Why m1 differs from m2, When the Fed buys government

Why m1 differs from m2

Reference no: EM13176108

1. In addition to the chairman of the Board of Governors, the FOMC consists of ________.

A. Six rotating members of the Board of Governors and five presidents of Federal Reserve banks

B. Six other members of the Board of Governors, four rotating bank presidents and the president of the New York Federal Reserve

C. Six other members of the Board of Governors and five presidents of Federal Reserve banks; all twelve rotating members

D. Twelve Federal Reserve Bank presidents

E. None of these

2. When the Fed buys government securities in the open market, the money supply ________ because ________.

A. decreases; banks lose liquidity, they make fewer loans and checking account deposits decrease

B. increases; banks gain liquidity, they make more loans and checking account deposits increase

C. increases; banks lose liquidity, they make more loans and checking account deposits increase

D. decreases; banks gain liquidity, they make fewer loans and checking account deposits decrease

E. None of these

3. In the quantity theory of money, the assumption that aggregate output is fixed is based on the view that ________.

A.wages and prices are perfectly flexible in the long run

B. the velocity of money is constant in the short run

C. the demand for real money balances is proportional to income

D. changes in the quantity of money lead to proportional changes in the price level

E. None of these

4. M1 differs from M2 because ________.

A. M1 is less liquid than M2

B. M1 includes demand deposits and M2 does not

C. M1 includes only the most liquid forms of money and M2 includes all of M1 and some less liquid items

D. All of these

E. None of these

5. The quantity theory of money ________.

A. implies that inflation equals the ratio of the growth rates of the money supply and of real income

B. provides central banks with a tool to prevent the rate of inflation from fluctuating

C. implies that, in the long run, changes in the money supply will be matched by changes in real income

D. All of these

E. None of these

6. The phrase "double coincidence of wants" ________.

A. is useful to explain why barter is an efficient practice

B. refers to two people who have similar tastes

C. suggests a quite improbable circumstance

D. clarifies the distinction between income and wealth

E. None of these

7. Money serves as ________.

A. a unit of account,

B. a store of value

C. a medium of exchange

D. All of these

E. None of these

8. Financial innovations such as direct deposit of paychecks, electronic payment of bills, and automated teller machines (ATMs) have likely ________.

A. had minimal effect on M1 and M2

B. reduced the size of M2 relative to M1

C. increased both M1 and M2 relative to GDP

D. caused the growth rates of M1 and M2 to become more stable

E. reduced the size of M1 relative to M2

9. Fred has always been known as "the rich kid." Strictly speaking, this must mean that ________.

A. Fred has a lot of cash

B. Fred's income is quite high

C. Fred won the lottery before he was legally eligible

D. Fred has a flashy wardrobe

E. Fred has a lot of wealth

10. The quantity theory of money ________.

A. is the product of Keynesian economists

B. links total income to a country's supply of money

C. explains why the equation of exchange is true by definition

D. All of these

E. None of these

Reference no: EM13176108

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