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Money and Monetary Equations: Understanding the Value and Velocity of Money, Study notes of Finance

Carteret Community CollegeFinance

Various monetary equations, including Fisher's equation, the Quantity Theory of Money, and the Cambridge equation. It discusses the role of demand and supply in determining the value of money and the relationship between money, velocity, and price level. It also covers high-powered money, the barter system, and the functions of money.

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CBCS
IV SEMESTER
DEPARTMENT OF ECONOMICS
OBJECTIVES
NAME OF THE PAPER : MACROECONOMICS -II
PAPER – IV
SECTION –A
MULTIPLE CHOICE QUESTIONS
MODULE-I : MONEY
A. Choose the correct answer:
1. The value of money in Fisher’s equation is determined by
(a) Demand for money ( )
(b) Supply of money ( )
(c) Demand and supply of money ( )
(d) None of the above ( )
2. According to the Quantity Theory of Money, the value of money depends upon
(a) Quantity theory of money in circulation ( )
(b) Purchasing power of money ( )
(c) Demand for money ( )
(d) Price level ( )
3. According to Cambridge equation, the value of money depends upon
(a) Demand for money ( )
(b) Supply of money ( )
(c) Demand for goods and services ( )
(d) All of the above ( )
4. The degree of relationship between the demand for and the supply of money in Fisher’s
equation will be
(a) 𝑠𝑢𝑝𝑝𝑙𝑦 >𝑑𝑒𝑚𝑎𝑛𝑑 ( )
(b) 𝒔𝒖𝒑𝒑𝒍𝒚 =𝒅𝒆𝒎𝒂𝒏𝒅 ( )
(c) 𝑠𝑢𝑝𝑝𝑙𝑦 <𝑑𝑒𝑚𝑎𝑛𝑑 ( )
(d) None of the above ( )
pf3
pf4
pf5
pf8
pf9
pfa
pfd
pfe
pff
pf12
pf13
pf14
pf15
pf16

Partial preview of the text

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CBCS

IV SEMESTER

DEPARTMENT OF ECONOMICS

OBJECTIVES

NAME OF THE PAPER : MACROECONOMICS -II

PAPER – IV

SECTION – A

MULTIPLE CHOICE QUESTIONS

MODULE-I : MONEY

A. Choose the correct answer:

  1. The value of money in Fisher’s equation is determined by (a) Demand for money ( ) (b) Supply of money ( ) (c) Demand and supply of money ( ) (d) None of the above ( )
  2. According to the Quantity Theory of Money, the value of money depends upon (a) Quantity theory of money in circulation ( ) (b) Purchasing power of money ( ) (c) Demand for money ( ) (d) Price level ( )
  3. According to Cambridge equation, the value of money depends upon (a) Demand for money ( ) (b) Supply of money ( ) (c) Demand for goods and services ( ) (d) All of the above ( )
  4. The degree of relationship between the demand for and the supply of money in Fisher’s equation will be (a) 𝑠𝑢𝑝𝑝𝑙𝑦 > 𝑑𝑒𝑚𝑎𝑛𝑑 ( ) (b) 𝒔𝒖𝒑𝒑𝒍𝒚 = 𝒅𝒆𝒎𝒂𝒏𝒅 ( ) (c) 𝑠𝑢𝑝𝑝𝑙𝑦 < 𝑑𝑒𝑚𝑎𝑛𝑑 ( ) (d) None of the above ( )
  1. Which is not the function of money (a) Make demand and supply equal ( ) (b) Store of value ( ) (c) Medium of exchange ( ) (d) Measure of value ( )
  2. High-powered money is also known as (a) Base money ( ) (b) Reserve money ( ) (c) Narrow money ( ) (d) All of the above ( )
  3. Who stated, “Bad money drives good money out of circulation, when both of them are full legal tender”? (a) Irving Fisher ( ) (b) Milton Friedman ( ) (c) J.M. Keynes ( ) (d) Thomas Gresham ( )
  4. Value of money is (a) Directly related to the price level ( ) (b) Inversely related to the price level ( ) (c) Proportionately related to the price level ( ) (d) All the above ( )
  5. Who stated, “Money is what money does”? (a) Milton Friedman ( ) (b) Walker ( ) (c) Irving Fisher ( ) (d) Thomas Gresham ( )
  6. Fisher’s cash transaction equation is expressed as

