Eastern Mediterranean University

Department of Economics
2016-2017 Spring Semester
Econ 102 Quiz 1
Duration: 50 minutes A 15 May 2017

Name:__________________________________ St. No.___________________

Group Number___________________________

1. When conducting an open-market sale, the central bank

a. buys government bonds, and in so doing increases the money supply.
b. buys government bonds, and in so doing decreases the money supply.
c. sells government bonds, and in so doing increases the money supply.
d. sells government bonds, and in so doing decreases the money supply.

2. In a fractional-reserve banking system, a bank

a. does not make loans. b. does not accept deposits.
c. keeps only a fraction of its deposits in reserve. d. None of the above is correct.

3. A bank has a 5 percent reserve requirement, $5,000 in deposits, and has loaned out all
it can, given the reserve requirement.
a. It has $25 in reserves and $4,975 in loans.
b. It has $250 in reserves and $4,750 in loans.
c. It has $1,000 in reserves and $4,000 in loans.
d. None of the above is correct.

4. In the special case of the 100 percent-reserve banking, the money multiplier is
a. 1 and banks create money. b. 1 and banks do not create money.
c. 2 and banks create money d. 2 and banks do not create money.

5. Which tool of monetary policy do the central banks use most often?
a. term auctions b. open-market operations
c. changes in reserve requirements d. changes in the discount rate

6. Bank capital is
a. the machinery, structures, and equipment of the bank.
b. the resources that owners have put into the bank.
c. the reserves of the bank. d. the bank’s total assets.

7. Which of the following can a central bank do to change the money supply?
a. change reserves or change the reserve ratio
b. change reserves but not change the reserve ratio
c. change the reserve ratio but not change the reserve ratio
d. neither change reserves nor change the reserve ratio

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8. If a central bank sells government bonds to the public, then reserves
a. increase and the money supply increases.
b. increase and the money supply decreases.
c. decrease and the money supply increases.
d. decrease and the money supply decreases.

9. The interest rate the central bank charges on loans it makes to banks is called
a. the prime rate. b. the federal funds rate. c. the discount rate. d. the LIBOR.

10. The money supply increases when the Fed

a. lowers the discount rate. The increase will be larger the smaller the reserve ratio is.
b. lowers the discount rate. The increase will be larger the larger the reserve ratio is.
c. raises the discount rate. The increase will be larger the smaller the reserve ratio is.
d. raises the discount rate. The increase will be larger the larger the reserve ratio is.

11. The term hyperinflation refers to

a. the spread of inflation from one country to others.
b. a decrease in the inflation rate.
c. a period of very high inflation.
d. inflation accompanied by a recession.

12. To explain the long-run determinants of the price level and the inflation rate, most
economists today rely on the
a. quantity theory of money. b. price-index theory of money.
c. theory of hyperinflation. d. disequilibrium theory of money and inflation.

13. Money demand refers to

a. the total quantity of financial assets that people want to hold.
b. how much income people want to earn per year.
c. how much wealth people want to hold in liquid form.
d. how much currency the Federal Reserve decides to print.

14. As the price level rises, the value of money

a. increases, so people must hold less money to purchase goods and services.
b. increases, so people must hold more money to purchase goods and services.
c. decreases, so people must hold more money to purchase goods and services.
d. decreases, so people must hold less money to purchase goods and services.

15. When the Consumer Price Index falls from 110 to 100
a. there is inflation of 9.1% and the value of money decreases.
b. there is deflation of 9.1% and the value of money increases.
c. there is deflation of 10% and the value of money increases.
d. there is inflation of 10% and the value of money decreases.

16. If the reserve ratio is 4 percent, then the money multiplier is

a. 24. b. 25. c. 26. d. 4.

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17. If the Fed increases the money supply, then 1/P
a. falls, so the value of money falls. b. falls, so the value of money rises.
c. rises, so the value of money falls. d. rises, so the value of money rises.

18. In the 1970s, in response to recessions caused by an increase in the price of oil, the
central banks in many countries increased their money supplies. The central banks might
have done this by
a. selling bonds on the open market, which would have raised the value of money.
b. purchasing bonds on the open market, which would have raised the value of money.
c. selling bonds on the open market, which would have raised the value of money.
d. purchasing bonds on the open market, which would have lowered the value of money.
Figure 30-1

19. Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, then
a. the quantity of money demanded is greater than the quantity supplied; the price level will rise.
b. the quantity of money demanded is greater than the quantity supplied; the price level will fall.
c. the quantity of money supplied is greater than the quantity demanded; the price level will rise.
d. the quantity of money supplied is greater than the quantity demanded; the price level will fall.

20. A country sells more to foreign countries than it buys from them. It has
a. a trade surplus and positive net exports.
b. a trade surplus and negative net exports.
c. a trade deficit and positive net exports.
d. a trade deficit and negative net exports.

21. If a country had a trade surplus of $50 billion and then its exports rose by $30 billion
and its imports rose by $20 billion, its net exports would now be
a. $0 billion. b. $20 billion. c. $40 billion. d. $60 billion.

22. If U.S. residents purchase $600 billion worth of foreign assets and foreigners purchase
$300 billion worth of U.S. assets,
a. U.S. net capital outflow is $300 billion; capital is flowing into the U.S.
b. U.S. net capital outflow is $300 billion; capital is flowing out of the U.S.
c. U.S. net capital outflow is -$300 billion; capital is flowing into the U.S.
d. U.S. net capital outflow is -$300 billion; capital is flowing out of the U.S.

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23. Which of the following is an example of U.S. foreign direct investment?
a. A Greek company opens a cheese factory in the U.S.
b. A German mutual fund buys stock issued by a U.S. corporation.
c. A U.S. beverage company opens a bottling plant in Russia.
d. A U.S. bank buys bonds issued by an Argentinean company

24. Other things the same, which of the following would both make foreigners more willing
to engage in U.S. portfolio investment?
a. U.S. interest rates rise, the default risk of U.S. assets rise
b. U.S. interest rates rise, the default risk of U.S. assets fall
c. U.S. interest rates fall, the default risk of U.S. assets rise
d. U.S. interest rates fall, the default risk of U.S. assets fall

25. Which of the following equations is correct?

a. S = I + C b. S = I – NX c. S = I + NCO d. S = NX - NCO.

26. If purchases of French assets by foreigners are less than French purchases of foreign
assets, then France has a
a. positive net capital outflow and a trade surplus.
b. positive net capital outflow and a trade deficit.
c. negative net capital outflow and a trade surplus.
d. negative net capital outflow and a trade deficit

27. Last year a country had exports of $50 billion, imports of $60 billion, and domestic
investment of $40 billion. What was its saving last year?
a. $30 billion b. $20 billion c. $10 billion d. -$10 billion

28. Other things the same, if the exchange rate changes from 75 Algerian dinar per dollar
to 72 Algerian dinar per dollar, the dollar has
a. appreciated and so buys more Algerian goods.
b. appreciated and so buys fewer Algerian goods.
c. depreciated and so buys more Algerian goods.
d. depreciated and so buys fewer Algerian goods.

29. According to purchasing-power parity which of the following is equal to 1?

a. both the nominal and the real exchange rate.
b. the nominal exchange rate but not the real exchange rate
c. the real exchange rate but not the nominal exchange rate
d. neither the nominal exchange rate nor the real exchange rate

30. According to purchasing-power parity, inflation in the U.S. causes the dollar to
a. depreciate relative to all other currencies.
b. depreciate relative to currencies of countries that have lower inflation rates.
c. appreciate relative to all other currencies.
d. appreciate relative to currencies of countries that have lower inflation rates