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Quiz 7
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
1. The supply of money is determined by
a. the price level.
b. the Ministry of Finance.
c. the Bank of Canada.
d. the demand for money.
e. the Treasury Board of Canada.
____
2. When the money market is depicted in a diagram with the value of money on the vertical axis, the money
demand curve
a. slopes upward because at higher prices people want to hold more money.
b. slopes downward because at higher prices people want to hold more money.
c. slopes downward because at higher price people want to hold less money.
d. slopes upward, because at higher prices people want to hold less money.
e. is vertical.
____
3. A decrease in the money supply creates an excess
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.
____
4. When the money market is drawn with the value of money on the vertical axis, if the value of money is below
the equilibrium level,
a. the price level will rise.
b. the value of money will rise.
c. money demand will shift left.
d. money demand will shift right.
e. money supply will shift right.
Use the figure below for the following questions.
Figure 30-1
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5. Refer to Figure 30-1. When the money supply curve shifts from MS1 to MS2,
a.
b.
c.
d.
e.
the demand for goods and services decreases.
the economy's ability to produce goods and services increases.
the equilibrium price level increases.
the equilibrium value of money increases.
None of the above are correct.
____
6. Refer to Figure 30-1. If the current money supply is located at MS1,
a. there is no excess supply or excess demand if the value of money is 2.
b. the equilibrium is at point C.
c. there is an excess supply of money if the value of money is 1.
d. All of the above are correct.
____
7. Changes in nominal variables are determined mostly by the quantity of money and the monetary system
according to
a. both the classical dichotomy and the quantity theory of money.
b. the classical dichotomy, but not the quantity theory of money.
c. the quantity theory of money, but not the classical dichotomy.
d. neither the classical dichotomy nor the quantity theory of money.
____
8. According to the quantity equation if P = 4 and Y= 800, which of the following pairs could M and V be?
a. 800, 4
b. 600, 3
c. 400, 2
d. 200, 1
____
9. Velocity in the country of Shem is always stable. In 2002, the money supply was $200 billion and the GDP
price deflator was four times as high as it was in the base year. In 2003, the money supply increased to $240
billion, the price level increased by 15 percent, and nominal GDP equaled $1,200 billion. By how much did
real GDP increase between 2002 and 2003?
a. 20 percent
b. 4.35 percent
c. 2.17 percent
d. There is not enough information to answer the question.
____ 10. People can avoid the inflation tax by
a. reducing savings.
b. not filing a tax return.
c. reducing cash holdings.
d. None of the above are correct.
____ 11. The nominal interest rate is 8 percent and the real interest rate is 3 percent. What is the inflation rate?
a. 3 percent.
b. 5 percent.
c. 8 percent.
d. 11 percent.
e. -5 percent.
____ 12. If the money supply growth rate permanently increased from 5 percent to 30 percent, we would expect that
inflation and nominal interest rates would both
a. increase by more than 25 percentage points.
b. increase by 25 percentage points.
c. increase, but by less than 25 percentage points.
d. decrease by more than 25 percentage points
e. None of the above is correct.
____ 13. Inflation is positively correlated with
a. nominal wage growth and nominal interest rates.
b. neither nominal wage growth nor nominal interest rates.
c. nominal wage growth, but not nominal interest rates.
d. the nominal interest rate, but not nominal wage growth.
____ 14. When people use more resources to reduce their money holdings because of high inflation, this is an example
of
a. inflation-induced tax distortions.
b. relative-price variability costs.
c. shoeleather costs.
d. menu costs.
e. None of the above are correct.
____ 15. Which of the following statements is NOT true?
a. Inflation reduces the purchasing power of most workers.
b. Given the current Canadian tax structure, inflation reduces the incentive to save.
c. The inflation tax causes deadweight loss because people waste scarce resources trying to
avoid it.
d. Countries with high rates of inflation usually also have volatile rates of inflation.
____ 16. You put money in an account and earn a real interest rate of 10 percent, inflation is 3 percent, and your
marginal tax rate is 40 percent. What is your after-tax real rate of interest?
a. 4.8 percent
b. 3.2 percent
c. 2.8 percent
d. 1.8 percent
e. None of the above is correct.
____ 17. Wealth is distributed from debtors to creditors when inflation is
a. high, but expected.
b. low, but expected.
c. unexpectedly high.
d. unexpectedly low.
____ 18. Wealth is distributed from creditors to debtors when inflation is
a. high, whether it is expected or not.
b. low, whether it is expected or not.
c. unexpectedly high.
d. unexpectedly low.
____ 19. Which of the following is accurate?
a. Monetary policy is neutral in both the short run and the long run.
b. Though monetary policy is neutral in the long run, it may have effects on real variables in
the short run.
c. Monetary policy has profound effects on real variables in both the short run and the long
run.
d. Monetary policy has profound effects on real variables in the long run, but is neutral in the
short run.
____ 20. Since 1992, the Bank of Canada has
a.
b.
c.
d.
e.
explicitly rejected targeting the supply of money.
announced a target rate of inflation of 2 percent.
successfully used monetary polich to keep inflation close to its 5 percent target.
Both a and b are correct.
Both a and c are correct.
Short Answer
21. 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
22. Identify each of the following as nominal or real variables.
a. the physical output of goods and services
b. the overall price level
c. the dollar price of apples
d. the price of apples relative to the price of oranges
e. the unemployment rate
f. the amount that shows up on your paycheck after taxes
g. the amount of goods you can purchase with the wage you get each hour
h. the taxes that you pay the government