
(c) Sarah takes $5,000 out of her savings account and transfers it to her
checking account. - CORRECT ANSWERS ✔✔(a) M1 stays the same
and M2 decreases.
(b) M1 decreases and M2 stays the same.
,PRINCIPLES OF MACROECONOMICS
Exam #3 Quiz prep ( LATEST
UPDATE2025)
(c) Both M1 and M2 decrease.
Assume there is an economy with a single bank, and the central bank
sets the reserve requirement ratio at 10%. Assume also that the only
bank had no transactions (i.e., no loans, reserves, or deposits) prior to
an individual who deposits $1000 of currency with the bank.
(a) As a result of this deposit, calculate the amount of required
reserves, actual reserves, and excess reserves.
(b) After the bank has issued the maximum amount of loans, what will
be the total amount of loans, deposits, and money in the economy?
(c) What is the size of the money multiplier for this economy? -
CORRECT ANSWERS ✔✔(a) Total reserves will be $1,000. Required
reserves will be 10% of the $1,000 deposit (i.e., $100). Excess reserves
will be $900.
(b) The total money supply will be $10,000. The bank will have issued
$9,000 of new loans. Total deposits will equal $10,000.
(c) The money multiplier is 1/rr = 1/.1 = 10.
Fill in the following table by indicating whether the proposed Federal
Reserve action will increase or decrease the money supply. If the action
is not a federal reserve power then write not applicable.
, PRINCIPLES OF MACROECONOMICS
Exam #3 Quiz prep ( LATEST
UPDATE2025)
(a)A decrease in federal spending
(b)A decrease in the required reserve ratio
(c)A sale of government debt
(d)A lowering of the discount rate
(e)Buying government debt
(f)A decrease in taxes - CORRECT ANSWERS ✔✔(a) N/A
(b) increase
(c)decrease
(d)increase
(e)increase
(f)N/A
How do changes in interest rates affect the composition of bonds and
money that people will want to hold? - CORRECT ANSWERS
✔✔When interest rates are high, people want to take advantage of
the high return on bonds, so they choose to hold very little money and
hold more bonds.
Explain the speculative motive for holding bonds - CORRECT ANSWERS
✔✔Investors may wish to hold bonds when interest rates are high
with the hope of selling them when interest rates fall. This can be
profitable since the market value of bonds varies inversely with the
Exam #3 Quiz prep ( LATEST
UPDATE2025)
Explain the difference between commodity monies, fiat money, and
legal tender. - CORRECT ANSWERS ✔✔*Commodity monies are
those tangible items that are used as monies that also have an intrinsic
value in other forms of use. Examples include gold, precious stones,
jewelry, cigarettes, and countless other items.
*Fiat or token money is intrinsically worth less than its face value and
has full face value only because it is universally accepted as money. The
dollar is intrinsically worthless and acquires value only because it is
accepted in performing the functions of money.
*Legal tender represents money that a government declares to be
accepted to perform the various functions of money. It is used to fulfill
debt obligations.
Explain what will happen to the size of both M1 and M2 in each of the
following situations:
(a) Bill withdraws $500,000 from his money market account to buy a
famous painting.
(b) Paul transfers $10,000 from his NOW account to his savings
account.
(c) Sarah takes $5,000 out of her savings account and transfers it to her
checking account. - CORRECT ANSWERS ✔✔(a) M1 stays the same
and M2 decreases.
(b) M1 decreases and M2 stays the same.
,PRINCIPLES OF MACROECONOMICS
Exam #3 Quiz prep ( LATEST
UPDATE2025)
(c) Both M1 and M2 decrease.
Assume there is an economy with a single bank, and the central bank
sets the reserve requirement ratio at 10%. Assume also that the only
bank had no transactions (i.e., no loans, reserves, or deposits) prior to
an individual who deposits $1000 of currency with the bank.
(a) As a result of this deposit, calculate the amount of required
reserves, actual reserves, and excess reserves.
(b) After the bank has issued the maximum amount of loans, what will
be the total amount of loans, deposits, and money in the economy?
(c) What is the size of the money multiplier for this economy? -
CORRECT ANSWERS ✔✔(a) Total reserves will be $1,000. Required
reserves will be 10% of the $1,000 deposit (i.e., $100). Excess reserves
will be $900.
(b) The total money supply will be $10,000. The bank will have issued
$9,000 of new loans. Total deposits will equal $10,000.
(c) The money multiplier is 1/rr = 1/.1 = 10.
Fill in the following table by indicating whether the proposed Federal
Reserve action will increase or decrease the money supply. If the action
is not a federal reserve power then write not applicable.
, PRINCIPLES OF MACROECONOMICS
Exam #3 Quiz prep ( LATEST
UPDATE2025)
(a)A decrease in federal spending
(b)A decrease in the required reserve ratio
(c)A sale of government debt
(d)A lowering of the discount rate
(e)Buying government debt
(f)A decrease in taxes - CORRECT ANSWERS ✔✔(a) N/A
(b) increase
(c)decrease
(d)increase
(e)increase
(f)N/A
How do changes in interest rates affect the composition of bonds and
money that people will want to hold? - CORRECT ANSWERS
✔✔When interest rates are high, people want to take advantage of
the high return on bonds, so they choose to hold very little money and
hold more bonds.
Explain the speculative motive for holding bonds - CORRECT ANSWERS
✔✔Investors may wish to hold bonds when interest rates are high
with the hope of selling them when interest rates fall. This can be
profitable since the market value of bonds varies inversely with the