(a) 𝑷 = 𝑴𝑽𝑻 ( ) (b) 𝐾 = (^) 𝑃𝑇𝑀 ( ) (c) 𝑉 = (^) 𝐾𝐼 ( )

(d) 𝑃 = (^) 𝐾𝑇𝑀 ( )

  1. Barter system means (a) Purchase of commodity with money ( ) (b) Sale of commodity with money ( ) (c) Purchase and sale of commodity with commodity ( )
  1. In the equation 𝑀𝑉 = 𝑃𝑌, 𝑉 𝑟𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑠 (a) Value of money ( ) (b) Velocity of circulation of money ( ) (c) Variation of national income ( ) (d) All of the above ( )
  2. In the equation 𝑀𝑉 = 𝑃𝑌, 𝑀 𝑟𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑠 (a) Money supply ( ) (b) Money demand ( ) (c) Maximum output ( ) (d) Minimum output ( )
  3. According to Keynes, motives for holding money are (a) Two ( ) (b) Three ( ) (c) Four ( ) (d) Five ( )
  4. Under normal circumstances, the velocity of circulation of money in a country is (a) 100 % ( ) (b) Negative ( ) (c) Less than 10 ( ) (d) Zero ( )
  5. Paper money is called fiat money because (a) It is issued with authority of government ( ) (b) It is convertible into gold ( ) (c) It can be easily printed ( ) (d) It is light weight ( )
  6. Value of money means (a) Gold purchased by money ( ) (b) General Purchasing power of money ( ) (c) Importance of money ( ) (d) Demand for money ( )
  7. If the quantity of money increases 100%, other things remaining constant, value of money changes by (a) Increases by 100 % ( ) (b) Decreases by 100 % ( ) (c) Decreases by 200% ( ) (d) Does not change ( )
  1. Value of money and supply of money are related (a) Inversely ( ) (b) Directly ( ) (c) Are not related ( ) (d) None of the above ( )
  2. The quantity demanded of money rises (a) As the interest rises ( ) (b) As the interest falls ( ) (c) As the supply of money falls ( ) (d) As the numberof banks rises ( )
  3. Equation of exchange is associated with (a) Pigou ( ) (b) J.B. Say ( ) (c) Marshall ( ) (d) Irving Fisher ( )
  4. Equation of exchange is converted into the quantity theory of money by assuming the following variables as constants (a) V and T ( ) (b) M and V ( ) (c) M and P ( ) (d) V and P ( )
  5. Fisher equation of exchange states that (a) P varies directly with income ( ) (b) P varies directly with M ( ) (c) P and M are constants ( ) (d) None of the above ( )
  6. In the Fisher’s extended equation of exchange MIVI^ represents (a) Credit money ( ) (b) Primary money ( ) (c) Both primary and credit money ( ) (d) General Price level ( )
  7. In Fisher’s transaction velocity model, which one of the following is not an assumption (a) Velocity of circulation of money is constant ( ) (b) The volume of transaction is constant ( ) (c) Full employment ( ) (d) P is considered as an active factor ( )
  1. The number of times a unit of money exchanges hands during a unit period of time is known as (a) Velocity of the circulation of money ( ) (b) Speed of circulation of money ( ) (c) Momentum of circulation of money ( ) (d) Count of circulation of money ( )
  2. In India, coins are minted at four places, which among the following is one of them (a) New Delhi ( ) (b) Chennai ( ) (c) Hyderabad ( ) (d) All of them ( )

ANSWER KEY

(UNIT-I)

Question No. Answer Key

  1. C
  2. A
  3. A
  4. B
  5. A
  6. D
  7. D
  8. B
  9. B
  10. A
  11. C
  12. B
  13. D
  14. B
  15. C
  16. D
  17. A
  18. C
  19. B
  20. A
  21. B
  22. C
  23. A
  24. B
  25. B

