Question 1

Suppose one year ago the price index was 120 and Maria purchased $20,000 worth of bonds. One year later the price index is 126. Maria redeems her bonds for $22,700 and is in a 40 percent tax bracket. What is Maria's real after-tax rate of interest to the nearest tenth of a percent?

Accepted Answer

A)  5.1 percent 
B)  3.1 percent 
C)  2.1 percent 
D)  2.4 percent

Question 2

Fifteen years ago your parents purchased some land with the idea of selling it later to help pay your college expenses. They purchased the land for $100,000. They sold it for $180,000. During the time they held it the price level rose from 80 to 120. If your parents face a 25% tax rate, what was their real after­tax gain? Hint: What's the real value of the land in current prices?)

Accepted Answer

The answer of Fifteen years ago your parents purchased some...

Question 3

When the money market is drawn with the value of money on the vertical axis, an increase in the money supply creates an excess

Accepted Answer

A)  supply of money, causing people to spend more. 
B)  supply of money, causing people to spend less. 
C)  demand for money, causing people to spend more. 
D)  demand for money, causing people to spend less.

Question 4

You put money into an account and earn a real interest rate of 5 percent. Inflation is 2 percent, and your marginal tax rate is 35 percent. What is your after-tax real rate of interest?

Accepted Answer

A)  5.25 percent 
B)  3.05 percent 
C)  2.55 percent 
D)  1.25 percent

Question 5

Figure 30-3. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. 
-Refer to Figure 30-3. What quantity is measured along the vertical axis?

Accepted Answer

A)  the price level 
B)  the velocity of money 
C)  the value of money 
D)  the quantity of money

Question 6

The value of money falls as the price level

Accepted Answer

A)  rises, because the number of dollars needed to buy a representative basket of goods rises. 
B)  rises, because the number of dollars needed to buy a representative basket of goods falls. 
C)  falls, because the number of dollars needed to buy a representative basket of goods rises. 
D)  falls, because the number of dollars needed to buy a representative basket of goods falls.

Question 7

When the money market is drawn with the value of money on the vertical axis, an increase in the money supply causes the equilibrium value of money

Accepted Answer

A)  and equilibrium quantity of money to increase. 
B)  and equilibrium quantity of money to decrease. 
C)  to increase, while the equilibrium quantity of money decreases. 
D)  to decrease, while the equilibrium quantity of money increases.

Question 8

If P = 2 and Y = 1000, then which of the following pairs of values are possible?

Accepted Answer

A)  M = $500, V = 4. 
B)  M = $250, V = 8. 
C)  M = $1,000, V = 2. 
D)  All of the above are correct.

Question 9

Which of the following combinations of real interest rates and inflation implies a nominal interest rate of 6 percent?

Accepted Answer

A)  a real interest rate of 3 percent and an inflation rate of 2 percent. 
B)  a real interest rate of 7 percent and an inflation rate of 1 percent. 
C)  a real interest rate of 5 percent and an inflation rate of 1 percent. 
D)  a real interest rate of 6 percent and an inflation rate of 1 percent.

Question 10

You find that to attract a sufficient number of workers you have to pay them more dollars. Given the price of your output you determine you are paying your workers more in goods than before. Which of the following has risen?

Accepted Answer

A)  The real and nominal value of the wages you pay. 
B)  The real but not the nominal value of wages you pay. 
C)  The nominal but not the real value of the wages you pay. 
D)  Neither the real nor the nominal value of the wages you pay.

Question 11

According to the Fisher effect, if inflation rises then the nominal interest rate rises.

Accepted Answer

A) True 
 B)False

Question 12

You observe people going to the bank more frequently. Other things the same this could result from

Accepted Answer

A)  an increase in inflation which increases money demand. 
B)  an increase in inflation which reduces money demand. 
C)  a decrease in inflation which increases money demand. 
D)  a decrease in inflation which reduces money demand.

Question 13

The supply of money is determined by

Accepted Answer

A)  the price level. 
B)  the Treasury and Congressional Budget Office. 
C)  the Federal Reserve System. 
D)  the demand for money.

Question 14

Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate falls, then

Accepted Answer

A)  both the nominal and the real interest rate fall. 
B)  neither the nominal nor the real interest rate fall. 
C)  the nominal interest rate falls, but the real interest rate does not. 
D)  the real interest rate falls, but the nominal interest rate does not.

Question 15

In which of the following cases is the after-tax real interest rate highest?

Accepted Answer

A)  inflation is 6%, the pre-tax real interest rate is 3%, and the tax rate is 20%. 
B)  inflation is 6%, the pre-tax real interest rate is 3%, and the tax rate is 25%. 
C)  inflation is 4%, the pre-tax real interest rate is 2%, and the tax rate is 20%. 
D)  inflation is 4%, the pre-tax real interest rate is 2%, and the tax rate is 25%.

Question 16

Figure 30-2. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. 
-Refer to Figure 30-2. What quantity is measured along the horizontal axis?

Accepted Answer

A)  the price level 
B)  the real interest rate 
C)  the value of money 
D)  the quantity of money

Question 17

According to the classical dichotomy, which of the following is not influenced by monetary factors?

Accepted Answer

A)  unemployment 
B)  the price level 
C)  nominal interest rates 
D)  All of the above are correct.

Question 18

Suppose over some period of time the money supply tripled, velocity doubled, and real GDP doubled. According to the quantity equation the price level is now

Accepted Answer

A)  6 times its old value. 
B)  3 times its old value. 
C)  1.5 times its old value. 
D)  0.75 times its old value.

Question 19

When the price level falls, the number of dollars needed to buy a representative basket of goods

Accepted Answer

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

Question 20

When the money market is drawn with the value of money on the vertical axis, if there is a shortage of money then

Accepted Answer

A)  the value of money rises which will make people desire to hold more money. 
B)  the value of money rises which will make people desire to hold less money. 
C)  the value of money falls which will make people desire to hold more money. 
D)  the value of money falls which will make people desire to hold less money.

Exam 22: Money Growth and Inflation