Macro Midterm 3

According to the classical dichotomy, when the money supply doubles which of the following double? a. the price level and nominal GDP b. the price level and real GDP c. only real GDP d. only the price level

A

According to the quantity equation if P = 4 and Y= 800, which of the following pairs could M and V be? a. 800, 4 b. 600, 3 c. 400, 2 d. 200, 1

A

Given a nominal interest rate of 6 percent, in which case would you earn the lowest after-tax real rate of interest? a. Inflation is 4 percent; the tax rate is 25 percent. b. Inflation is 3 percent; the tax rate is 20 percent. c. Inflation is 2 percent; the tax rate is 15 percent. d. The after-tax real interest rate is the same for all of the above.

A

Suppose that velocity and output are constant, and that the quantity theory and Fisher effect are both correct. If nominal interest rates are 6 percent and inflation is 2.5 percent, it follows that the a. money supply growth rate is 2.5 percent. b. real interest rate is 8.5 percent. c. real interest rate is 2.5 percent. d. money supply growth rate is 6 percent.

A

For a given real interest rate, an increase in inflation makes the after-tax real interest rate a. decrease, which encourages savings. b. decrease, which discourages savings. c. increase, which encourages savings. d. increase, which discourages savings.

B

When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is a a. shortage, so the price level will rise. b. shortage, so the price level will fall. c. surplus, so the price level will rise. d. surplus, so the price level will fall.

B

Given a nominal interest rate of 8 percent, in which case below would you earn the highest after-tax real interest rate? a. Inflation is 5 percent; the tax rate is 20 percent. b. Inflation is 4 percent; the tax rate is 30 percent. c. Inflation is 3 percent; the tax rate is 40 percent. d. The after-tax real interest rate is the same for all of the above.

C

In the long run when money is neutral, which of the following increases when the money supply growth rate increases? a. real output growth b. real interest rates c. nominal interest rates d. the money supply divided by the price level

C

People can avoid the inflation tax by a. reducing savings. b. not filing a tax return. c. reducing cash holdings. d. None of the above are correct

C

The money supply in Freedonia is $100 billion. Nominal GDP is $800 billion and real GDP is $200 billion. What are the price level and velocity in Freedonia? a. Velocity is 2 and the price level is 1. b. Velocity is 4 and the price level is 8. c. Velocity is 8 and the price level is 4. d. There is insufficient information to answer the question.

C

The money supply in Freedonia is $200 billion. Nominal GDP is $800 billion and real GDP is $400 billion. The central bank of Freedonia has instituted a policy of zero inflation. Assuming that velocity is stable, if real GDP grows by 10 percent this year, how will the central bank of Freedonia change the money supply this year? a. It will not change the money supply at all. b. It will reduce the money supply by 10 percent. c. It will increase the money supply by 10 percent. d. It will increase the money supply by 2.5 percent.

C

The shoeleather cost of inflation refers to a. the fall in real income associated with inflation. b. the time spent searching for low prices when inflation rises. c. the waste of resources used to maintain lower money holdings. d. the increased cost to the government of printing more money.

C

The supply of money increases when a. the value of money increases. b. the interest rate increases. c. the Fed makes open-market purchases. d. None of the above is correct.

C

You buy stock and its price rises just as much as the price level, so before taxes you made a. a nominal and real gain, and you pay taxes on the nominal gain. b. a nominal and real gain, but you pay taxes only on the real gain. c. a nominal gain, but no real gain, yet you pay taxes on the nominal gain. d. a nominal gain, but no real gain, so you pay no taxes on the nominal gain.

C

A decrease in the money supply creates an excess a. supply of money that is eliminated by rising prices. b. supply of money that is eliminated by falling prices. c. demand for money that is eliminated by rising prices. d. demand for money that is eliminated by falling prices.

D

Assuming that V is constant, the quantity equation implies that an increase in M could result in a. an increase in the price level. b. an increase in real GDP. c. an increase in nominal GDP. d. any of the above.

D

Menu costs refers to a. resources used by people to maintain lower money holdings when inflation is high. b. the distortion in resource allocation created by uncertainty concerning relative price changes created by inflation. c. the distortion in incentives created by inflation when taxes do not adjust for inflation. d. the cost of more frequent price changes induced by higher inflation.

D

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

D

When the value of money rises, the number of dollars needed to buy a representative basket of goods a. increases, and so the price level rises. b. increases, and so the price level falls. c. decreases, and so the price level rises. d. decreases, and so the price level falls.

D

Which of the following is not implied by the quantity equation? a. If velocity is stable, an increase in the money supply creates a proportional increase in nominal output. b. If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in the price level. c. With constant money supply and output, an increase in velocity creates an increase in the price level. d. With constant money supply and velocity, an increase in output creates a proportional increase in the price level.

D