Deck 12: Money, Interest, and Inflation

Question 1

The opportunity cost of holding money is that you

A)have trouble balancing your check book.
B)run a greater risk of being robbed.
C)pay a higher tax rate.
D)must make more trips to the bank to manage the money.
E)forego interest on an alternative asset.

Answer 1

E

Question 2

Barbara is willing to loan $10,000 if she can earn a real interest rate of 6 percent. Everything else the same, if the inflation rate is 2 percent, she would agree to loan the $10,000 if the nominal interest rate is

A)12 percent.
B)3 percent.
C)4 percent.
D)10 percent.
E)8 percent.

Answer 2

E

Question 3

In the money market, if the price level rises, then the demand for money_{--------------------} equilibrium nominal interest rate _{--------------------}.

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

Answer 3

increases; rises

Question 4

If real GDP grows by 3 percent, the velocity of circulation does not change, and the quantity of money grows by 5 percent, then in the long run the inflation rate is

A)3 percent.
B)2 percent.
C)8 percent.
D)-5 percent.
E)-2 percent.

Question 5

During the early 1920s, Germany experienced

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

Question 6

Inflation_{--------------------}the cost of holding money and_{--------------------}the after-tax real interest rate.

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

Question 7

In the above figure, a movement from point B to point C represents

A)a decrease in the quantity of money demanded.
B)a increase in the quantity of money demanded.
C)an increase in the demand for money that might be the result of a fall in the price level.
D)an increase in the demand for money that might be the result of an increase in real GDP.
E)a decrease in the demand for money that might be the result of an increase in real GDP.

Question 8

The velocity of circulation grows at 1 percent and real GDP grows at 3 percent. if the quantity of money grows at 4 percent, the inflation rate is

A)zero.
B)10 percent.
C)4 percent.
D)2 percent.
E)8 percent.

Question 9

Which of the following shifts the demand for money curve?
I. change in the nominal interest rate
Ii. change in real GDP
Iii. change in the price level

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

Question 10

$\begin{array} { c c c } \hline &\text { Quantity of }&\text { Quantity of }\\\text { Nominal interest rate }&\text { money demanded }&\text { money supplied }\\\text { (percent per year) }&\text { (trillions of dollars) }&\text { (trillions of dollars) }\\\hline 5 & 2.9 & 2.5 \\6 & 2.8 & 2.5 \\7 & 2.7 & 2.5 \\8 & 2.6 & 2.5 \\9 & 2.5 & 2.5 \\10 & 2.4 & 2.5 \\\hline\end{array}$
The above table has the demand and supply schedules for money.

- What is the equilibrium nominal interest rate?

A)6 percent
B)8 percent
C)7 percent
D)5 percent
E)9 percent

Question 11

As opportunity cost of holding money increases, people can

A)find a better job.
B)try to maximize marginal benefit.
C)increase the demand for money but not the quantity of money they hold.
D)do nothing.
E)seek substitutes for money.

Question 12

If real GDP decreases, there is

A)a rightward shift of the demand for money curve.
B)an upward movement along the demand for money curve and no shift of the curve.
C)a downward movement along the demand for money curve and no shift of the curve.
D)no movement along the demand for money curve and the curve does not shift.
E)a leftward shift of the demand for money curve.

Question 13

The quantity of money demanded

A)is infinite.
B)is the quantity that balances the benefit of holding an additional dollar of money against the opportunity cost of doing so.
C)is directly controlled by the Fed.
D)changes very infrequently.
E)has no opportunity cost.

Question 14

When the price level rises, the demand for money_{--------------------} and, as a result, the equilibrium nominal interest rate_{--------------------}.

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

Question 15

From 1970 to 2010, as a fraction of GDP, the quantity of money that people and businesses have held has been

A)changing only as the interest rate changed.
B)fluctuating erratically.
C)increasing.
D)independent of people's use of credit cards.
E)decreasing.

