Question 1

Even though monetary policy is neutral in the short run,it may have profound real effects in the long run.

Accepted Answer

A) True 
 B)False  False

Question 2

Suppose Bob considers borrowing $100 from Sheila.They both think that a 4 percent real interest rate would be fair,but they are aware of a 30 percent interest income tax.Therefore,they think of the fair 4 percent real interest rate as an after-tax rate.How much should Bob pay to Sheila in interest,such that the after-tax real interest rate would be 4 percent,if they expect inflation to be 6 percent? What if the expected inflation was 8 percent? How does this affect Bob's incentive to borrow?

Accepted Answer

The after-tax real interest rate can be calculated using Fischer's formula,where the nominal interest rate is the after-tax value:After-tax real interest rate = After-tax nominal interest rate minus Inflation rate.Let t be the tax rate,r the after-tax real interest rate,i the nominal interest rate,and ð the inflation rate.Fisher's formula becomes r = i(1 - t)- ð.When a target after-tax real interest rate is given,the corresponding nominal interest rate is i = (r + ð) / (1 - t).If Bob and Sheila are aware of the interest income tax and they agree on a 4 percent after-tax real interest rate,the nominal interest rate should be equal to (4% + 6%) / (1 - 0.3)= 14.28%.If they expect inflation to be 8 percent,then the corresponding nominal interest rate should be (4% + 8%) / (1 - 0.3)= 17.14%.One can notice that,because of the tax,the increase in the nominal interest rate is higher than the increase in the inflation rate.This,of course,would make Bob think twice before borrowing.Like any other tax,a capital gain tax will induce an additional burden on both lender and borrower.(Sheila may also agree to lower her after-tax real interest rate expectations in order to persuade Bob to borrow.)

Question 3

According to the quantity equation,if P = 6 and Y = 800,which of the following pairs could M and V be?

Accepted Answer

A)  200,3 
B)  400,4 
C)  600,5 
D)  800,6 
A)  200,3 
B)  400,4 
C)  600,5 
D)  800,6 D

Question 4

Based on the quantity equation,if M = 120,V = 4,and Y = 160,what is P?

Accepted Answer

A)  0.5 
B)  1 
C)  2.5 
D)  3 
A)  0.5 
B)  1 
C)  2.5 
D)  3

Question 5

Figure 11-1  
-Refer to the Figure 11-1.If the money supply is MS2 and the value of money is 2,which relationship holds?

Accepted Answer

A)  The value of money is less than its equilibrium level. 
B)  The price level is higher than its equilibrium level. 
C)  The money demand is greater than the money supply. 
D)  The money supply is greater than money demand. 
A)  The value of money is less than its equilibrium level. 
B)  The price level is higher than its equilibrium level. 
C)  The money demand is greater than the money supply. 
D)  The money supply is greater than money demand.

Question 6

List and define any two of the costs of high inflation.

Accepted Answer

The costs include: shoe leather costs:Th

Question 7

When the money market is depicted in a graph with the value of money on the vertical axis,what does an increase in the price level cause?

Accepted Answer

A)  a shift to the right of the money demand curve 
B)  a shift to the left of the money demand curve 
C)  a movement to the left along the money demand curve 
D)  a movement to the right along the money demand curve 
A)  a shift to the right of the money demand curve 
B)  a shift to the left of the money demand curve 
C)  a movement to the left along the money demand curve 
D)  a movement to the right along the money demand curve

Question 8

Suppose we interpret the quantity theory as a money demand equation.The quantity theory of money equation can be transformed into a growth rate equation: ÄM / M + ÄV / V = ÄP / P + ÄY / Y.If the velocity of money and real GDP are constant,calculate the elasticity of the demand for money with respect to the price level.

Accepted Answer

The elasticity of money with respect to

Question 9

Under which condition is wealth distributed from creditors to debtors?

Accepted Answer

A)  when inflation is high,whether it is expected or not 
B)  when inflation is low,whether it is expected or not 
C)  when inflation is unexpectedly high 
D)  when inflation is unexpectedly low 
A)  when inflation is high,whether it is expected or not 
B)  when inflation is low,whether it is expected or not 
C)  when inflation is unexpectedly high 
D)  when inflation is unexpectedly low

Question 10

When do most economists believe the principle of monetary neutrality can be relevant?

Accepted Answer

A)  in both the short run and the long run 
B)  in neither the short run nor the long run 
C)  mostly in the short run 
D)  mostly in the long run 
A)  in both the short run and the long run 
B)  in neither the short run nor the long run 
C)  mostly in the short run 
D)  mostly in the long run

Question 11

Which term refers to economic variables whose values are measured in monetary units?

Accepted Answer

A)  dichotomous variables 
B)  nominal variables 
C)  classical variables 
D)  real variables 
A)  dichotomous variables 
B)  nominal variables 
C)  classical variables 
D)  real variables

Question 12

An assistant professor of economics gets a $100-a-month raise,but then she figures that with her current monthly salary she can't buy as many goods as she could last year.What has happened to her real and nominal wage?

Accepted Answer

A)  Her real and nominal wages have risen. 
B)  Her real and nominal wages have fallen. 
C)  Her real wage has risen,but her nominal wage has fallen. 
D)  Her real wage has fallen,but her nominal wage has risen. 
A)  Her real and nominal wages have risen. 
B)  Her real and nominal wages have fallen. 
C)  Her real wage has risen,but her nominal wage has fallen. 
D)  Her real wage has fallen,but her nominal wage has risen.

Question 13

When the money market is depicted in a diagram with the value of money on the vertical axis,in which situation does the price level decrease?

