Question 1

What two key assumptions does the quantity theory make concerning variables in the equation of exchange?

Accepted Answer

That V is ...

Question 2

The classical dichotomy is useful for analyzing the economy because in the long run nominal variables are heavily influenced by developments in the monetary system, and real variables are not.

Accepted Answer

A) True 
 B)False

Question 3

If the CPI rises, the number of dollars needed to buy a representative basket of goods

Accepted Answer

A)   increases, and so the value of money rises.
B)   increases, and so the value of money falls.
C)   decreases, and so the value of money rises.
D)   decreases, and so the value of money fallsE) A) and D)
F) A) and C)

Question 4

During the last tax year you lent money at a nominal rate of 6 percent. Actual inflation was 1 percent, but people had been expecting 1.5 percent. This difference between actual and expected inflation

Accepted Answer

A)   transferred wealth from the borrower to you and caused your after-tax real interest rate to be 0.5 percentage points higher than what you had expected.
B)   transferred wealth from the borrower to you and caused your after-tax real interest rate to be more than 0.5 percentage points higher than what you had expected.
C)   transferred wealth from you to the borrower and caused your after-tax real interest rate to be 0.5 percentage points lower than what you had expected.
D)   transferred wealth from you to the borrower and caused your after-tax real interest rate to be more than 0.5 percentage points lower than what you had expected.E) A) and B)
F) None of the above

Question 5

Based on the quantity equation, if M = 8,000, P = 3, and Y = 12,000, then V =

Accepted Answer

A)   0.33.
B)   2.0.
C)   4.5.
D)   0.5.E) None of the above
F) A) and B)

Question 6

You earn a nominal return of 6% on your savings and the tax rate is 20%. If the rate of inflation is 2%, what are the before-tax real interest rate and your after-tax rate of return?

Accepted Answer

The answer of You earn a nominal return of 6%...

Question 7

Norma complains that she is not receiving the full benefit of her six percent raise, because inflation is two percent. You tell her that nominal incomes tend to rise with inflation, therefore

Accepted Answer

A)   she really is worse off.
B)   her real income increased eight percent.
C)   menu costs have reduced her purchasing power.
D)   she is committing the inflation fallacy.E) All of the above
F) A) and B)

Question 8

Higher inflation

Accepted Answer

A)   causes firms to change prices less frequently and makes relative prices less variable.
B)   causes firms to change prices less frequently and makes relative prices more variable.
C)   causes firms to change prices more frequently and makes relative prices less variable.
D)   causes firms to change prices more frequently and makes relative prices more variable.E) A) and D)
F) A) and C)

Question 9

When inflation rises people will

Accepted Answer

A)   demand more money so the price level rises.
B)   demand more money so the price level falls.
C)   demand less money so the price level rises.
D)   demand less money so the price level falls.E) A) and D)
F) None of the above

Question 10

Which of the following is not implied by the quantity equation?

Accepted Answer

A)   If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in nominal output.
B)   If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in the price level.
C)   With constant money supply and output, an increase in velocity creates an increase in the price level.
D)   With constant money supply and velocity, an increase in output creates a proportional increase in the price level.E) B) and C)
F) A) and B)

Question 11

Studies have found which of the following economic terms mentioned most often in U.S. newspapers?

Accepted Answer

A)   Unemployment
B)   Productivity
C)   Inflation
D)   Monetary policyE) B) and C)
F) All of the above

Question 12

Suppose that velocity rises while the money supply stays the same. It follows that

Accepted Answer

A)   P x Y must rise.
B)   P x Y must fall.
C)   P x Y must be unchanged.
D)   the effects on P x Y are uncertain.E) A) and B)
F) All of the above

Question 13

When the value of money is on the vertical axis, an increase in the price level shifts money demand to the right.

