1. Briefly define the following term:
a. Money multiplier
b. Velocity
2. Suppose that the demand for money increases. Using a diagram with a money demand curve and a money supply curve, determine the effect on the interest rate.
3. What actions can the Federal Reserve take to decrease the quantity of money? Briefly explain how each works.
4. What is the effect on the money multiplier of a decrease in the required reserve ratio?
5. What does the quantity theory of money suggest is the cause of increases in the price level?
Answer the following multiple choice questions.
6. If the Fed wished to eliminate an inflationary gap, which of the following would be an appropriate policy?
a. increase the discount rate
b. decrease the required reserve ratio
c. buy bonds
d. increase the monetary base
7. Use the equation of exchange formula to answer the following questions.
a. If M = $100, V = 4, and Y = 200, then P = ____.
b. If M = $200, V = 4, and Y = 200, then P = ____.
c. If M = $400, P = 4, and Y = 200, then V = ____.
d. How do the quantities of money in parts a and b compare? How do the price levels in parts a and b compare? What do your two answers indicate?