On the Statement of Cash Flows, which of the following are considered operating activities?

On the Statement of Cash Flows, which of the following are considered operating activities?

I. costs of goods sold
II. decrease in accounts payable
III. interest paid
IV. dividends paid


a. I and III only

b. III and IV only

c. I, II, and III only

d. I, II, and III only

e. I, II, III, and IV


Answer: C

On the statement of Cash Flows, which of the following are considered financing activities?

On the statement of Cash Flows, which of the following are considered financing activities?

I. increase in long-term debt
II. decrease in accounts payable
III. interest paid
IV. dividends paid


a. I and IV only

b. III and IV only

c. II and III only

d. I, III, and IV only

e. I, II, III, and IV




Answer: E

Which one of the following is a use of cash?

Which one of the following is a use of cash?

a. increase in notes payable

b. decrease in inventory

c. increase in long-term debt

d. decrease in accounts receivables

e. decrease in common stock

Answer: E

Which one of the following is a source of cash?

Which one of the following is a source of cash?

a. increase in accounts receivable

b. decrease in notes payable

c. decrease in common stock

d. increase in accounts payable

e. increase in inventory

Answer: D

The sources and uses of cash over a stated period of time are reflected on the:

The sources and uses of cash over a stated period of time are reflected on the:

a. income statement

b. balance sheet

c. tax reconciliation statement

d. statement of cash flows

e. statement of operating position

Answer: D

A firm has a debt-equity ratio of 57 percent, a total asset turnover of 1.12, and a profit margin of 4.9 percent. The total equity is $511,640. What is the amount of the net income?

A firm has a debt-equity ratio of 57 percent, a total asset turnover of 1.12, and a profit margin of 4.9 percent. The total equity is $511,640. What is the amount of the net income?

a. $28,079

b. $35,143

c. $44,084

d. $47,601

e. $52,601

Answer: C

The Meat Market has $747,000 in sales. The profit margin is 4.1 percent and the firm has 7,500 shares of stock outstanding. The market price per share is $27. What is the price-earning ratio?

The Meat Market has $747,000 in sales. The profit margin is 4.1 percent and the firm has 7,500 shares of stock outstanding. The market price per share is $27. What is the price-earning ratio?

a. 6.61

b. 8.98

c. 11.42

d. 13.15

e. 14.27

Answer: A

The Purple Martin has annual sales of $687,400, total debt of $210,000, total equity of $365,000, and a profit margin of 5.20 percent. What is the return on assets?

The Purple Martin has annual sales of $687,400, total debt of $210,000, total equity of $365,000, and a profit margin of 5.20 percent. What is the return on assets?

a. 6.22 percent

b. 6.48 percent

c. 7.02 percent

d. 7.78 percent

e. 9.79 percent

Answer: A

A firm has total debt of $4,620 and a debt-equity ratio of 0.57. What is the value of the total assets?

A firm has total debt of $4,620 and a debt-equity ratio of 0.57. What is the value of the total assets?

a. $6,128.05

b. $7,253.40

c. $9,571.95

d. $11,034.00

e. $12,725.26

Answer: E

During the year, Kitchen Supply increased its accounts receivable by $130, decreased its inventory by $75, and decreased its accounts payable by $40. How did these three accounts affect the firm's cash flow for the year?

During the year, Kitchen Supply increased its accounts receivable by $130, decreased its inventory by $75, and decreased its accounts payable by $40. How did these three accounts affect the firm's cash flow for the year?

a. $245 use of cash

b. $165 use of cash

c. $95 use of cash

d. $95 source of cash

e. $165 source of cash

Answer: C

The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the:

The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the:

a. operating cash flow

b. net capital spending

c. net working capital

d. cash flow from assets

e. cash flow to stockholders

Answer: D

Noncash items refer to :

Noncash items refer to :

a. inventory items purchased using credit

b. the ownership of intangible assets such as patents

c. the ownership of intangible assets such as patents

d. expenses which do not directly affect cash flows

e. sales which are made using store credit

Answer: D

The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased net working capital by $1,330. What is the amount of the cash flow to stockholders?

The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased net working capital by $1,330. What is the amount of the cash flow to stockholders?

a. $5,100

b. $7,830

c. $18,020

d. $19,998

e. $20,680

Answer: E

At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407. At the end of the year, long-term debt was $68,219 and total debt was $145,838. The interest paid was $6,430. What is the amount of the cash flow to creditors?