Question 16

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

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

Question 17

In the money market, if the nominal interest rate is below the equilibrium level,

A)asset prices will rise.
B)the supply of money curve will shift leftward.
C)the quantity of money demanded exceeds the quantity of money supplied.
D)the demand for money curve will shift leftward.
E)the quantity of money supplied exceeds the quantity of money demanded.

Question 18

In the money market, in the short run if the quantity of money exceeds the quantity of money demanded, then to achieve equilibrium the

A)inflation rate increases.
B)demand for money increases.
C)price level rises.
D)nominal interest rate falls.
E)supply of money increases.

Question 19

When the nominal interest rate falls, there is

A)a leftward shift of the demand for money curve.
B)an upward movement along the demand for money curve.
C)a rightward shift of the demand for money curve.
D)a downward movement along the demand for money curve.
E)no movement along the demand for money curve and the curve does not shift.

Question 20

-
A movement from point B to point C could be the result of

A)a rise in the real interest rate.
B)an increase in the quantity of money held by banks.
C)a fall in the nominal interest rate.
D)a decrease in the total benefit from holding money.
E)a rise in the real interest rate matched by an equal fall in the nominal interest rate.

Question 21

If real GDP grows by 3 percent, the velocity of circulation does not change, and the quantity of
Money grows by 3 percent, then in the long run the inflation rate is

A)3 percent.
B)6 percent.
C)-3 percent.
D)-6 percent.
E)0 percent.

Question 22

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

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

Question 23

The "velocity of circulation" refers to the

A)average number of times a dollar is deposited and withdrawn from a bank account.
B)ratio between the quantity of money and the price level.
C)average speed with which the nominal interest rate changes when the inflation rate changes.
D)average number of times in a year each dollar is used to buy goods and services.
E)average speed with which the Fed increases or decreases the quantity of money.

Question 24

If the Fed wants to raise the interest rate, in the short run in the money market the Fed

A)increases the quantity of money.
B)shifts the demand for money curve rightward.
C)decreases the quantity of money.
D)shifts the demand for money curve leftward.
E)directly raises the interest rate and does nothing to either the supply of money or the demand for money.

Question 25

An increase in real GDP affects the demand for money because

A)when real GDP increases, more money is needed to make expenditures.
B)there is an inverse relationship between the quantity money demanded and nominal GDP.
C)at the higher price level, it takes more dollars to make expenditures.
D)the larger real GDP, the higher the real interest rate.
E)tax payments rise because more income is earned.

Question 26

What could shift the demand for money curve rightward from the curve illustrated in the figure above?

A)a fall in the nominal interest rate
B)an increase in real GDP
C)a decrease in the supply of money
D)an increase in the supply of money
E)a fall in the inflation rate

Question 27

If velocity does not change and the quantity of money grows at the same rate as does real GDP, then in the long run

A)the nominal interest rate is less than the real interest rate.
B)the inflation rate equals the growth rate of the quantity of money.
C)the inflation rate equals zero.
D)the nominal interest rate equals zero.
E)the real interest rate is less than the nominal interest rate.

Question 28

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,

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

Question 29

Hyperinflation is defined as periods of

A)inflation over 50 percent per month.
B)inflation under 10 percent per year.
C)inflation over 25 percent per year
D)negative price changes.
E)low inflation.

Question 30

The average number of times in a year each dollar is used to buy goods and service is called

A)circulation rate.
B)inflation.
C)rate of circulation speed.
D)nominal GDP.
E)velocity of circulation.

Question 31

When the nominal interest rate falls, the opportunity cost of holding money

A)decreases and the demand for money curve shifts rightward.
B)decreases and there is a movement downward along the demand for money curve.
C)increases and there is a movement upward along the demand for money curve.
D)decreases and the demand for money curve shifts leftward.
E)increases and the demand for money curve shifts rightward.

Question 32

The opportunity cost of holding money instead of an interest earning asset is the

A)nominal interest rate.
B)inflation rate minus the real interest rate.
C)real interest rate.
D)inflation rate.
E)inflation rate minus the nominal interest rate.