Accepted Answer

A)  if either money demand or money supply shifts right 
B)  if either money demand or money supply shifts left 
C)  if money demand shifts right or money supply shifts left 
D)  if money demand shifts left or money supply shifts right 
A)  if either money demand or money supply shifts right 
B)  if either money demand or money supply shifts left 
C)  if money demand shifts right or money supply shifts left 
D)  if money demand shifts left or money supply shifts right

Question 14

What do shoe leather costs refer to?

Accepted Answer

A)  the cost of more frequent price changes induced by higher inflation 
B)  the distortion in resource allocation created by distortions in relative prices due to inflation 
C)  resources used to maintain lower money holdings when inflation is high 
D)  the distortion in incentives created by inflation by taxes that do not adjust for inflation 
A)  the cost of more frequent price changes induced by higher inflation 
B)  the distortion in resource allocation created by distortions in relative prices due to inflation 
C)  resources used to maintain lower money holdings when inflation is high 
D)  the distortion in incentives created by inflation by taxes that do not adjust for inflation

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Norbert purchased 100 shares of Gentech stock for $200 per share in year 1 and sold all the shares in year 2 for $220 a share.Between year 1 and year 2,the price index increased by 5 percent.The tax on capital gains is 50 percent.If the capital gains tax is on nominal gains,how much tax does Norbert pay on his gain?

Accepted Answer

A)  $900 
B)  $950 
C)  $1000 
D)  $1050 
A)  $900 
B)  $950 
C)  $1000 
D)  $1050

Question 17

The quantity theory of money can explain hyperinflations but not moderate inflation.

Accepted Answer

A) True 
 B)False

Question 18

When the money market is depicted in a diagram with the value of money on the vertical axis,what happens if the price level is above the equilibrium level?

Accepted Answer

A)  There is a shortage,so the price level will rise. 
B)  There is a shortage,so the price level will fall. 
C)  There is a surplus,so the price level will rise. 
D)  There is a surplus,so the price level will fall. 
A)  There is a shortage,so the price level will rise. 
B)  There is a shortage,so the price level will fall. 
C)  There is a surplus,so the price level will rise. 
D)  There is a surplus,so the price level will fall.

Question 19

Use a money supply and demand diagram to answer the following problem: Everything else being the same,what is the effect of an increase in interest rates on the price level? Discuss the process of adjustment to the new equilibrium.

Accepted Answer

An increase in interest rates makes the

Question 20

What does real GDP measure?

Accepted Answer

A)  the total quantity of final goods and services produced 
B)  the dollar value of the economy's output of final goods and services 
C)  the total income received from producing final goods and services at current prices 
D)  the change in prices from the base year to current year 
A)  the total quantity of final goods and services produced 
B)  the dollar value of the economy's output of final goods and services 
C)  the total income received from producing final goods and services at current prices 
D)  the change in prices from the base year to current year

Even though monetary policy is neutral in the short run,it may have profound real effects in the long run.

According to the quantity equation,if P = 6 and Y = 800,which of the following pairs could M and V be?

Based on the quantity equation,if M = 120,V = 4,and Y = 160,what is P?

Figure 11-1 -Refer to the Figure 11-1.If the money supply is MS2 and the value of money is 2,which relationship holds?

List and define any two of the costs of high inflation.

When the money market is depicted in a graph with the value of money on the vertical axis,what does an increase in the price level cause?

Under which condition is wealth distributed from creditors to debtors?

When do most economists believe the principle of monetary neutrality can be relevant?

Which term refers to economic variables whose values are measured in monetary units?

An assistant professor of economics gets a $100-a-month raise,but then she figures that with her current monthly salary she can't buy as many goods as she could last year.What has happened to her real and nominal wage?

When the money market is depicted in a diagram with the value of money on the vertical axis,in which situation does the price level decrease?

What do shoe leather costs refer to?

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

The quantity theory of money can explain hyperinflations but not moderate inflation.

When the money market is depicted in a diagram with the value of money on the vertical axis,what happens if the price level is above the equilibrium level?

Use a money supply and demand diagram to answer the following problem: Everything else being the same,what is the effect of an increase in interest rates on the price level? Discuss the process of adjustment to the new equilibrium.

What does real GDP measure?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

Filters

Exam 11: Money Growth and Inflation

Even though monetary policy is neutral in the short run,it may have profound real effects in the long run.

According to the quantity equation,if P = 6 and Y = 800,which of the following pairs could M and V be?

Based on the quantity equation,if M = 120,V = 4,and Y = 160,what is P?

Figure 11-1 -Refer to the Figure 11-1.If the money supply is MS2 and the value of money is 2,which relationship holds?

List and define any two of the costs of high inflation.

When the money market is depicted in a graph with the value of money on the vertical axis,what does an increase in the price level cause?

Under which condition is wealth distributed from creditors to debtors?

When do most economists believe the principle of monetary neutrality can be relevant?

Which term refers to economic variables whose values are measured in monetary units?

An assistant professor of economics gets a $100-a-month raise,but then she figures that with her current monthly salary she can't buy as many goods as she could last year.What has happened to her real and nominal wage?

When the money market is depicted in a diagram with the value of money on the vertical axis,in which situation does the price level decrease?

What do shoe leather costs refer to?

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

The quantity theory of money can explain hyperinflations but not moderate inflation.

When the money market is depicted in a diagram with the value of money on the vertical axis,what happens if the price level is above the equilibrium level?

Use a money supply and demand diagram to answer the following problem: Everything else being the same,what is the effect of an increase in interest rates on the price level? Discuss the process of adjustment to the new equilibrium.

What does real GDP measure?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

Filters