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EC 102.07-08-09
Exercises for Chapter 30
SPRING 2006
1.
When the number of dollars needed to buy a representative basket of goods falls, the value of money
a. rises, and so the price level rises.
b. rises, and so the price level falls.
c. falls, and so the price level rises.
d. falls, and so the price level falls.
2.
The supply curve of money is vertical because the quantity of money supplied increases
a. when the value of money increases.
b. when the value of money decreases.
c. only if people desire to hold more money.
d. only if the central bank increases the money supply.
3.
The supply of money increases when
a. the value of money increases.
b. the interest rate increases.
c. the CB makes open-market purchases.
d. None of the above is correct.
4.
When the money market is drawn with the value of money on the vertical axis, an increase in the price
level causes a
a. shift to the right of the money demand curve.
b. shift to the left of the money demand curve.
c. movement to the left along the money demand curve.
d. movement to the right along the money demand curve.
5.
When the money market is drawn with the value of money on the vertical axis, as the price level increases,
the value of money
a. increases, so the quantity of money demanded increases.
b. increases, so the quantity of money demanded decreases.
c. decreases, so the quantity of money demanded decreases.
d. decreases, so the quantity of money demanded increases.
6.
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.
7.
When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is
obtained when the quantity demanded and quantity supplied of money are equal due to adjustments in the
a. the value of money.
b. real interest rates.
c. nominal interest rates.
d. money supply.
8.
Ali pays $120 for a bag of goods he purchases at the HyValu discount store.
a. The $120 is a real variable; the bag of groceries is a nominal variable.
b. The $120 is a nominal variable; the bag of groceries is a real variable.
c. Both the $120 and the bag of groceries are nominal variables.
d. Both the $120 and the bag of groceries are real variables.
9.
The price level is a
a. relative variable.
b. actual variable.
c. real variable.
d. nominal variable.
10.
The price of a Honda Accord divided by the price of a Honda Civic is a
a. classical variable.
b. dichotomous variable.
c. nominal variable.
d. real variable.
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11.
Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay makes
a. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level,
then your real wage also increased.
b. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level,
then your real wage decreased.
c. your real wage increase. If your real wage rose by a greater percentage than the price level, then your
nominal wage also increased.
d. your real wage decrease. If your real wage rose by a greater percentage than the price level, then your
nominal wage decreased.
12.
The classical dichotomy refers to the idea that the supply of money
a. is irrelevant for understanding the determinants of nominal and real variables.
b. determines nominal variables, but not real variables.
c. determines real variables, but not nominal variables.
d. is a determinant of both real and nominal variables.
13.
According to the classical dichotomy, when the money supply doubles, which of the following also
double?
a. the price level and nominal wages
b. the price level, but not the nominal wage
c. the nominal wage, but not the price level
d. neither the nominal wage nor the price level
14.
The velocity of money is
a. the rate at which the CB puts money into the economy.
b. the same thing as the long-term growth rate of the money supply.
c. the money supply divided by nominal GDP.
d. the average number of times per year a dollar is spent.
15.
Last year Tealandia produced 50,000 bags of green tea, which sold at 4 units each of Tealandia’s currency—
the Leaf. Tealandia’s money supply was 10,000. What was the velocity of money in Tealandia?
a. 20
b. 5
c. 1/20
d. 1/5
16.
If Y and V are constant, and M doubles, the quantity equation implies that the price level
a. more than doubles.
b. less than doubles.
c. doubles.
d. might do any of the above; more information is needed.
17.
The money supply in Freedonia is $200 billion. Nominal GDP is $800 billion and real GDP is $400 billion.
The central bank of Freedonia has instituted a policy of zero inflation. Assuming that velocity is stable, if
real GDP grows by 10 percent this year, how will the central bank of Freedonia change the money supply
this year?
a. It will not change the money supply at all.
b. It will reduce the money supply by 10 percent.
c. It will increase the money supply by 10 percent.
d. It will increase the money supply by 2.5 percent.
18.
Velocity in the country of Aquilonia is always stable. In 2002, the money supply was $100 billion, nominal
GDP was $500 billion, and the real interest rate was 3 percent. In 2003, the money supply was $105 billion
and real GDP did not change from its level in 2002. The nominal interest rate in 2003 was approximately
a. 3 percent.
b. 5 percent.
c. 8 percent.
d. 11 percent.
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19.
The inflation tax
a. is an alternative to income taxes and government borrowing.
b. taxes most those who hold the most money.
c. is the revenue created when the government prints money.
d. All of the above are correct.
20.
Printing money to finance government expenditures
a. causes the value of money to rise.
b. imposes a tax on everyone who holds money.
c. is the principle method by which the U.S. government finances its expenditures.
d. None of the above is correct.
21.
The claim that increases in the growth rate of the money supply increase nominal but not real interest rates
is known as the
a. Friedman Effect,
b. Hume Effect.
c. Fisher Effect.
d. None of the above are correct.
22.
Which of the following assets guarantees a fixed real return over a long period of time?
a. gold
b. stocks
c. inflation-indexed bonds
d. No asset guarantees a fixed real return over a long period of time.
23.
If the economy unexpectedly went from inflation to deflation,
a. debtors and creditors would both have reduced real wealth
b. debtors and creditors would both have increased real wealth
c. debtors would gain at the expense of creditors
d. creditors would gain at the expense of debtors
24.
You put money in an account that earns 5 percent. The inflation rate is 3 percent, and your marginal tax
rate is 20 percent. What is your after-tax real rate of interest?
a. 3.4 percent
b. 1.6 percent
c. 1 percent
d. None of the above is correct.
25.
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.
26.
Using separate graphs, demonstrate what happens to the money supply, money demand, the value of
money, and the price level if:
a. the CB increases the money supply.
b. people decide to demand less money at each value of money.
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