At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407. At the end of the year, long-term debt was $68,219 and total debt was $145,838. The interest paid was $6,430. What is the amount of the cash flow to creditors?

a. -$18,348

b. -$1,001

c. $11,129

d. $13,861

e. $19,172

Answer: C

Crandall Oil has total sales of $1,349,800 and cost of $903,500. Depreciation is $42,700 and the tax rate is 34 percent. The firm does not have any interest expense. What is the operating cash flow?

Crandall Oil has total sales of $1,349,800 and cost of $903,500. Depreciation is $42,700 and the tax rate is 34 percent. The firm does not have any interest expense. What is the operating cash flow?

a. $129,152

b. $171,852

c. $179,924

d. $281,417

e. $309,076

Answer: E

Andre's Bakery has sales of $687,000 with costs of $492,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 35 percent. What is the net income?

Andre's Bakery has sales of $687,000 with costs of $492,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 35 percent. What is the net income?

a. $42,750

b. $44,450

c. $82,550

d. $86,450

Answer: C

A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and fixed assets are $3,910. What is the amount of the total liabilities?

A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and fixed assets are $3,910. What is the amount of the total liabilities?

a. $2,050

b. $2,690

c. $4,130

d. $5,590

e. $5,860



Answer: E

A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets?

A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets?

a. $710

b. $780

c. $990

d. $2,430

e. $2,640

Answer: B

Which one of the following is an agency cost?

Which one of the following is an agency cost?

a. accepting an investment opportunity that will add value to the firm

b. increasing the quarterly dividend

c. investing in a new project that creates firm value

e. hiring outside accountants to audit the company's financial statements

e. closing a division of the firm that is operating at a loss

Answer: E

Which one of the following actions by a financial manager is most apt to create an agency problem?

Which one of the following actions by a financial manager is most apt to create an agency problem?

a. refusing to borrow money when doing so will create losses for the firm

b. refusing to lower selling prices if doing so will reduce the net profits

c. refusing to expand the company if doing so will lower the value of the equity

d. agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of sales

e. increasing current profits when doing so lowers the value of the firm's equity

Answer: E

The Sarbanes-Oxley Act of 2002 is a government response to:

The Sarbanes-Oxley Act of 2002 is a government response to:

a. decreasing corporate profits

b. the terrorists attacks on 9/11/2001

c. a weakening economy

d. deregulation of the stock exchanges

e. management greed and abuses

Answer: E

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management?

a. increase in the amount of the quarterly dividend

b. decrease in the per unit production costs

c. increase in the number of shares outstanding

d. decrease in the net working capital

e. increase in the market value per share

Answer: E

Which of the following are advantages of the corporate form of business ownership?

Which of the following are advantages of the corporate form of business ownership?

I. limited liability for firm debt
II. double taxation
III. ability to raise capital
IV. unlimited firm life


a. I and II only

b. III and IV only

c. I, III, and IV only

d. II, III, and IV only

e. I, II, III, and IV

Answer: C

Which one of the following is a capital structure decision?

Which one of the following is a capital structure decision?

a. determining which one of the two projects to accept

b. determining how to allocate investment funds to multiple projects

c. determining the amount of funds needed to finance customer purchases of a new product

d. determining how much debt should be assumed to fund a project

e. determining how much inventory will be needed to support a project

Answer: D

Which of the following is a capital budgeting decision?

Which of the following is a capital budgeting decision?

a. determining how many shares of stock to issue

b. deciding whether or not to purchase a new machine for the production line

c. deciding how to refinance a debt issue that is maturing

d. determining how much inventory to keep on hand

e. determining how much money should be kept in the checking account

Answer: B

The most likely explanation for the high inflation rates that countries like Russia and the Ukraine have suffered is that

The most likely explanation for the high inflation rates that countries like Russia and the Ukraine have suffered is that 

(a) large inflows of foreign funds increase the money supply, causing inflation.
(b) without inflation, these countries would be unable to achieve high rates of growth.
(c) borrowing from the central bank is the most expedient method of funding the government's expenditures.
(d) the flood of financial innovations has increased liquidity in these nations' economies.

Answer: C

When a government prints money to finance its expenditures, it is likely to cause

When a government prints money to finance its expenditures, it is likely to cause 

(a) unemployment.
(b) inflation.
(c) deflation.
(d) reductions in the use of barter.

Answer: B

Large differences in inflation rates among countries are almost always the result of large differences in

Large differences in inflation rates among countries are almost always the result of large differences in 

(a) productivity.
(b) real income growth.
(c) the growth rates of real money demand.
(d) the growth rates of nominal money supplies.


