Deck 12: Money, Interest, and Inflation

Question 1

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

A) decreases and the demand for money curve shifts leftward.
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 rightward.
E) increases and the demand for money curve shifts rightward.

Answer 1

B

Question 2

When you accumulate more money,

A) the marginal benefit of holding money decreases.
B) the opportunity cost of holding money decreases.
C) your marginal tax rate falls.
D) you earn a lower rate of interest on your checkable deposit.
E) the interest rate you are paid on your currency increases.

Answer 2

A

Question 3

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) $50.
D) $30.
E) $510.

Answer 3

D

Question 4

The quantity of money demanded is the

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

Question 5

The opportunity cost of holding money is the

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

Question 6

When the opportunity cost of holding money increases, then

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

Question 7

The lower the nominal interest rate, the

A) greater the demand for money.
B) greater the quantity of money demanded.
C) greater the quantity of money supplied.
D) smaller the demand for goods and services.
E) smaller the quantity of money demanded.

Question 8

The quantity of money demanded is

A) the total currency in circulation.
B) the same as the money supply.
C) equal to real GDP.
D) the money that people choose to hold.
E) changes only when real GDP changes.

Question 9

The relationship between the nominal interest rate, the real interest rate, and the inflation rate is that the

A) real interest rate is equal to the nominal interest rate plus the inflation rate.
B) nominal interest rate is equal to the real interest rate plus the inflation rate.
C) real interest rate is equal to the nominal interest rate multiplied by the inflation rate.
D) nominal interest rate is equal to the real interest rate divided by the inflation rate.
E) nominal interest rate is equal to the real interest rate minus the inflation rate.

Question 10

Mary has $1,000 and is considering purchasing a $1,000 bond that pays 7 percent interest per year.Mary decides not to buy the bond and holds the $1,000 as cash.If the inflation rate is 4 percent, the opportunity cost of holding the $1,000 as money is

A) $30.00.
B) $40.00.
C) $70.00.
D) $110.00.
E) $100.00.

Question 11

The opportunity cost of holding money is that you

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

Question 12

Suppose you can earn 5 percent on your savings account if you deposit $500 in it. The opportunity cost of holding the $500 is

A) $25.
B) $100.
C) $495.
D) $525.
E) $125.

Question 13

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

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

Question 14

The opportunity cost of holding money is the

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

Question 15

The real interest rate equals the

A) nominal interest rate - inflation rate.
B) (nominal interest rate ÷ inflation rate) × 100.
C) nominal interest rate ÷ inflation rate.
D) (nominal interest rate × inflation rate)/100.
E) nominal interest rate ÷ inflation rate.

Question 16

The ________ the nominal interest rate, the ________ is the quantity of money demanded.

A) lower; greater
B) lower; smaller
C) higher; greater
D) more variable; smaller
E) None of the above because the nominal interest rate does not influence the quantity of money demanded.

Question 17

In the long run, the nominal interest rate is

A) negatively related to the price level.
B) positively related to the price level.
C) negatively related to the inflation rate.
D) positively related to the inflation rate.
E) not related to the price level or the inflation rate.

Question 18

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

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

Question 19

As opportunity cost of holding money increases, people can

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

Question 20

The quantity of money demanded will decrease if the

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

Question 21

As the nominal interest rate increases, the opportunity cost of holding money ________ and the quantity of money demanded ________.

A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change because people need money

Question 22

The demand for money schedule shows the ________ relationship between money demand and the nominal interest rate which means that as the ________.

A) negative; nominal interest rate increases, the opportunity cost of holding money increases.
B) negative; nominal interest rate increases, the opportunity cost of holding money decreases.
C) positive; nominal interest rate increases, the opportunity cost of holding money increases.
D) positive; nominal interest rate increases, the opportunity cost of holding money decreases.
E) negative; the opportunity cost of holding money increases, the nominal interest rate increases.

Question 23

If the real interest rate is 8 percent and the inflation rate is 2.5 percent, then the nominal interest rate is

A) 10.5 percent.
B) 2.5 percent.
C) 5.5 percent.
D) 8 percent.
E) 3.2 percent.

Question 24

Suppose the nominal interest rate on a savings bond is 7 percent a year and the inflation rate is 4.5 percent a year.How much is the real interest rate?

