Question 1

The value of money is calculated as:

Accepted Answer

A)   M1 × Price level.
B)   Price level / Money supply.
C)   1 / Price level.
D)   Interest rate / Price level.E) A) and B)
F) A) and C)

Question 2

The average number of times that a unit of currency is spent on final goods and services in a year is called the:

Accepted Answer

A)   variation in the interest rate.
B)   price level in the economy.
C)   velocity of money.
D)   value of the annual output.E) A) and C)
F) None of the above

Question 3

According to the quantity theory of money, increases in the money supply lead to _____, which can cause:

Accepted Answer

A)   increased production; higher productivity.
B)   excess cash balances; increased spending.
C)   excess cash balances; increased production.
D)   increased production; excess cash balances.E) All of the above
F) B) and D)

Question 4

Carlos borrowed $100 for a year at 5% interest. At the end of the year, he repaid the loan with a payment of $105. The inflation rate that year was 4%. The real rate of interest on his loan was:

Accepted Answer

A)   9%.
B)   5%.
C)   4%.
D)   1%.E) A) and D)
F) All of the above

Question 5

The formula to compute the velocity of money is:

Accepted Answer

A)   (P × Yreal GDP)  / M.
B)   real GDP / M.
C)   M × Yreal GDP / P.
D)   P / M × Yreal GDP.E) B) and D)
F) A) and B)

Question 6

The equation of exchange indicates that if velocity is steady, then a decreasing money supply will cause:

Accepted Answer

A)   per capita GDP to fall.
B)   real GDP to rise.
C)   nominal GDP to fall.
D)   nominal GDP to rise.E) A) and D)
F) All of the above

Question 7

When currency has its value set to the worth of a specific amount of gold, the economy is using a _____ monetary system called the:

Accepted Answer

A)   fiat; gold standard.
B)   fiat; currency standard.
C)   commodity; gold standard.
D)   commodity; currency standard.E) A) and B)
F) C) and D)

Question 8

What insight about negative interest rates is clear from the Fisher equation?

Accepted Answer

A)   Negative real interest rates are most likely to occur when the inflation rate is low.
B)   Negative nominal interest rates are most likely to occur when the inflation rate is low.
C)   Negative real interest rates are more likely to occur than negative nominal interest rates.
D)   Negative nominal interest rates are more likely to occur than negative real interest rates.E) A) and B)
F) A) and C)

Question 9

According to the quantity theory of money, central banks _____ the real value of the public's total money balances.

Accepted Answer

A)   determine any change in
B)   sometimes by chance change
C)   cannot change
D)   choose whether to changeE) A) and B)
F) None of the above

Question 10

According to the quantity theory of money, in the long run, changes in the money supply affect:

Accepted Answer

A)   the purchasing power of money.
B)   output.
C)   employment.
D)   the money illusion.E) A) and C)
F) None of the above

Question 11

Assume that interest rates have been 7% and the inflation rate has been 3% for the past three years. Changes in the Federal Reserve's policies are causing the expected inflation rate to increase to 4.5%. If the Fisher effect holds, the nominal rate will _____, and the real interest rate will:

Accepted Answer

A)   rise to 8.5%; remain 4%.
B)   remain at 7%; drop to 2.5%.
C)   fall to 5.5%; drop to 3%.
D)   rise to 8.5%; remain 3%.E) A) and B)
F) All of the above

Question 12

Why is the expected inflation rate rather than the current inflation rate typically used in analysis of the Fisher effect?

Accepted Answer

A)   The Fisher effect is an estimate, so an estimated inflation rate is more appropriate than an actual inflation rate.
B)   The expected inflation rate is what impacts the current real interest rate because the current inflation rate impacts that past.
C)   The Fisher effect deals with the future and does not explain the present situation.
D)   Interest rates impact borrowing and saving, which are activities that have connections to the future.E) A) and C)
F) B) and C)

Question 13

Historically, the U.S. monetary system was:

Accepted Answer

A)   based on the gold standard until the Civil War in the 1860s, when a transfer to fiat money began.
B)   a fiat system from its founding and still is a fiat money system.
C)   a gold-backed commodity system and still is a commodity system today.
D)   based on the gold standard until 1933, when a move toward fiat money began.E) A) and B)
F) A) and C)

Question 14

Monetary neutrality means that money:

Accepted Answer

A)   has no impact on real variables such as national output.
B)   is not used to gain advantages or support particular participants in wars.
C)   supply cannot be increased or decreased but will remain constant.
D)   the price level is not an indicator of the strength and health of an economy.E) C) and D)
F) None of the above

Question 15

In most countries, the nominal interest rate is _____ than the real interest rate because inflation is:

Accepted Answer

A)   higher; positive.
B)   higher; negative.
C)   lower; positive.
D)   lower; negative.E) A) and B)
F) A) and C)

Question 16

The quantity theory of money seems to be most consistent when growth in the money supply is _____ and the time period is _____.