Answer: D

If the nominal money supply grows by 5%, real income falls by 2%, and the income elasticity of money demand is 0.8, then the inflation rate is

If the nominal money supply grows by 5%, real income falls by 2%, and the income elasticity of money demand is 0.8, then the inflation rate is 

(a) 3.0%.
(b) 3.4%.
(c) 6.6%.
(d) 7.0%.



Answer: C

If the income elasticity of money demand is 3/4 and income increases by 8%, by about how much does the price level change?

If the income elasticity of money demand is 3/4 and income increases by 8%, by about how much does the price level change? 

(a) Falls by 6%.
(b) Unchanged.
(c) Rises by 6%.
(d) Rises by 8%


Answer: A

If real money demand increases 5% and real money supply increases by 10%, by about how much does the price level change?

If real money demand increases 5% and real money supply increases by 10%, by about how much does the price level change? 

(a) Falls by 5%.
(b) Unchanged.
(c) Rises by 2%.
(d) Rises by 5%.



Answer: D

If nominal money supply grows by 3% and real money demand grows by 8%, the inflation rate is

If nominal money supply grows by 3% and real money demand grows by 8%, the inflation rate is 

(a) -5%.
(b) 8/3%.
(c) 5%.
(d) 11%.




Answer: A

If real money demand doubles while the nominal money supply is unchanged, what happens to the rice level?

If real money demand doubles while the nominal money supply is unchanged, what happens to the rice level? 

(a) The price level increases by a factor of four.
(b) The price level doubles.
(c) The price level is unchanged.
(d) The price level falls by one-half.



Answer: D

If the nominal money supply doubles while real money demand is unchanged, what happens to the price level?

If the nominal money supply doubles while real money demand is unchanged, what happens to the price level? 

(a) The price level increases by a factor of four.
(b) The price level doubles.
(c) The price level is unchanged.
(d) The price level falls by one-half.



Answer: B

Suppose real money demand is L =0.8 Y- 100,000 (r + pe). If the nominal money supply is 12,000, real output is 15,000, the real interest rate is .02, and the expected inflation rate is .01, then the price level is

Suppose real money demand is L =0.8 Y- 100,000 (r + pe). If the nominal money supply is 12,000, real output is 15,000, the real interest rate is .02, and the expected inflation rate is .01, then the price level is 

(a) 3/4
(b) 1
(c) 4/3
(d) 3



Answer: C

Suppose the real money demand function is Md/P =2400 +0.2 Y- 10,000 (r + pe). Assume M =5000, P =2.0, and pe=.03. If Ywere to increase from 4000 to 5000, then the real interest rate would increase by how many percentage points?

Suppose the real money demand function is Md/P =2400 +0.2 Y- 10,000 (r + pe). Assume M =5000, P =2.0, and pe=.03. If Ywere to increase from 4000 to 5000, then the real interest rate would increase by how many percentage points? 

(a) 2
(b) 4
(c) 5
(d) 7



Answer: A

Suppose the real money demand function is Md/P =2400 +0.2 Y- 10,000 (r + pe). Assume M =5000, pe=0.03, and Y =5000. If the price level were to decrease from 2.5 to 2.0, then the real interest rate would decreaseby how many percentage points (assuming Md, pe, and Yare unchanged)?

Suppose the real money demand function is Md/P =2400 +0.2 Y- 10,000 (r + pe). Assume M =5000, pe=0.03, and Y =5000. If the price level were to decrease from 2.5 to 2.0, then the real interest rate would decreaseby how many percentage points (assuming Md, pe, and Yare unchanged)? 

(a) 4
(b) 5
(c) 9
(d) 14




Answer: B

Suppose the real money demand function is Md/P =2400 +0.2 Y- 10,000 (r + pe). Assume M =4000, P =2.0, pe=0.03, and Y =5000. The real interest rate that clears the asset market is

Suppose the real money demand function is Md/P =2400 +0.2 Y- 10,000 (r + pe).
Assume M =4000, P =2.0, pe=0.03, and Y =5000. The real interest rate that clears the asset  market is 

(a) 3%.
(b) 6%.
(c) 11%.
(d) 14%.

Answer: C

If the quantity of money demanded exceeds the quantity of money supplied, then

If the quantity of money demanded exceeds the quantity of money supplied, then 

(a) the quantity of nonmonetary assets demanded exceeds the quantity supplied.
(b) the quantity of nonmonetary assets supplied exceeds the quantity demanded.
(c) the quantity of nonmonetary assets demanded will still equal the quantity supplied, all else being equal.
(d) you can make no conclusions about the relative supply and demand of nonmonetary assets.