26. A

27. B

28. D

29. A

30. B

31. A

32. D

33. D

34. A

35. B

36. B

37. A

38. B

39. A

40. C

MODULE-II: BANKING

A. Choose the correct answer:

  1. Which of the following is a qualitative or selective method of credit control by the central bank? (a) Bank rate or Discount Rate Policy ( ) (b) Open market operations ( ) (c) Cash Reserve Ratio ( ) (d) None of the above ( )
  2. In what way the Central Bank serves as a Banker’s Bank? (a) By maintaining gold reserve ( ) (b) By controlling currency ( ) (c) By acting as a lender of the last resort ( ) (d) By reducing the interest rates ( )
  3. Which of the following is not a function of commercial bank? (a) Accepting deposits ( ) (b) Creating credits ( ) (c) Printing bank notes ( ) (d) None of the above ( )
  1. Which of the following is a selective credit instrument? (a) variable reserve ratio ( ) (b) credit rationing ( ) (c) Bank rate ( ) (d) All of the above ( )
  2. When the Central Bank intends to expand the credit, it should (a) Raise the margin requirements ( ) (b) Raise the variable reserve ratio ( ) (c) Lower the bank rate ( ) (d) Purchase government securities in the open market ( )
  3. Open Market Operation is (a) Buying and selling of government securities ( ) (b) Sale of government securities ( ) (c) Buying and selling of government cheques ( ) (d) All of the above ( )
  4. Open market operation will become successful if there is a (a) free-market economy ( ) (b) developing economy ( ) (c) well-developed bill and security market ( ) (d) All of the above ( )
  5. Which of the following is not an instrument of selective credit control? (a) Margin requirements ( ) (b) Open market operation ( ) (c) Credit rationing ( ) (d) None of the above ( )
  6. Bank rate policy is not very effective because- (a) It requires a well-developed money market ( ) (b) It cannot operate effectively ( ) (c) All banks are not under the control of central bank ( ) (d) All the above ( )
  7. Which of the following is not a quantitative method of credit control (a) Bank arte ( ) (b) Open market operation ( ) (c) Variable reserve ratio ( ) (d) Regulation of consumer credit ( )
  1. To what extent the central bank is the lender of the last resort? (a) As it lends to the government ( ) (b) As it provides finance to agriculture ( ) (c) As it is the ultimate source of credit in times of crisis ( ) (d) As it controls the money supply in the economy ( )
  2. Variable reserve ratio refers to- (a) The ratio which the commercial banks are required to maintain with the central bank ( ) (b) The ratio at which the central bank rediscounts first class bills ( ) (c) The purchase and sale by the central bank to government securities in the money market ( ) (d) All of the above ( )
  3. The term bank liquidity implies (a) Management of cash ( ) (b) Creation of credit ( ) (c) The capacity of the bank to give cash on demand in exchange ( ) (d) All of the above ( )
  4. What is known as the most profitable asset of a commercial bank? (a) Investment at call and short-notice ( ) (b) Loans and advances to its customers ( ) (c) Accepting deposits ( ) (d) None of the above ( )
  5. The fundamental function of a commercial bank is (a) Acceptance of deposits ( ) (b) Advancing loans ( ) (c) Issuing bank draft ( ) (d) Creating credit ( )
  6. Which of the following is not a function of commercial bank? (a) Accepting deposits ( ) (b) Advancing loans ( ) (c) Creating credit ( ) (d) Printing bank notes ( )
  7. Loans and investment of a commercial bank constitute its (a) Derivative deposits ( ) (b) Primary deposits ( ) (c) Secondary deposits ( ) (d) All of the above ( )

(a) a decrease in the total stock of money ( ) (b) an increase in the total stock of money ( ) (c) an increase in government securities ( ) (d) none of the above ( )

