Question

1. The velocity of money is the

1. Rapidity of price increases during inflation.
2. Number of times per year each dollar is used to transact an exchange.
3. Number of times the price level increases during a year.
4. Number of times per year each product is purchased during the year.

2. The characteristics that money should have include:

1. portability, durability, and flexibility.
2. Durability, flexibility, and stability.
3. Durability, portability, and non-homogeneity.
4. Scarcity, portability, and divisibility.

3. During a period of inflation, the Fed is likely to:

1. Sell government bonds to banks in order to reduce the amount of loanable funds.
2. Buy government bonds from banks in order to reduce the amount of loanable funds.
3. Raise taxes in order to reduce the money supply.
4. Cut the required reserve ratio in order to reduce the amount of excess reserves banks have to loan out.

4. Which of the following would cause the money supply to expand?

1. An open market purchase by the Fed.
2. A reduction in the discount rate.
3. A reduction in required ratios.
4. All of the above.

Answer 1

Answer : 1) The answer is option b.

Velocity of money means that how many times the money is used for transaction purpose at a given period of time. Therefore, option b is correct.

2) The answer is option d.

Money supply is limited in the economy. So, money is scarce or limited.

Currency of one country can be exchanged with another currency. So, money is divisible.

Money is portable. Because people can carry money in pocket to start a business.

Therefore, option d is correct.

3) The answer is option a.

By open market operation Fed buy or sell bonds to maintain the money supply of economy. When money supply decrease then loanable fund decrease. As a result inflation level decrease. To decrease the money supply of economy Fed sell bonds to banks which decrease the loanable funds. As a result, inflation fall. Therefore, option a is correct.

4) The answer is option d.

To increase the money supply Fed buy bonds through open market.

To increase the money supply Fed reduce the required reserve ratio.

Again, to increase the money supply in the economy Fed decrease the discount rate.

Therefore, option d is the correct answer.