Answer: B

Under a situation of asset market equilibrium,

Under a situation of asset market equilibrium, 

(a) the quantity of money supplied equals the quantity of money demanded.
(b) the quantity of money supplied equals the quantity of nonmonetary assets demanded.
(c) the quantity of nonmonetary assets supplied equals the quantity of monetary assets demanded.
(d) the quantity of money supplied equals the quantity of nonmonetary assets supplied.

Answer: A

Suppose velocity is constant at4, real output is 10, and the price level is 2. From this initial situation, the government increases the nominal money supply to 6. If velocity and output remain unchanged, by how much will the price level increase?

Suppose velocity is constant at4, real output is 10, and the price level is 2. From this initial situation, the government increases the nominal money supply to 6. If velocity and output remain unchanged, by how much will the price level increase? 

(a) 2.4%
(b) 20%
(c) 24%
(d) 50%



Answer: B

Given that P =200, Y =2000, and i =.10, velocity is equal to

Money demand is given by
M
d
/P =1000 +.2Y- 1000i.

Given that P =200, Y =2000, and i =.10, velocity is equal to 

(a) 0.65.
(b) 0.75.
(c) 1.33.
(d) 1.54.



Answer: B

Given that P =200, Y =2000, and i =.10, velocity is equal to

Money demand is given by
M
d
/P =1000 +.2Y- 1000i.

Given that P =200, Y =2000, and i =.10, velocity is equal to 

(a) 0.65.
(b) 0.75.
(c) 1.33.
(d) 1.54.



Answer: D

If real GDP is $4 billion, the price level is 1.25, and the nominal money stock is $500 million, then velocity is

If real GDP is $4 billion, the price level is 1.25, and the nominal money stock is $500 million, then  velocity is 

(a) 0.1.
(b) 1.
(c) 10.
(d) 100.



Answer: C

Velocity is defined as

Velocity is defined as 

(a) nominal money stock/nominal GDP.
(b) nominal GDP/nominal money stock.
(c) real money stock/real GDP.
(d) mc


Answer: B

Which of the following is the most likely explanation for the causes of the "case of the missing money"?

Which of the following is the most likely explanation for the causes of the "case of the missing money"? 

(a) Higher prices in the 1970s reduced the demand for money.
(b) Government deficits increased the demand for money, draining it out of the private sector.
(c) Financial innovations, such as money market mutual funds, changed the demand for narrow definitions of money such as M1.
(d) Increases in Eurodollar deposits drew money out of the American banking system.

Answer: C

If the income elasticity of money demand is 3/4 and the interest elasticity of money demand is -1/4, by what percent does money demand rise if income rises 10% and the nominal interest rate rises from 4% to 5%?

If the income elasticity of money demand is 3/4 and the interest elasticity of money demand is -1/4,  by what percent does money demand rise if income rises 10% and the nominal interest rate rises from 4% to 5%? 

(a) 7.50%
(b) 6.25%
(c) 5.00%
(d) 1.25%




Answer: D

If the interest elasticity of money demand is -0.1, by what percent does money demand change if the nominal interest rate rises from 2% to 3%?

If the interest elasticity of money demand is -0.1, by what percent does money demand change if the  nominal interest rate rises from 2% to 3%? 

(a) -0.1%
(b) 5%
(c) 0%
(d) -5%



Answer: D

If real income rises 4%, prices rise 1%, and nominal money demand rises 4%, what is the income elasticity of real money demand?

If real income rises 4%, prices rise 1%, and nominal money demand rises 4%, what is the income elasticity of real money demand? 

(a) 3/4
(b) 4/5
(c) 5/6
(d) 1




Answer: A

Suppose a new law imposes a tax on all trades of bonds and stock. What is the likely effect on money demand?

Suppose a new law imposes a tax on all trades of bonds and stock. What is the likely effect on money demand? 

(a) Money demand declines first, then rises when inflation increases.
(b) Money demand rises.
(c) The overall effect is ambiguous.
(d) Money demand declines.


Answer: B

If there is a financial panic and increased uncertainty about the returns in the stock market and bond market, what is the likely effect on money demand?

If there is a financial panic and increased uncertainty about the returns in the stock market and bond market, what is the likely effect on money demand? 

(a) Money demand declines first, then rises when inflation increases.
(b) Money demand rises.
(c) The overall effect is ambiguous.
(d) Money demand declines.



