ECON 1040 CH 12

1. Suppose an economy produces only ice cream cones. If the price level rises, the value of currency a. rises, because one unit of currency buys more ice cream cones. b. rises, because one unit of currency buys fewer ice cream cones. c. falls, because one unit of currency buys more ice cream cones. d. falls, because one unit of currency buys fewer ice cream cones.

2. If P denotes the price of goods and services measured in terms of money, then a. 1/P represents the value of money measured in terms of goods and services. b. P can be interpreted as the inflation rate. c. the supply of money influences the value of P, but the demand for money does not. d. All of the above are correct.

3. When the money market is drawn with the value of money on the vertical axis, as the price level decreases, 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.

4. Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, then there is an excess a. demand for money that is represented by the distance between points A and C. b. demand for money that is represented by the distance between points A and B. c. supply of money that is represented by the distance between points A and C. d. supply of money that is represented by the distance between points A and B.

5. Refer to Figure 30-1. When the money supply curve shifts from MS1 to MS2, a. the equilibrium value of money decreases. b. the equilibrium price level decreases. c. the supply of money has decreased. d. the demand for goods and services will decrease.

6. Refer to Figure 30-3. If the relevant money-supply curve is the one labeled MS1, then the equilibrium price level is a. 0.5 and the equilibrium value of money is 2. b. 2 and the equilibrium value of money is 0.5. c. 0.5 and the equilibrium value of money cannot be determined from the graph. d. 2 and the equilibrium value of money cannot be determined from the graph.

7. Refer to Figure 30-3. If the relevant money-supply curve is the one labeled MS2, then a. when the money market is in equilibrium, one dollar purchases about one-third of a basket of goods and services. b. when the money market is in equilibrium, one unit of goods and services sells for 33 cents. c. there is an excess demand for money if the value of money in terms of goods and services is 0.5. d. All of the above are correct.

8. Refer to Figure 30-2. If the relevant money-demand curve is the one labeled MD1, then the equilibrium value of money is a. 0.5 and the equilibrium price level is 2. b. 2 and the equilibrium price level is 0.5. c. 0.5 and the equilibrium price level cannot be determined from the graph. d. 2 and the equilibrium price level cannot be determined from the graph.

9. The payments you make on your automobile loan are given in terms of dollars. As prices rise you notice you give up fewer goods to make your payments. a. The dollar amount you pay is a nominal value. The number of goods you give up is a real value. b. The dollar amount you pay is a real value. The number of goods you give up is a nominal value. c. Both the dollar amount you pay and the goods you give up are nominal values. d. Both the dollar amount you pay and the goods you give up are real values.

10. An assistant manager at a restaurant gets a $100 a month raise. He figures that with his new monthly salary he cannot buy as many goods and services as he could buy last year. a. His real and nominal salary have risen. b. His real and nominal salary have fallen. c. His real salary has risen and his nominal salary has fallen. d. His real salary has fallen and his nominal salary has risen.

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. According to the classical dichotomy, when the money supply doubles, which of the following also doubles? 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

13. Most economists believe the principle of monetary neutrality is a. relevant to both the short and long run. b. irrelevant to both the short and long run. c. mostly relevant to the short run. d. mostly relevant to the long run.

14. Which of the following is correct? a. The classical dichotomy separates real and nominal variables. b. Monetary neutrality is the proposition that changes in the money supply do not change real variables. c. When studying long-run changes in the economy, the neutrality of money offers a good description of how the world works. d. All of the above are correct.

15. If M = 6,000, P = 3, and Y = 3,000, what is velocity? a. 6 b. 1.5 c. 0.67 d. 0.167

16. If real output in an economy is 1,000 goods per year, the money supply is $300, and each dollar is spent an average of 4 times per year, then according to the quantity equation, the average price level is a. 3.33. b. 0.83. c. 1.20. d. 13.33.

17. According to the assumptions of the quantity theory of money, if the money supply increases by 5 percent, then a. nominal and real GDP would rise by 5 percent. b. nominal GDP would rise by 5 percent; real GDP would be unchanged. c. nominal GDP would be unchanged; real GDP would rise by 5 percent. d. neither nominal GDP nor real GDP would change.

18. The money supply is 4,000, nominal GDP is 8,000, and real GDP is 2,000. Which of the following is 2? a. the price level and velocity. b. the price level but not velocity. c. velocity but not the price level. d. neither the price level nor velocity.

19. Other things the same, an increase in velocity means that a. transactions per dollar increase so the price level rises. b. transactions per dollar increase so the price level falls. c. transactions per dollar decrease so the price level rises. d. transactions per dollar decrease so the price level falls.