  1. What is Currency Deposit Ratio (CDR)? (a) Ratio of money held by the public in currency to that of money held in bank deposits ( ) (b) Ratio of money held by the public in bank deposits to that of money held by public in currency ( ) (c) Ratio of money held in demand drafts to that of money held in treasury bonds ( ) (d) None of the above ( )
  2. What is the Reserve Deposit Ratio? (a) The proportion of money RBI lends to commercial banks ( ) (b) The proportion of total deposits commercial banks keep as reserves ( ) (c) The total proportion of money that commercial banks lend to the customers ( ) (d) None of the above ( )
  3. Which among the following is called the rate of interest charged by RBI for lending money to various commercial banks by rediscounting of the bills in India? (a) Bank rate ( ) (b) Discount window ( ) (c) Monetary Policy ( ) (d) Overnight rate ( )
  4. What method is used by the Bank to read code on cheque? (a) MICR ( ) (b) OCR ( ) (c) OMR ( ) (d) None of the above ( )
  5. Which is the largest private sector bank in India? (a) ICICI ( ) (b) Axis Bank ( ) (c) HDFC ( ) (d) ICICI ( )
  6. Who was the first Indian to become Governor of Reserve Bank of India(RBI)? (a) Liaquant Ali Khan ( ) (b) T.T. Krishnamachari ( ) (c) John Mathai ( )

(d) C.D. Deshmukh ( )

  1. In July 1969, 14 major Indian Scheduled Banks were nationalized and 6 more banks were nationalized in (a) April 1980 ( ) (b) May 1980 ( ) (c) April 1981 ( ) (d) May 1981 ( )
  2. Which is the largest private sector bank in India on the basis of consolidated assets? (a) Axis Bank ( ) (b) ICICI Bank ( ) (c) HDFC Bank ( ) (d) South Indian Bank ( )

ANSWER KEY

(UNIT-II)