Answer: B

Over time, the wealth of society increases and payments technologies get more efficient. What is the effect on money demand of these two changes?

Over time, the wealth of society increases and payments technologies get more efficient. What is the effect on money demand of these two changes? 

(a) Money demand rises proportionately to the rise in wealth.
(b) Money demand rises, but less than proportionately to the rise in wealth.
(c) The overall effect is ambiguous.
(d) Money demand declines.



Answer: C

Money demand is given by Md/P =1000 +.2Y- 1000i. Given that P =200, Y =2000, and i =.10, real money demand is equal to

Money demand is given by Md/P =1000 +.2Y- 1000i. Given that P =200, Y =2000, and i =.10, real money demand is equal to 

(a) 1300.
(b) 1500.
(c) 260,000.
(d) 300,000.



Answer: A

An increase in expected inflation is likely to cause

An increase in expected inflation is likely to cause 

(a) a decline in the demand for real balances.
(b) an increase in the demand for real balances.
(c) no change in the demand for real balances.
(d) no change in the demand for real balances only if the income elasticity of real money demand is zero.

Answer: A

An increase in the real interest rate would cause an increase in the real demand for money

An increase in the real interest rate would cause an increase in the real demand for money 

(a) no matter what the change in expected inflation.
(b) if expected inflation fell by less than the rise in the real interest rate.
(c) if expected inflation fell by the same amount as the rise in the real interest rate.
(d) if expected inflation fell by more than the rise in the real interest rate.

Answer: D

The opportunity cost of holding currency decreases when

The opportunity cost of holding currency decreases when 

(a) income decreases.
(b) the interest rate on bonds decreases.
(c) the interest rate on money decreases.
(d) wealth decreases.



Answer: B

Which of the following is most likely to lead to a decrease of 10% in the nominal demand for money?

Which of the following is most likely to lead to a decrease of 10% in the nominal demand for money? 

(a) An increase in real inome of 5%
(b) A decrease in real income of 5%
(c) A decline of 10% in the price level
(d) An increase of 10% in the price level


Answer: C

A 10% decrease in real income usually leads to _____ in money demand.

A 10% decrease in real income usually leads to _____ in money demand. 

(a) an increase
(b) no change
(c) a decrease of less than 10%
(d) a decrease of 10%


Answer: C

AAA Company stock has a higher expected rate of return than ZZZ Company stock. All else being equal, you would expect that relative to ZZZ, AAA company stock provides

AAA Company stock has a higher expected rate of return than ZZZ Company stock. All else being equal, you would expect that relative to ZZZ, AAA company stock provides 

(a) less risk and less liquidity.
(b) less risk and more liquidity.
(c) more risk and less liquidity.
(d) more risk and more liquidity.



Answer: C

People's best guesses about returns on assets are called

People's best guesses about returns on assets are called 

(a) expected returns.
(b) liquidity.
(c) risk.
(d) the term structure of returns.



Answer: A

A developing country does not have enough taxes to cover its expenditures and is unable to borrow. This government would be most likely to cover its deficit by

A developing country does not have enough taxes to cover its expenditures and is unable to borrow. This government would be most likely to cover its deficit by 

(a) purchasing government bonds from the public.
(b) selling government bonds to the public.
(c) selling newly issued government bonds directly to the central bank.
(d) buying newly issued government bonds directly from the central bank.

Answer: C

What's the most common way for a central bank to reduce the money supply?

What's the most common way for a central bank to reduce the money supply? 

(a) Collect higher taxes
(b) Sell bonds to the public
(c) Buy bonds from the government
(d) Buy bonds from the public


Answer: B

We shouldn't be concerned about U.S. currency held abroad because

We shouldn't be concerned about U.S. currency held abroad because 

(a) the currency will never return to the United States.
(b) foreigners use it to buy U.S. bonds.
(c) it represents an interest-free loan to the United States.
(d) foreigners can't spend it in their own countries.



Answer: C

People in other countries wantto hold U.S. dollars as a

People in other countries wantto hold U.S. dollars as a 

(a) medium of exchange.
(b) store of value.
(c) unit of account.
(d) standard of deferred payment.



Answer: B

Over half of U.S. currency is

Over half of U.S. currency is 

(a) held abroad.
(b) used in the underground economy.
(c) held by banks as reserves.
(d) held by businesses, especially retailers, for making transactions.



