International Economics, 8e (Krugman) Chapter 14 Money, Interest Rates, and Exchange Rates14.1 Money Defined: A Brief Review1) The exchange rate between currencies depends on A) the interest rate that can be earned on deposits of those currencies. B) the interest rate that can be earned on deposits of those currencies and the expected future exchange rate. C) the expected future exchange rate. D) national output. E) None of the above. Answer: B Question Status: Previous Edition2) Money serves as A) a medium of exchange. B) a unit of account. C) a store of value. D) All of the above. E) Only A and B. Answer: D Question Status: Previous Edition3) Money includes A) currency. B) checking deposits held by households and firms. C) deposits in the foreign exchange markets. D) Both A and B. E) A, B, and C. Answer: D Question Status: Previous Edition4) In the United States at the end of , the total money supply, M1, amounted to approximately A) 10 percent of that years GNP. B) 20 percent of that years GNP. C) 30 percent of that years GNP. D) 40 percent of that years GNP. E) 50 percent of that years GNP. Answer: A Question Status: Previous Edition5) What are the main functions of money? Answer: Money serves in general three important functions: a medium of exchange; a unit of account; and a store of value. As a medium of exchange, money avoids going back to a barter economy, with the enormous search costs connected with it. As a unit of account, the use of money economizes on the number of prices an individual faces. Consider an economy with N goods, then one needs only (N - 1) prices. As a store of value, the use of money in general ensures that you can transfer wealth between periods. Question Status: Previous Edition 14.2 The Demand for Money by Individuals1) Individuals base their demand for an asset on A) the expected return the asset offers compared with the returns offered by other assets. B) the riskiness of the assets expected return. C) the assets liquidity. D) All of the above. E) Only A and B. Answer: D Question Status: Previous Edition2) The family summer house on Cape Code pays a return in the form of A) interest rate. B) capital gains. C) the pleasure of vacations at the beach. D) A, B, and C. E) B and C only. Answer: E Question Status: Previous Edition3) In a world with money and bonds only, A) it is not risky to hold money. B) it is risky to hold money. C) risk is an important factor in the demand for money. D) there is no relationship between risk and holding money. E) None of the above. Answer: B Question Status: Previous Edition4) Which one of the following statements is the most accurate? A) A rise in the average value of transactions carried out by a household or a firm causes its demand for money to fall. B) A reduction in the average value of transactions carried out by a household or a firm causes its demand for money to rise. C) A rise in the average value of transactions carried out by a household or a firm causes its demand for money to rise. D) A rise in the average value of transactions carried out by a household or a firm causes its demand for real money to rise. E) None of the above. Answer: D Question Status: Previous Edition5) An individuals need for liquidity would be up if: A) the average value of transactions carried out by the individual fell. B) the average value of transactions carried out by the individual rose. C) the individual got a raise. D) the individual received a new ATM card. E) None of the above. Answer: B Question Status: Previous Edition 6) What are the factors that determine the amount of money an individual desires to hold? Answer: Three main factors: first, the expected return the asset offers compared with the returns offered by other assets; second, the riskiness of the assets expected return; and third, the assets liquidity. Question Status: Previous Edition14.3 Aggregate Money Demand1) The aggregate money demand depends on A) the interest rate. B) the price level. C) real national income. D) All of the above. E) Only A and C. Answer: D Question Status: Previous Edition2) If there is initially A) excess demand for money, the interest rate falls, and if there is initially an excess supply, it rises. B) excess supply of money, the interest rate falls, and if there is initially an excess demand, it rises. C) excess supply of money, the inte