Question

25.       While deflation did occur before World War II, wages and prices have exhibited downward rigidity since the end of World War II. Among the explanations offered for this are (I) recessions have been shorter in the postwar years and (II) firms fear the loss of good workers if they cut wages in a recession.

            a. I not II

            b. II not I

            c. I and II

            d. neither I nor II

26.       Money in the contemporary United States is almost entirely

            a. commodity money

            b. paper (i.e., fiat) money

            c. barter money

            d. backed by gold

27.       Excess reserves are put to use by a bank when it

            a. purchases government securities

            b. pays off the mortgage on its building

            c. extends loans to its customers

            d. puts the cash in the vault to back existing loans

28.       The banking system receives a cash deposit of $200,000. Total deposits eventually rise to $2 Million. The value of R, the official reserve requirement, is

            a. 10

            b. 0.10

            c. 5

            d. 0.20

29.       The value of R, the official reserve requirement, will give an overestimate of the money multiplier if (I) banks wish to keep excess reserves and (II) if households and firms decide to hold more cash outside the banking system.

            a. I and II

            b. I not II

            c. II not I

            d. neither I nor II

30.       When the Fed wishes to contract the money supply it can

            a. increase the reserve requirement

            b. decrease the reserve requirement

            c. ask people to save more

            d. turn additional sums of money over to the Treasury

31.       The discount rate is that which

            a. the Fed charges when it lends to commercial banks

            b. commercial banks pay when borrowing reserves from other commercial banks

            c. the Treasury pays when borrowing funds from the public

Answer 1

Q 25 - option d

Reason - Although deflation had started before 2nd world War, but downward rigidity in wages and prices took place after the war. This is due to economic slow down as result of deflation. As a result of deflation production declines, which lead to cut down of employment and subsequently income of the economy declines.

Q 26 - option b

Reason - Money in the contemporary US as well as over all the developed countries is not backed by any physical commodity rather it is based on the the authority who issue it. Most paper currency in the world is regarded as fiat currency including US dollar.

Q 27 - option d

Q 28 - option b

Q 29 - option b

Q 30 - option a

Q 31 - option a