20. Suppose the money supply tripled, but at the same time velocity doubled and real GDP was unchanged. According to the quantity equation the price level a. is 1.5 times its old value. b. is 3 times its old value. c. is 6 times its old value. d. is the same as its old value.

21. The source of hyperinflations is primarily a. lower output growth. b. continuing declines in velocity. c. increases in money-supply growth. d. continuing increases in money demand.

22. The inflation tax refers to a. the revenue a government creates by printing money. b. higher inflation which requires more frequent price changes. c. the idea that, other things the same, an increase in the tax rate raises the inflation rate. d. taxes being indexed for inflation.

23. The inflation tax falls mostly heavily on a. those who hold a lot of currency and accounts for a large share of U.S. government revenue. b. those who hold a lot of currency but accounts for a small share of U.S. government revenue. c. those who hold little currency and accounts for a large share of U.S. government revenue. d. those who hold little currency but accounts for a small share of U.S. government revenue.

24. The claim that increases in the growth rate of the money supply increase nominal interest rates but not real interest rates is known as the a. Friedman Effect. b. Hume Effect. c. Fisher Effect. d. the inflation tax

25. Walter puts money in a savings account at his bank earning 3.5 percent. One year later he takes his money out and notes that while his money was earning interest, prices rose 1.5 percent. Walter earned a nominal interest rate of a. 3.5 percent and a real interest rate of 5 percent. b. 3.5 percent and a real interest rate of 2 percent. c. 5 percent and a real interest rate of 3.5 percent d. 5 percent and a real interest rate of 2 percent

26. If a country experienced deflation, then a. the nominal interest rate would be greater than the real interest rate. b. the real interest rate would be greater than the nominal interest rate. c. the real interest rate would equal the nominal interest rate. d. nominal GDP would be greater than the money supply.

27. The costs of changing price tags and price listings are known as a. inflation-induced tax distortions. b. relative-price variability costs. c. shoeleather costs. d. menu costs.

28. When inflation falls, people a. make less frequent trips to the bank and firms make less frequent price changes. b. make less frequent trips to the bank while firms make more frequent price changes. c. make more frequent trips to the bank while firms make less frequent price changes. d. make more frequent trips to the bank and firms make more frequent price changes.

29. Higher inflation makes relative prices a. more variable, making it more likely that resources will be allocated to their best use. b. more variable, making it less likely that resources will be allocated to their best use. c. less variable, making it more likely that resources will be allocated to their best use. d. less variable, making it less likely that resources will be allocated to their best use.

30. The nominal interest rate is 4%, the inflation rate is 1% and the tax rate is 20%. Given U.S. tax laws, how is after- tax real return computed? a. .03(1-.20) b. .04(1 -.20) c. .04(1 - .20) - .01 d. None of the above is correct.

31. You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest? a. 3.6 percent. b. 2.4 percent. c. 2.0 percent. d. 4.4 percent.

32. Serena purchased 10 shares of GLC, Inc. stock for $200 per share; one year later she sold the 10 shares for $220 a share. Over the year, the price level increased from 135.0 to 143.1. The tax rate on capital gains is 50 percent. If the capital gains tax is on nominal gains, how much tax does Serena pay on her gain? a. $90 b. b. $95 c. c. $100 d. None of the above is correct.

33. Which of the following costs of inflation can be significant even if actual inflation and expected inflation are the same? a. menu costs b. inflation tax c. shoeleather costs d. All of the above are correct

34. Open-market purchases by the Fed make the money supply a. increase, which makes the value of money increase. b. increase, which makes the value of money decrease. c. decrease, which makes the value of money decrease. d. decrease, which makes the value of money increase.

35. Economic variables whose values are measured in monetary units are called a. dichotomous variables. b. nominal variables. c. classical variables. d. real variables.

36. When shopping you notice that a pair of jeans costs $20 and that a tee-shirt costs $10. You compute the price of jeans relative to tee-shirts. a. The dollar price of jeans and the relative price of jeans are both nominal variables. b. The dollar price of jeans and the relative price of jeans are both real variables. c. The dollar price of jeans is a nominal variable; the relative price of jeans is a real variable. d. The dollar price of jeans is a real variable; the relative price of jeans is a nominal variable.

37. Marta lends money at a fixed interest rate and then inflation turns out to be higher than she had expected it to be. The real interest rate she earns is a. higher than she had expected, and the real value of the loan is higher than she had expected. b. higher than she had expected, and the real value of the loan is lower than she had expected. c. lower than she had expected, and the real value of the loan is higher than she had expected. d. lower then she had expected, and the real value of the loan is lower than she had expected.