Accepted Answer

A) True 
 B)False

Question 14

A decrease in the money supply creates an excess

Accepted Answer

A)   supply of money that is eliminated by rising prices.
B)   supply of money that is eliminated by falling prices.
C)   demand for money that is eliminated by rising prices.
D)   demand for money that is eliminated by falling prices.E) All of the above
F) B) and D)

Question 15

If velocity and output were nearly constant, then

Accepted Answer

A)   the inflation rate would be much higher than the money supply growth rate.
B)   the inflation rate would be about the same as the money supply growth rate.
C)   the inflation rate would be much lower than the money supply growth rate.
D)   any of the above would be possible.E) C) and D)
F) B) and D)

Question 16

Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases

Accepted Answer

A)   the inflation rate and the nominal interest rate by the same number of percentage points.
B)   nominal interest rates but by less than the percentage point increase in the inflation rate.
C)   the inflation rate but not the nominal interest.
D)   neither the inflation rate nor the nominal interest rate.E) A) and D)
F) B) and C)

Question 17

In the 1990s, U.S. prices rose at about the same rate as in the 1970s.

Accepted Answer

A) True 
 B)False

Question 18

Explain the adjustment process in the money market that creates a change in the price level when the money supply increases.

Accepted Answer

When the money supply increases, there i...

Question 19

Suppose that monetary neutrality holds. Of the following variables, which ones do not change when the money supply increases?
a. real interest rates
b. inflation
c. the price level
d. real output
e. real wages
f. nominal wages

Accepted Answer

a. real interest rat...

Question 20

Suppose the rate of inflation rate is two percent and the nominal interest rate is five percent. According to the Fisher Effect, an increase in the inflation rate to six percent should cause the nominal interest rate to increase from five percent to in the long run.

Accepted Answer

The answer of Suppose the rate of inflation rate is...

Exam 17: Money Growth and Inflation

When inflation rises people will

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If velocity and output were nearly constant, then

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Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases

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Suppose that velocity rises while the money supply stays the same. It follows that

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What two key assumptions does the quantity theory make concerning variables in the equation of exchange?

Correct AnswerverifiedThat V is ...View AnswerShow Answer

Suppose that monetary neutrality holds. Of the following variables, which ones do not change when the money supply increases? a. real interest rates b. inflation c. the price level d. real output e. real wages f. nominal wages

Correct Answerverifieda. real interest rat...View AnswerShow Answer

If the CPI rises, the number of dollars needed to buy a representative basket of goods

Correct AnswerverifiedShow Answer

When the value of money is on the vertical axis, an increase in the price level shifts money demand to the right.

Correct AnswerverifiedShow Answer

Studies have found which of the following economic terms mentioned most often in U.S. newspapers?

Correct AnswerverifiedShow Answer

Norma complains that she is not receiving the full benefit of her six percent raise, because inflation is two percent. You tell her that nominal incomes tend to rise with inflation, therefore

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A decrease in the money supply creates an excess

Correct AnswerverifiedShow Answer

In the 1990s, U.S. prices rose at about the same rate as in the 1970s.

Correct AnswerverifiedShow Answer

Suppose the rate of inflation rate is two percent and the nominal interest rate is five percent. According to the Fisher Effect, an increase in the inflation rate to six percent should cause the nominal interest rate to increase from five percent to in the long run.

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Higher inflation

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Explain the adjustment process in the money market that creates a change in the price level when the money supply increases.

Correct AnswerverifiedWhen the money supply increases, there i...View AnswerShow Answer

Which of the following is not implied by the quantity equation?

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During the last tax year you lent money at a nominal rate of 6 percent. Actual inflation was 1 percent, but people had been expecting 1.5 percent. This difference between actual and expected inflation

Correct AnswerverifiedShow Answer

You earn a nominal return of 6% on your savings and the tax rate is 20%. If the rate of inflation is 2%, what are the before-tax real interest rate and your after-tax rate of return?

Correct AnswerverifiedShow Answer

Based on the quantity equation, if M = 8,000, P = 3, and Y = 12,000, then V =

Correct AnswerverifiedShow Answer

The classical dichotomy is useful for analyzing the economy because in the long run nominal variables are heavily influenced by developments in the monetary system, and real variables are not.

Correct AnswerverifiedShow Answer

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That V is ...
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a. real interest rat...
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When the money supply increases, there i...
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