Question 33

If real GDP grows by 3 percent, the velocity of circulation grows by 4 percent, and the quantity of money grows by 3 percent, then in the long run the inflation rate is

A)10 percent.
B)-4 percent.
C)7 percent.
D)4 percent.
E)0 percent.

Question 34

A consequence of hyperinflation is that people

A)increase the quantity of money demanded.
B)receive higher real wage hikes, which increases their purchasing power for goods and services.
C)want to lend funds because interest rates are so high.
D)who make fixed-payment loans to others receive higher payments as inflation increases.
E)spend time trying to keep their money holdings near zero.

Question 35

If the nominal interest rate is above its equilibrium value, then

A)people sell financial assets and the interest rate falls.
B)the demand curve for money shifts leftward and the interest rate falls.
C)people buy financial assets and the interest rate falls.
D)the supply curve of money shifts leftward and the interest rate rises.
E)the demand curve for money shifts rightward and the interest rate rises.

Question 36

According to the equation of exchange, if the quantity of money is $4 billion and the velocity of circulation is 3, nominal GDP is

A)$1.3 billion.
B)$8 billion.
C)$12 billion.
D)$0.75 billion.
E)$7 billion.

Question 37

Becky holds $30,000 as money. After a year during which inflation was 5 percent a year, the inflation tax over that year was

A)$500.
B)$3,000.
C)$5.
D)$1,500.
E)$1,000.

Question 38

If real GDP decreases, the

A)supply of money decreases.
B)supply of money increases.
C)demand for money increases.
D)quantity of money demanded increases.
E)demand for money decreases.

Question 39

All of the following shift the demand for money curve EXCEPT

A)an increase in the price level.
B)an increase in real GDP.
C)a rise in the nominal interest rate.
D)an improvement in financial technology.
E)a decrease in real GDP.

Question 40

If the interest rate rises from 1 percent to 3 percent, the_{--------------------} decreases and the opportunity cost of holding money _{--------------------} .

A)quantity of money supplied; rises
B)quantity of money demanded; rises
C)quantity of money supplied; falls
D)demand for money; rises
E)quantity of money demanded; falls

Question 41

In the long run, an increase in the growth rate of the quantity of money_{--------------------} the inflation rate and _{--------------------} the nominal interest rate.

A)raises; does not change
B)raises; raises
C)raises; lowers
D)lowers; raises
E)lowers; lowers

Question 42

If velocity does not change and if real GDP and the quantity of money grow at the same rate, then the price level

A)does not change and the inflation rate is zero.
B)falls and the inflation rate is negative.
C)falls and the inflation rate is positive.
D)rises and the inflation rate is negative.
E)rises and the inflation rate is positive.

Question 43

Hyperinflation is

A)inflation at a rate that exceeds 5 percent a month.
B)only theoretical and has never occurred in the real world.
C)inflation caused by negative growth in the quantity of money.
D)inflation caused by excessive growth in the demand for money.
E)inflation at a rate that exceeds 50 percent a month.

Question 44

If the Fed wants to lower the nominal interest rate in the short run, the Fed _{--------------------} the growth rate of the quantity of money.

A)raises
B)first lowers and then raises
C)does not change
D)lowers
E)None of the above answers are correct because the premise of the question is wrong since the Fed cannot affect the nominal interest rate, only the real interest rate.

Question 45

If the quantity of money grows at 4 percent a year, velocity grows at 2 percent, and real GDP grows at 2 percent a year, then the inflation rate equals

A)8 percent.
B)0 percent.
C)4 percent.
D)6 percent.
E)2 percent.

Question 46

The "shoe-leather costs" of inflation are the costs from

A)time spent trying to spend money quickly.
B)higher prices for all goods, including necessities such as shoes.
C)confusion as people lose track of real costs and benefits.
D)higher taxes due to higher inflation.
E)the government taking a higher percentage of interest income.