Accepted Answer

A)   small; long
B)   small; short
C)   large; long
D)   large; shortE) A) and C)
F) B) and C)

Question 17

The Venn diagram shows real variables versus nominal variables, where both nominal and real variables play roles in the business cycle. All the following are examples of real variables, EXCEPT:

Accepted Answer

A)   inflation.
B)   innovation and new technology.
C)   investments in physical capital.
D)   improvements in human capital.E) A) and B)
F) None of the above

Question 18

Evidence from many countries during the last half of the twentieth century shows a _____ relationship between money supply growth and:

Accepted Answer

A)   positive; inflation.
B)   negative; inflation.
C)   positive; GDP growth.
D)   negative; GDP growth.E) None of the above
F) B) and D)

Question 19

How is monetary neutrality assured when currency reform occurs?

Accepted Answer

Currency reform occurs when a country ad...

Question 20

Which of the following is a correct description of the money supply and money demand model?

Accepted Answer

A)   The demand curve has a negative slope, and the supply curve is vertical.
B)   The demand curve has a negative slope, and the supply curve is horizontal.
C)   The demand curve is horizontal, and the supply curve has an upward slope.
D)   The demand curve is vertical, and the supply curve has an upward slope.E) A) and B)
F) A) and C)

Exam 25: Money and the Price Level in the Long Run

Historically, the U.S. monetary system was:

Correct AnswerverifiedShow Answer

The value of money is calculated as:

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The average number of times that a unit of currency is spent on final goods and services in a year is called the:

Correct AnswerverifiedShow Answer

In most countries, the nominal interest rate is _____ than the real interest rate because inflation is:

Correct AnswerverifiedShow Answer

When currency has its value set to the worth of a specific amount of gold, the economy is using a _____ monetary system called the:

Correct AnswerverifiedShow Answer

Monetary neutrality means that money:

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Assume that interest rates have been 7% and the inflation rate has been 3% for the past three years. Changes in the Federal Reserve's policies are causing the expected inflation rate to increase to 4.5%. If the Fisher effect holds, the nominal rate will _____, and the real interest rate will:

Correct AnswerverifiedShow Answer

How is monetary neutrality assured when currency reform occurs?

Correct AnswerverifiedCurrency reform occurs when a country ad...View AnswerShow Answer

Carlos borrowed $100 for a year at 5% interest. At the end of the year, he repaid the loan with a payment of $105. The inflation rate that year was 4%. The real rate of interest on his loan was:

Correct AnswerverifiedShow Answer

According to the quantity theory of money, increases in the money supply lead to _____, which can cause:

Correct AnswerverifiedShow Answer

The equation of exchange indicates that if velocity is steady, then a decreasing money supply will cause:

Correct AnswerverifiedShow Answer

The quantity theory of money seems to be most consistent when growth in the money supply is _____ and the time period is _____.

Correct AnswerverifiedShow Answer

Which of the following is a correct description of the money supply and money demand model?

Correct AnswerverifiedShow Answer

According to the quantity theory of money, in the long run, changes in the money supply affect:

Correct AnswerverifiedShow Answer

The formula to compute the velocity of money is:

Correct AnswerverifiedShow Answer

Why is the expected inflation rate rather than the current inflation rate typically used in analysis of the Fisher effect?

Correct AnswerverifiedShow Answer

Evidence from many countries during the last half of the twentieth century shows a _____ relationship between money supply growth and:

Correct AnswerverifiedShow Answer

The Venn diagram shows real variables versus nominal variables, where both nominal and real variables play roles in the business cycle. All the following are examples of real variables, EXCEPT:

Correct AnswerverifiedShow Answer

What insight about negative interest rates is clear from the Fisher equation?

Correct AnswerverifiedShow Answer

According to the quantity theory of money, central banks _____ the real value of the public's total money balances.

Correct AnswerverifiedShow Answer

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Currency reform occurs when a country ad...
View Answer

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The quantity theory of money seems to be most consistent when growth in the money supply is _ and the time period is _.

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