Question 1

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is:

Accepted Answer

A)  1 percent.
B)  6 percent.
C)  -4 percent.
D)  -5 percent. C

Question 2

According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be:

Accepted Answer

A)  increasing.
B)  decreasing. 7
C)  percent.
D)  constant. A

Question 3

If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in:

Accepted Answer

A)  inflation of 1 percent and the nominal interest rate of less than 1 percent.
B)  inflation of 1 percent and the nominal interest rate of 1 percent.
C)  inflation of 1 percent and the nominal interest rate of more than 1 percent.
D)  both inflation and the nominal interest rate of less than 1 percent. B

Question 4

The quantity theory of money assumes that:

Accepted Answer

A)  income is constant.
B)  velocity is constant.
C)  prices are constant.
D)  the money supply is constant.

Question 5

According to the Fisher effect, the nominal interest rate moves one-for-one with changes in the:

Accepted Answer

A)  inflation rate.
B)  expected inflation rate.
C)  ex ante real interest rate.
D)  ex post real interest rate.

Question 6

In the case of an unanticipated inflation:

Accepted Answer

A)  creditors with an unindexed contract are hurt because they get less than they expected in real terms.
B)  creditors with an indexed contract gain because they get more than they contracted for in nominal terms.
C)  debtors with an unindexed contract do not gain because they pay exactly what they contracted for in nominal terms.
D)  debtors with an indexed contract are hurt because they pay more than they contracted for in nominal terms.

Question 7

When a person purchases a 90-day Treasury bill, he or she cannot know the:

Accepted Answer

A)  ex post real interest rate.
B)  ex ante real interest rate.
C)  nominal interest rate.
D)  expected rate of inflation.

Question 8

In classical macroeconomic theory, the concept of monetary neutrality means that changes in the money supply do not influence real variables. Explain why changes in money growth affect the nominal interest rate, but not the real interest rate.

Accepted Answer

The answer of In classical macroeconomic theory, the concept of...

Question 9

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be percent.

Accepted Answer

A)  3
B)  4
C)  9
D)  11

Question 10

The costs of expected inflation cause productive resources of an economy to be directed away from their efficient allocation. Explain how each of the following costs of expected inflation distort the allocation of productive resources:
a. shoeleather costs
b. menu costs
c. the inconvenience of a changing price level

Accepted Answer

The answer of The costs of expected inflation cause productive...

Question 11

The ex ante real interest rate is equal to the nominal interest rate:

Accepted Answer

A)  minus the inflation rate.
B)  plus the inflation rate.
C)  minus the expected inflation rate.
D)  plus the expected inflation rate.

Question 12

During the American Revolution, the price of gold measured in continental dollars increased to more than times its previous level.

Accepted Answer

A)  2
B)  10
C)  50
D)  100

Question 13

Consider the money demand function that takes the form (M/P)d = kY, where M is the quantity of money, P is the price level, k is a constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average inflation rate in this economy?

Accepted Answer

A)  3 percent
B)  7 percent
C)  10 percent
D)  13 percent

Question 14

"Inflation tax" means that:

Accepted Answer

A)  as the price level rises, taxpayers are pushed into higher tax brackets.
B)  as the price level rises, the real value of money held by the public
C)  decreases. as taxes increase, the rate of inflation also increases.
D)  in a hyperinflation, the chief source of tax revenue is often the printing of money.

Question 15

The income velocity of money increases and the money demand parameter k when people want to hold money.

Accepted Answer

A)  increases; more
B)  increases; less
C)  decreases; more
D)  decreases; less

Question 16

Consider the money demand function that takes the form (M/P)d = Y/4i, where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy?

Accepted Answer

A)  i
B)  4i
C)  1/4i
D)  0.25

Question 17

Inflation the variability of relative prices and allocative efficiency.

Accepted Answer

A)  increases; increases
B)  increases; decreases
C)  decreases; decreases
D)  decreases; increases

Question 18

If the transactions velocity of money remains constant while the quantity of money doubles, the:

Accepted Answer

A)  price of the average transaction must double.
B)  number of transactions must remain constant.
C)  price of the average transaction multiplied by the number of transactions must remain constant.
D)  price of the average transaction multiplied by the number of transactions must double.

Question 19

If the demand for money depends on the nominal interest rate, then via the quantity theory and the Fisher equation, the price level depends on:

Accepted Answer

A)  only the current money supply.
B)  only the expected future money supply.
C)  both the current and expected future money supply.
D)  neither the current nor the expected future money supply.

Question 20

Assume that the demand for real money balance (M/P) is M/P = 0.6Y - 100i, where Y is national income and i is the nominal interest rate (in percent). The real interest rate r is fixed at 3 percent by the investment and saving functions. The expected inflation rate equals the rate of nominal money growth.
a. If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be?
b. If Y is 1,000, M is 100, and the growth rate of nominal money is 2 percent, what must i and P be?

Accepted Answer

The answer of Assume that the demand for real money...

Exam 5: The Open Economy