Answer: A

Weighted monetary aggregates

Weighted monetary aggregates 

(a) ignore the fact that some assets are more moneylike than others.
(b) are constructed by simply adding up the outstanding amounts of various types of assets.
(c) give greater weight to currency than to savings deposits.
(d) value coins more than currency.



Answer: C

NOW accounts are different from demand deposits because

NOW accounts are different from demand deposits because 

(a) stores prefer checks from demand deposits rather than NOW accounts.
(b) NOW accounts are not insured by the FDIC.
(c) NOW accounts pay interest.
(d) money in NOW accounts may not be withdrawn from the bank without 30 days prior notice.

Answer: C

M2 does not include

M2 does not include 

(a) Treasury bonds.
(b) passbook savings accounts.
(c) small-denomination time deposits.
(d) M1.


Answer: A

Which of the following statements about M1 and M2 is true?

Which of the following statements about M1 and M2 is true? 

(a) Demand deposits are not part of M1.
(b) M2 is more liquid than M1.
(c) M1 is larger than M2.
(d) Savings deposits are part of M2.


Answer: D

Which of the following statements about M1 and M2 is true?

Which of the following statements about M1 and M2 is true? 

(a) Demand deposits are not part of M1.
(b) M2 is more liquid than M1.
(c) M1 is larger than M2.
(d) Savings deposits are part of M2.



Answer: D

M1 does not include

M1 does not include 

(a) MMMFs.
(b) travelers' checks.
(c) currency.
(d) demand deposits.



Answer: A

Suppose your bank raises its minimum-balance requirement for free checking on checking accounts by $500. You take $500 out of your passbook savings account and put it in your checking account. What is the overall effect on M1 and M2?

Suppose your bank raises its minimum-balance requirement for free checking on checking accounts by $500. You take $500 out of your passbook savings account and put it in your checking account. What is the overall effect on M1 and M2? 

(a) M1 rises by $500, M2 falls by $500.
(b) M1 is unchanged, M2 is unchanged.
(c) M1 rises by $500, M2 is unchanged.
(d) M1 is unchanged, M2 falls by $500.

Answer: C

Which of the following measures is the best measure of money as a medium of exchange?

Which of the following measures is the best measure of money as a medium of exchange? 

(a) M1
(b) M2
(c) M3
(d) None of the above



Answer: A

One of money's primary roles in the economy comes from the use of money to transfer purchasing power to the future. This role of money is called

One of money's primary roles in the economy comes from the use of money to transfer purchasing power to the future. This role of money is called 

(a) store of value.
(b) unit of account.
(c) medium of exchange.
(d) standard of deferred payment.

Answer: A

Why do people keep currency in their pockets when bank deposits pay interest?

Why do people keep currency in their pockets when bank deposits pay interest? 

(a) Because banks might steal your money.
(b) Because currency is more liquid.
(c) Because bank deposits lose value due to inflation.
(d) Because bank deposits lose value due to changes in interest rates



Answer: B

A good that is used as a medium of exchangeas well as being a consumption good is called

A good that is used as a medium of exchangeas well as being a consumption good is called 

(a) a barter money.
(b) a commodity money.
(c) a legal tender.
(d) a debased money.




Answer: B

In some countries, prices in stores are listed in terms of U.S. dollars, rather than in units of the local currency. That's most likely because

In some countries, prices in stores are listed in terms of U.S. dollars, rather than in units of the local currency. That's most likely because 

(a) the country's political system is unstable.
(b) interest rates are higher using U.S. dollars than using the local currency.
(c) there is no other store of value.
(d) the country has experienced high rates of inflation.


Answer: D

Money's primary role in the economy comes from the benefits of lowering transactions costs and allowing specialization. This function of money is called

Money's primary role in the economy comes from the benefits of lowering transactions costs and allowing specialization. This function of money is called 

(a) store of value.
(b) medium of exchange.
(c) standard of deferred payment.
(d) unit of account.


Answer: B

In economics, money refers to

In economics, money refers to 

(a) income.
(b) wealth.
(c) assets used and accepted as payment.
(d) currency.

Answer: C

The use of money is more efficient thanbarter because the introduction of money

The use of money is more efficient thanbarter because the introduction of money 

(a) reduces the need for economic specialization.
(b) reduces the need to exchange goods.
(c) reduces the need for other stores of value.
(d) reduces transaction costs.


Answer: D

A disadvantage of the barter system is that

A disadvantage of the barter system is that 

(a) no trade occurs.
(b) people must produce all their own food, clothing, and shelter.
(c) the opportunity to specialize is greatly reduced.
(d) gold is the only unit of account.

Answer: C