ECON-302 Chapter 5 Learning Exercise

Consider an economy where the only goods traded are coconuts and pineapples. Last year, 100 coconuts were sold at $1 each, and 200 pineapples were sold at $2.50 each. If the money supply was $100, what was velocity?

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

the inflation rate.

According to the classical dichotomy, which of these magnitudes is affected by monetary policy?

the price level

Which component of the quantity equation is assumed constant by the quantity theory of money?

the velocity of money

In the most-common version of the quantity equation, the total output of the economy Y is used instead of transactions T because:

transactions are harder to measure than income.

In the version of the quantity equation where MV = PT, V is the:

transactions velocity of money.

If an individual is to hold lower money balances on average, she must make more frequent trips to the bank to withdraw money. This inconvenience of reducing money holding is called:

a shoeleather cost.

The quantity theory of money states that if the money supply doubles and output is constant, prices will:

double.

Choose the pair of words that best completes this sentence: The nominal interest rate is the sum of the ex ante real interest rate and the _________ inflation rate, and real money balances are a function of the ___________ interest rate.

expected; nominal

Hyperinflation usually starts when:

governments are forced to print money to finance their spending.

In the version of the quantity equation where MV = PY, V is the:

income velocity of money.

A gradual increase over time in the general price level is called:

inflation.

One effect of an unexpected rise in inflation is that wealth is redistributed from:

lenders to borrowers.

An increase in the expected rate of inflation will:

lower demand for real balances because the nominal interest rate will rise.

According to the quantity equation, if M increases by 3 percent and V increases by 2 percent, then:

nominal income increases by approximately 5 percent.

The Fisher effect states that a 1 percent rise in the expected rate of inflation causes a 1 percent rise in the:

nominal interest rate.

The opportunity cost of holding money is determined by the:

nominal interest rate.

Consider the following table. By how much has the real interest rate changed between year 1 and year 2?

It has decreased by 10 percentage points.

Consider an economy where the money supply is growing at 7 percent per year and velocity is constant. Which of the following statements about real GDP growth and the inflation rate could be TRUE if the Quantity Theory of Money holds?

Real GDP is growing at 2 percent and inflation is 5 percent.

Using the quantity equation MV = PY, which of the following is possible if the money supply increases?

Velocity is constant, prices rise, and total output is constant.