1.If you want to deflate the current price of something to eliminate the effect
ID: 1191048 • Letter: 1
Question
1.If you want to deflate the current price of something to eliminate the effect of inflation,
a. divide the number by the price index
b.multiply the number by the price index
c.multiply the number by 2 and then divide by the price index
d.multiply the number by the price index and then divide by 2
2.A price index number
a.is really a percentage
b.indicates the extent of change in prices over some period of time
c.is always greater than 100 if prices have risen during the period in question
d.all of the above
3.The multiple expansion of the money supply is made possible because money withdrawn from one bank finds its way into other banks
True or False
4.If the CPI is 150, the value of the dollar now compared to in the base period is
a.$1.50
b.$1
c,$0.67
d.$0.50
5.Your nominal wages rose during the same period from $200 a week to $260. By how much did your real income rise?
a.30 percent
b.16.7 percent
c.8.33 percent
d.12 percent
6.If a bank has legal reserves of $1 million, a reserve requirement of 10 percent, and checkable deposits of $6 million, it can extend its checkable deposits by
a. $1 million
b. $2 million
c. $4 million
d.$10 million
7. Assume the following: M = $500; V = 10; and P = $10. If the money supply then increases by 50 percent while total transactions triple, the new value of the price level will be
a.$10
b. $2.5
c, $7.5
d. $5
8.The Federal Reserve Banks are owned by
a.the federal government
b.a combination of state governments and the federal government
c.the Board of Governors
d.their member banks
9.More than 50 percent of commercial banks in the United States belong to the Federal Reserve System
Ture or False
10.The Fed’s ability to influence the money supply through its open-market operations is independent of a commercial bank’s desire to make loans.
Ture or False
Explanation / Answer
(1) (a)
To eliminate effect of inflation, we deflate a variable with the price index, which measures the level of current prices compared to base year prices.
(2) (d)
A price index measures the change in price level over two periods, in percentage terms. In inflationary period, price index > 100.
(3) True.
As deposits are made into different banks, each bank lends the maximum allowable percentage of deposit as a loan. This increases total money supply.
(4) (a)
Value of dollar now = Current CPI / Base period CPI = 150 / 100 [Base period CPI is always 100]
= 1.5
(5) Incomplete data. A real variable cannot be determined from nominal variable unless price level is given.
(6) (d)
Increase in checkable deposits = Legal reserves / Required reserve ratio = 1 million / 0.1 = 10 million
(7) ()
MV = PY [V: Velocity of money = number of transactions]
Initially, $500 x 10 = $10 x Y, So Y = $500
Later, M = $500 x 1.5 = $750
Total transactions, V = 10 x 3 = 30
Revised MV = $750 x 30 = $22,500
Y = $500
So, P = $22,500 / $500 = 45
Tutor notes: Please cross-check the data. In equation MV = PY, is Y changing or unchanged? If Y does not change, then revised price level = 45. Answer is not matching.
(8) (d)
The Fed is owned by the member banks which govern and monitor it.
(9) True. Fed is the central bank which is banker of all commercial banks.
(10) True. Feb controls money supply based on its inflation target and not on commercial banks' credit creation willingness.
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