Question

The broader definition of money – M2- includes several components (near-monies), the biggest of which is:

A) Savings deposits, including money market deposit accounts (MMDA)

B) Small (less than $100,000) time deposits

C) Money market mutual funds (MMF)

D) Currency, checkable deposits and Traveler’s checks

Which of the following is a tool the Federal Reserve System can use to regulate the quantity of money?

i.    changing the discount rate

ii.   conducting open market operations

iii.  changing the required reserve ratio

A) i only

B) ii only

C) ii and iii

D) i, ii, and iii

.  The fundamental force that drives trade between nations is:

A) the government.

B) NAFTA.

C) absolute advantage.

D) comparative advantage.

Which of the following is the result of a tariff?

A) Lower domestic prices than those that would prevail without the tariff.

B) A more efficient allocation of resources than would occur without the tariff.

C) Greater domestic production than would occur without the tariff.

D) All of the above.

Answer 1

1) Answer: (D): Currency, checkable deposits and Traveler’s checks

Broad definition of money-M2, can be defined as the scope of money being extended to a store if value function along with a medium of exchange. Currency, demand deposits, time deposits, savings deposits, Travelers checks etc. has high value of moneyness as they can be converted into usable form i.e.. cash within a short time. Assets like securities and shares does not belong to the category of broad money even though they can be sold. It is because they fall under the category of assets than money.

2) Answer : (D): i, ii and iii

The American Federal Reserve can use all the four tools in regulating the quantity of money namely, the discount rate, reserve requirements, open market operations and interest on reserves.
Decreasing or increasing discount rates encourages or discourages lending and spending by customers and business respectively. An decrease or increase in reserve requirements leads to an increase or decrease in funds available in banking system to lend to consumers and businesses, respectively. Open market operations is also a reliable tool to regulate the cash flow in the market.

3) Answer : (D): Comparative Advantage

Comparative advantage refers to the ability of an economy to produce goods and services at a lower cost than that of the trade competitors. It is an important principle in the theory of international trade. The party with lower opportunity cost holds the advantage i.e. the one that comes as the best package has its advantage.

4. Answer : (C): Greater domestic production than would occur without the tariff.

The price of imported goods increases as a result of tariff and hence domestic producers need not reduce their prices. As a result, domestic consumers are left paying more. As the price increases, more companies produce more goods within the country resulting in decrease in imports and increase in domestic production and prices. Tariffs causes a discouraging effect on the allocation of resources.