Question 1

When the price level rises, the demand for money ________ and, as a result, the equilibrium nominal interest rate ________.

Accepted Answer

A)   rises; decreases
B)   rises; increases
C)   falls; decreases
D)   falls; increases
E)   rises; probably changes but more information is needed to determine if it rises or falls. B

Question 2

According to the equation of exchange, the

Accepted Answer

A)   quantity of money multiplied by the inflation rate equals nominal GDP.
B)   velocity of circulation is always smaller than the inflation rate.
C)   quantity of money divided by the inflation rate equals real GDP.
D)   quantity of money multiplied by the velocity of circulation equals nominal GDP.
E)   quantity of money minus the velocity of circulation equals real GDP minus the price level. D

Question 3

In the money market, if the quantity of money supplied exceeds the quantity of money demanded, the nominal interest rate will ________ and the prices of assets will ________.

Accepted Answer

A)   rise; increase
B)   rise; decrease
C)   fall; increase
D)   fall; decrease
E)   fall; not change C

Question 4

What factors lead to changes in the quantity demanded of money and what factors lead to changes in the demand for money?

Accepted Answer

The answer of What factors lead to changes in the...

Question 5

If the real interest rate is 3 percent and the inflation rate is 2 percent, what is the nominal interest rate?

Accepted Answer

The answer of If the real interest rate is 3...

Question 6

It is estimated that if the inflation rate is lowered from 3 percent a year to 0 percent a year, the growth rate of real GDP will rise by ________ percentage points a year.

Accepted Answer

A)   0.06 to 0.09
B)   1 to 3
C)   2.3
D)   3.2
E)   0

Question 7

Suppose that the equilibrium nominal interest rate is 4 percent and the equilibrium quantity of money is $1 trillion. At any interest rate above 4 percent,

Accepted Answer

A)   less than $1 trillion will be demanded and bond prices will increase.
B)   less than $1 trillion will be demanded and bond prices will fall.
C)   more than $1 trillion will be supplied and bond prices will fall.
D)   more than $1 trillion will be supplied and the interest rate will rise.
E)   there is a shortage of money and the interest rate will rise.

Question 8

Which of the following applies to the "value of money"?
i. It is the inverse of the price level.
ii. The value of money falls during economic expansions.
iii. It is the quantity of goods and services that a unit of money will buy.

Accepted Answer

A)   i and iii.
B)   i,ii and iii.
C)   iii only.
D)   ii and iii.
E)   i and iii

Question 9

-In the above figure, the equilibrium interest rate is ________ and the equilibrium quantity of money is ________ trillion.

Accepted Answer

A)   8 percent; $1.2
B)   4 percent; $0.6
C)   4 percent; $1.2
D)   8 percent; $0.6
E)   0 percent; $1.2

Question 10

What effect does an increase in the nominal interest rate have on the opportunity cost of holding money and on the demand for money curve?

Accepted Answer

The answer of What effect does an increase in the...

Question 11

During the early 1920s, Germany experienced

Accepted Answer

A)   negative inflation as a result of high money creation.
B)   hyperinflation as a result of low money creation.
C)   moderate price changes as a result of a recession.
D)   hyperinflation as a result of high money creation.
E)   hyperinflation as a result of rapidly increasing demand for money.

Question 12

If the quantity of money is $6 billion and nominal GDP is $9 billion, the velocity of circulation is

Accepted Answer

A)   0.67.
B)   3.
C)   1.5.
D)   36.
E)   54.

Question 13

If the growth of the quantity of money is 5 percent per year, potential and real GDP grow at 3 percent per year, and velocity does not change, in the long run what is the inflation rate?

Accepted Answer

The answer of If the growth of the quantity of...

Question 14

If the inflation rate is 2.5 percent and the nominal interest rate is 10 percent, then the real interest rate is

Accepted Answer

A)   2.5 percent.
B)   7.5 percent.
C)   -7.5 percent.
D)   -2.5 percent.
E)   12.5 percent.

Question 15

In the long run, the real interest rate is 3 percent, real GDP grows at 4 percent, velocity is constant, and the quantity of money grows at 6 percent.The nominal interest rate is

Accepted Answer

A)   3 percent.
B)   4 percent.
C)   5 percent.
D)   10 percent.
E)   6 percent.

Question 16

According to the equation of exchange, if velocity and real GDP do not change, a 3 percent increase in the quantity of money

Accepted Answer

A)   raises the price level by 3 percent.
B)   raises the price level by 3 ÷ (velocity) .
C)   lowers the price level by 3 ÷ (real GDP) .
D)   lowers the price level by 3 percent.
E)   raises the price level by less than 3 percent.

Question 17

Which of the following is NOT a cost of inflation?

Accepted Answer

A)   tax cost
B)   confusion cost
C)   uncertainty cost
D)   unemployment cost
E)   shoe-leather cost

Question 18

In the money market, if real GDP increases, then the demand for money ________ and the equilibrium nominal interest rate ________.

Accepted Answer

A)   increases; rises
B)   increases; falls
C)   decreases; rises
D)   decreases; falls
E)   increases; does not change

Question 19

If real GDP is $200, the price level is 2.5, and velocity is 5, then the quantity of money is

Accepted Answer

A)   $200.
B)   $100.
C)   $750.
D)   $1,000.
E)   $500.

Question 20

"Inflation acts as a tax because the government gains purchasing power." Is the previous statement correct or incorrect?

Accepted Answer

The answer of "Inflation acts as a tax because the...

Exam 12: Money, Interest, and Inflation

When the price level rises, the demand for money and, as a result, the equilibrium nominal interest rate .