Question No. Answer Key

  1. D
  2. C
  3. C
  4. B
  5. B
  6. A
  7. C
  8. C
  9. C
  10. B
  11. B
  12. D
  13. A
  14. C
  15. B
  16. A
  17. D
  18. C
  19. A
  20. C
  21. B
  22. B
  23. D
  24. A
  25. D
  26. A
  27. B
  1. According to Keynes, inflationary gap is caused by (a) excess supply ( ) (b) excess demand ( ) (c) deficiency of demand ( ) (d) deficiency of supply ( )
  2. Stagflation implies a situation of (a) High inflation and high unemployment ( ) (b) Low unemployment and low inflation ( ) (c) High inflation and low unemployment ( ) (d) Low inflation and high unemployment ( )
  3. Demand- Pull inflation is caused by an (a) Increase in the aggregate effective demand for goods and services ( ) (b) Increase in the money incomes of the factors of production ( ) (c) Increased investment in the economy ( ) (d) All of the above ( )
  4. Which of the following is a monetary measure to control inflation in an economy? (a) Increase in money supply ( ) (b) Demonetization of currency ( ) (c) Increase in government expenditure ( ) (d) All of the above ( )
  5. In Keynesian view, inflation is (a) The rise in the price level after the point of full employment ( ) (b) A rise in the price level before the point of full employment ( ) (c) Too much money chasing too few goods ( ) (d) All of the above ( )
  6. “Inflation is a state in which the value of money is falling i.e., prices are rising”. Who said this? (a) Hansen ( ) (b) Keynes ( ) (c) Crowther ( ) (d) Fisher ( )
  7. If inflation is allowed to continue without any check, it is known as (a) Supressed inflation ( ) (b) Normal inflation ( ) (c) Open inflation ( ) (d) Deflation ( )
  1. When both prices and money income fall, the situation is called (a) Disinflation ( ) (b) Recession ( ) (c) Deflation ( ) (d) Anti-inflation ( )
  2. Inflation in a developed country usually sets in (a) Before the point of full employment ( ) (b) After the point of full employment ( ) (c) at the point full employment ( ) (d) None of the above ( )
  3. During inflation, who suffers the most? (a) Wage and salary earners ( ) (b) Creditors ( ) (c) Debtors ( ) (d) Businessman ( )
  4. When government interrupts price rise, there is (a) Suppressed inflation ( ) (b) Reflation ( ) (c) Open inflation ( ) (d) Deflation ( )
  5. The phenomenal rise in prices accompanied by increased real income is known as (a) inflation ( ) (b) deflation ( ) (c) reflation ( ) (d) None of the above ( )
  6. Which of the following measure proves effective in reducing the rate of inflation? (a) Decreased personal consumption ( ) (b) Evaluation of currency ( ) (c) Increased taxation ( ) (d) All of the above ( )
  7. Inflation can be controlled by applying: (a) Monetary and fiscal policies ( ) (b) Monetary and labour policy ( ) (c) Fiscal and Commercial Policies ( ) (d) All of the above ( )
  1. Demand-pull inflation arises when (a) Policymakers set a very high unemployment target ( ) (b) A persistent budget deficit is financed by money creation ( ) (c) The deficit is financed by selling bonds to the public ( ) (d) All of the above ( )
  2. Government may pursue inflationary monetary policies (a) To promote high employment ( ) (b) To accommodate demands of workers for higher wages ( ) (c) To finance a persistent budget deficit ( ) (d) All of the above ( )
  3. Governments may end up with a high money growth rate and high inflation as a result of policies designed to (a) Lower unemployment ( ) (b) Finance persistent government budget deficits through money creation rather than by issuing bonds ( ) (c) Redistribute wealth from debtors to creditors ( ) (d) Both ( a) and (b) ( )
  4. Which of the following is an effect of inflation? (a) Erosion in purchasing power ( ) (b) Affects relative price of goods ( ) (c) Increase in inequalities of income ( ) (d) All of the above ( )
  5. Which of the following can be undertaken to control inflation? (a) Control on public expenditure ( ) (b) Control on hoarding and black-marketing ( ) (c) Effective control on credit ( ) (d) All of the above ( )
  6. Which of the following is phenomenon that leads to Hyperinflation? (a) It is a situation when aggregate demand in an economy outpaces aggregate supply( ) (b) It is a situation of persistent rise in inflation along with dip in growth and increase in unemployment ( ) (c) It is a situation caused by an increase in prices of inputs like labour, raw material etc ( ) (d) It is a situation when a nation experiences very high and accelerating inflation ( )
  7. Inflationary gap said to exist when (a) Real GDP > Potential GDP ( )

(b) Real GDP <Potential GDP ( ) (c) Real GDP= Potential GDP ( ) (d) Unemployment rate> natural rate of unemployment ( )

  1. Phillip’s curve shows the relationship between the rate of (a) Unemployment and output growth ( ) (b) Unemployment and increase in money wages ( ) (c) Employment and inflation ( ) (d) All of the above ( )
  2. According to Phillips curve unemployment will return to the natural rate when: (a) Nominal wages are equal to expected wages ( ) (b) Real wages are back at equilibrium level ( ) (c) Nominal wages are growing faster than inflation ( ) (d) Inflation is higher than the growth of nominal wages ( )
  3. An increase in aggregate is more likely to lead to demand pull inflation if: (a) Aggregate supply is perfectly elastic ( ) (b) Aggregate supply is perfectly inelastic ( ) (c) Aggregate supply is unit inelastic ( ) (d) Aggregate supply is relatively inelastic ( )
  4. In short-run, unemployment may fall below the natural rate of unemployment if: (a) Nominal wages have risen less than inflation ( ) (b) Nominal wages have risen at the same rate as inflation ( ) (c) Nominal wages have risen more than inflation ( ) (d) Nominal wages have risen less than unemployment ( )
  5. The effects of inflation on the price competitiveness of a country’s products may be offset by (a) An appreciation of the currency ( ) (b) A revaluation of the currency ( ) (c) A depreciation of the currency ( ) (d) None of the above ( )
  6. Countries with the highest inflation rates are likely to have (a) The highest rate of money growth ( ) (b) Large budget deficits ( ) (c) The lowest interest rates ( ) (d) Both (a) and (b) ( )
  7. A one-time increase in the price level is