A) 1.56 percent
B) 11.5 percent
C) 2.5 percent
D) 7 percent
E) 4.5 percent

Question 25

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

Question 26

An increase in the nominal interest rate leads to a

A) rightward shift in the demand for money curve.
B) movement upward along the demand for money curve.
C) leftward shift in the demand for money curve.
D) movement downward along the demand for money curve.
E) neither a shift in nor a movement along the demand for money curve.

Question 27

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

Question 28

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

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

Question 29

When the nominal interest rate falls, there is

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

Question 30

The demand for money depends on all of the following EXCEPT

A) the nominal interest rate.
B) real GDP.
C) financial technology.
D) the equation of exchange.
E) the price level.

Question 31

If the interest rate rises from 1 percent to 3 percent, the ________ decreases and the opportunity cost of holding money ________.

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

Question 32

The opportunity cost of holding money

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

Question 33

In 2009, the interest rate fell below 1 percent in the United States.As a result, there was a

A) leftward shift in the supply of money curve.
B) rightward shift in the demand for money curve.
C) movement downward along the demand for money curve.
D) movement upward along the demand for money curve.
E) movement upward along the money supply curve.

Question 34

If the inflation rate is 5 percent and the real interest rate is 2.5 percent, then the nominal interest rate is

A) -2.5 percent.
B) 2 percent.
C) 7.5 percent.
D) 2.5 percent.
E) 10 percent.

Question 35

The nominal interest rate is 12 percent and the inflation rate is 4 percent.The opportunity cost of holding a dollar for a year is

A) 12 cents.
B) 16 cents.
C) 88 cents.
D) 8 cents.
E) 48 cents.

Question 36

Assume you have a credit card balance of $2,000 at 15 percent and the inflation rate is 3 percent.What are the nominal and real interest rates?

A) 15 percent nominal and 3 percent real
B) 3 percent nominal and 12 percent real
C) 15 percent nominal and 12 percent real
D) 15 percent nominal and 18 percent real
E) 12 percent nominal and 15 percent real

Question 37

The demand for money depends on i. real GDP.
Ii) financial technology.
Iii) the price level.

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

Question 38

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

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

Question 39

When the nominal interest rate increases, the

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

Question 40

Which of the following increases the quantity of money demanded?

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

Question 41

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

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

Question 42

If real GDP decreases, there is

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

Question 43

An increase in real GDP affects the demand for money because

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

Question 44

When real GDP increases, the demand for money ________ and the demand for money curve ________.

A) increases; shifts rightward
B) increases; shifts leftward
C) decreases; shifts rightward
D) decreases; shifts leftward
E) does not change; does not shift

Question 45

Suppose that the price level does not change while real GDP decreases. As a result,

A) the demand for money increases and the demand for money curve shifts rightward.
B) the supply of money curve shifts leftward.
C) the supply of money curve shifts rightward.
D) the quantity of money demanded decreases and there is a movement downward along the demand for money curve.
E) the demand for money decreases so that households and firms hold smaller amounts of money.

Question 46

An increase in the price level leads to a

A) rightward shift in the demand for money curve.
B) movement upward along the demand for money curve and no shift of the curve.
C) leftward shift in the demand for money curve.
D) movement downward along the demand for money curve and no shift of the curve.
E) rightward shift of the supply of money curve.

Question 47

When the price level increases, people demand ________ money and the demand for money curve ________.

A) more; shifts rightward
B) more; shifts leftward
C) less; shifts rightward
D) less; shifts leftward
E) the same amount of; does not shift

Question 48

If the price level increases, the

A) demand for money increases.
B) demand for money decreases.
C) quantity of money demanded increases.
D) quantity of money demanded decreases.
E) demand for money does not change and the quantity of money demanded does not change.

Question 49

All else the same, when real GDP increases the

A) demand for money decreases.
B) demand for money increases.
C) supply of money decreases.
D) supply of money increases.
E) supply of money does not change and the demand for money does not change.

Question 50

If the price level falls, the

A) demand for money increases.
B) demand for money decreases.
C) quantity of money demanded increases.
D) quantity of money demanded decreases.
E) demand for money does not change and the quantity of money demanded does not change.