Question 47

The costs of inflation_{--------------------} when inflation is more rapid and_{--------------------} when inflation is more unpredictable.

A)increase; decrease
B)increase; do not change
C)increase; increase
D)decrease; increase
E)do not change; increase

Question 48

If real GDP grows at 4 percent, the quantity of money grows at 6 percent, and velocity does not change, then in the long run the inflation rate is

A)10 percent.
B)1.5 percent.
C)6 percent.
D)4 percent.
E)2 percent.

Question 49

When households and firms sell financial assets, such as government securities, the

A)nominal interest rate falls.
B)market price of the securities increases.
C)supply of money curve shifts leftward.
D)nominal interest rate rises.
E)demand for money curve shifts leftward.

Question 50

In the long run, when the Fed increases the quantity of money, the

A)price level rises.
B)nominal interest rate falls.
C)real interest rate rises.
D)price level falls.
E)demand for money decreases.

Question 51

During a period of hyperinflation, as households and firms avoid holding money,

A)long term savings accounts become more popular.
B)potential GDP increases.
C)the costs of inflation decrease.
D)capital investment increases.
E)barter becomes more common.

Question 52

Which of the following increases the quantity of money demanded?

A)a fall in the nominal interest rate
B)an increase in real GDP
C)a rise in the inflation rate
D)a rise in the nominal interest rate
E)a rise in the real interest rate

Question 53

The demand for money curve shows the relationship between the quantity of money demanded and

A)the price level.
B)the real interest rate.
C)the inflation rate.
D)the nominal interest rate.
E)real GDP.

Question 54

You have a $500 saving bond. The nominal interest rate is 10 percent, and the inflation rate is 4 Percent. After a year, in real terms you have earned

A)$70.
B)$40.
C)$30.
D)$510.
E)$50.

Question 55

Shoe-leather costs arise from inflation because the velocity of circulation of money _{--------------------} as the inflation rate_{--------------------} .

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

Question 56

The demand for money increases and the demand for money curve shifts rightward if

A)the real interest rate increase.
B)the nominal interest rate increases.
C)the inflation rate increases.
D)real GDP decreases.
E)the price level increases.

Question 57

The opportunity cost of holding money

A)is the price level.
B)increases as the nominal interest rate increases.
C)is fixed at all interest rates.
D)does not change with the changes in the nominal interest rate.
E)decreases as the nominal interest rate increases.

Question 58

If the quantity of money grows at 3 percent per year, velocity does not grow, and real GDP grows at 2 percent per year, then the inflation rate equals

A)12 percent.
B)6 percent.
C)5 percent.
D)-1 percent.
E)1 percent.

Question 59

The increased use of credit cards leads to

A)a movement upward along the demand for money curve.
B)a rightward shift in the demand for money curve.
C)a movement downward along the demand for money curve.
D)no movement along the demand curve for money nor a shift in the demand curve.
E)a leftward shift in the demand for money curve.

Question 60

Other things remaining the same, if the quantity of money increases by a given percentage, then in the long run the_{--------------------} by the same percentage.

A)real interest rate rises
B)price level rises
C)real interest rate falls
D)nominal interest rate falls
E)price level falls

Question 61

According to the equation of exchange, the

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

Question 62

In 2008 and 2009, the quantity theory of money did a_{--------------------} job of predicting year-to-year changes in the inflation rate because_{--------------------} .

A)poor; velocity of circulation plunged
B)good; interest rates behaved predictably
C)good; real GDP remained stable
D)poor; the Fed changed the growth rate of the quantity of money too quickly
E)poor; the price level and the velocity of circulation did not change

Question 63

On any given day,_{--------------------}

A)real GDP
B)the nominal interest rate
C)the real interest rate
D)the price level
E)the inflation rate

Question 64

The opportunity cost of holding money is the

A)growth rate of real GDP.
B)inflation rate.
C)nominal interest rate plus the inflation rate.
D)nominal interest rate.
E)real interest rate.