Question 51

If the price level rises, there is

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

Question 52

The ________ the price level, the ________.

A) higher; greater the demand for money
B) higher; smaller the demand for money
C) lower; greater the demand for money
D) higher; greater the supply of money
E) higher; smaller the supply of money

Question 53

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 price level increases.
D) the inflation rate increases.
E) real GDP decreases.

Question 54

The demand for money is

A) positively related to the price level.
B) positively related to the nominal interest rate.
C) negatively related to the price level.
D) negatively related to real GDP.
E) positively related to the real interest rate.

Question 55

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

Question 56

The quantity of money demanded is proportional to

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

Question 57

If real GDP decreases, the

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

Question 58

The demand for money increases and the demand curve for money shifts rightward as a result of

A) an increase in real GDP.
B) a decrease in the real interest rate.
C) an increase in the use of credit cards.
D) a decrease in the price level.
E) a decrease in the nominal interest rate.

Question 59

As the economy enters a strong expansion in which real GDP increases, which of the following occurs?

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

Question 60

The ________ real GDP, the ________.

A) larger; larger the demand for money
B) larger; smaller the demand for money
C) smaller; larger the demand for money
D) larger; larger the supply of money
E) larger; smaller the supply of money

Question 61

From the 1970s to 2008, as a fraction of GDP, the quantity of money that people and businesses have held has been

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

Question 62

Which statement most accurately describes the effect financial technology has had on the demand for money in the United States?

A) Advances in financial technology have all decreased the demand for money.
B) Advances in financial technology have all increased the demand for money.
C) Some advances in financial technology have increased the demand for money while others have decreased it.
D) Advances in financial technology have had no effect on the demand for money.
E) It is not possible to tell what would be the effect because financial technology has not changed over the past three decades.

Question 63

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

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

Question 64

If credit card usage exhibits a sharp increase, there is

A) an upward movement along the demand for money curve.
B) a downward movement along the demand for money curve.
C) a rightward shift of the demand for money curve.
D) a leftward shift of the demand for money curve.
E) a leftward shift of the supply of money curve.

Question 65

Advances in financial technology

A) must increase the demand for money.
B) must decrease the demand for money.
C) have no effect on the demand for money or on the supply of money.
D) might increase or decrease the demand for money.
E) affect only the supply of money.

Question 66

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

Question 67

As a result of increased use of credit cards,

A) the demand for money has decreased and the demand for money curve has shifted leftward.
B) the demand for money has decreased and there has been a movement up along the demand for money curve.
C) the demand for money has decreased and there has been a movement down along the demand for money curve.
D) the equilibrium nominal interest rate has increased and bond prices have decreased.
E) the equilibrium nominal interest rate has decreased and bond prices have fallen.

Question 68

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

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

Question 69

The supply of money curve is

A) upward sloping, showing the influence of the interest rate.
B) horizontal because interest rates are fixed at any one moment.
C) vertical because the quantity of money is fixed at any one moment.
D) downward sloping, showing the negative influence of the interest rate.
E) horizontal because the Fed controls the quantity of money supplied.

Question 70

An increase in real GDP leads to a

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

Question 71

Since 1970, as a percent of GDP, M1 held has steadily decreased.Which of the following can account for this fact?

A) Real GDP has increased since 1970.
B) The price level has risen since 1970.
C) Credit cards have become more widely available since 1970.
D) The nominal interest rate has steadily risen since 1970.
E) The nominal interest rate has steadily fallen since 1970.

Question 72

As more and more businesses accept credit cards, the

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

Question 73

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

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

Question 74

In the demand and supply model of the money market, the i. supply of money curve is a vertical straight line.
Ii) supply of money is the quantity that must be held by households and firms.
Iii) quantity of money is determined by Fed actions.

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

Question 75

All of the following shift the demand for money curve EXCEPT

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

Question 76

During an economic expansion when real GDP increases, the

A) demand for money increases.
B) demand for money decreases.
C) supply of money decreases.
D) nominal interest rate is constant.
E) real interest rate is constant.

Question 77

On any given day, ________ changes to achieve equilibrium in the money market.

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

Question 78

Every day, ________ changes to make the quantity of money demanded equal the quantity of money supplied.

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

Question 79

The increased use of credit cards leads to

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

Question 80

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

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