Question 65

The proposition that in the long run when real GDP equals potential GDP, an increase in the
Quantity of money leads to an equal percentage increase in the price level is the called the quantity
Theory of

A)money.
B)the long run.
C)constant velocity.
D)inflation.
E)equal change.

Question 66

A change in financial technology that reduces the need to hold cash balances_{--------------------} the demand for money and _{--------------------} the equilibrium nominal interest rate.

A)decreases; lowers
B)decreases; raises
C)increases; raises
D)decreases; does not change
E)increases; lowers

Question 67

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 8 percent. The nominal interest rate is

A)12 percent.
B)8 percent.
C)6 percent.
D)10 percent.
E)7 percent.

Question 68

An increase in real GDP leads to a

A)movement upward along the demand for money curve but no shift of the curve.
B)movement downward along the demand for money curve but no shift of the curve.
C)neither a shift in the demand for money curve nor a movement along the curve.
D)leftward shift in the demand for money curve.
E)rightward shift in the demand for money curve.

Question 69

-
In the above figure, if the interest rate is 2 percent per year, the quantity of money demanded is

A)greater than the quantity of money supplied, and the demand for money curve will shift.
B)greater than the quantity of money supplied, and the interest rate will change.
C)less than the quantity of money supplied, and the demand for money curve will shift.
D)less than the quantity of money supplied, and the interest rate will change.
E)greater than the quantity of money supplied, and the supply of money curve will shift.

Question 70

Using the quantity theory of money, in the long run a 3 percent increase in the quantity of money leads to a 3 percent

A)decrease in the real interest rate.
B)increase in real GDP.
C)increase in the real interest rate.
D)decrease in the price level.
E)increase in the price level.

Question 71

If the inflation rate increases,

A)real GDP growth increases.
B)the real interest rate rises.
C)potential GDP increases.
D)the velocity of circulation increases.
E)the nominal interest rate falls.

Question 72

An increase in the price level leads to _{--------------------} in the demand for money and an increase in real GDP leads to _{--------------------} in the demand for money.

A)an increase; a decrease
B)an increase; an increase
C)no change; an increase
D)an decrease; a increase
E)a decrease; a decrease

Question 73

The demand for money curve slopes downward because a rise in the nominal interest rate_{--------------------} the opportunity cost of holding money and therefore_{--------------------} the quantity of money demanded.

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

Question 74

The difference between the nominal interest rate and the real interest rate is the

A)unemployment rate.
B)price level.
C)inflation rate.
D)GDP growth rate.
E)money growth rate minus the growth rate of real GDP.

Question 75

The quantity of money demanded is the

A)sum of checkable and savings deposits at banks.
B)average daily volume of bank account withdrawals.
C)income and volume of profits that people and businesses would like to receive.
D)amount that people and businesses choose to hold.
E)fraction of cash holdings in an average investment portfolio.

Question 76

During an inflation, a household with savings of $100,000

A)gains because inflation increases the value of their savings.
B)loses because inflation increases the real tax on the interest paid.
C)loses because the inflation increases the after-tax real interest rate.
D)neither gains nor loses because inflation does not affect savers.
E)gains because the inflation gives savers more money and so more purchasing power.

Question 77

The demand for money increases and the demand for money curve shifts rightward if

A)real GDP increases.
B)the nominal interest rate increases.
C)the inflation rate increases.
D)the real interest rate increases.
E)the price level falls.

Question 78

In the United States since 1970, the quantity of M1 money people hold as a percentage of GDP has

A)decreased.
B)increased.
C)remained constant.
D)increased at first and the decreased.
E)decreased at first and then increased.

Question 79

One effect of inflation is that it is a tax that redistributes goods and services from

A)businesses to households.
B)government to businesses.
C)households and businesses to the government.
D)government to households.
E)investors to savers.

Question 80

When the opportunity cost of holding money increases, then

A)people want to hold more money.
B)the real interest rate falls.
C)people want to hold less money.
D)the nominal interest rate falls.
E)the quantity of money supplied increases.