Macroeconomics CHAPTER 4

The cost of holding money is determined by the

. nominal interest rate.

Hyperinflation usually starts when

governments are forced to print money to finance their spending.

One purpose of money is to provide the terms in which prices are quoted and debts are recorded. This function of money is called

unit of account.

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

. lenders to borrowers.

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

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

double.

The expected rate of inflation does not influence the

ex post real interest rate.

One possible benefit from inflation is:

if nominal wages are fixed, inflation decreases real wages.

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

inflation.

M2 does not include

long-term government bonds.

An increase in the expected rate of inflation will

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

One purpose of money is to be the item we use to buy and sell things. This function of money is called

medium of exchange.

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 equation states that a 1 percent rise in the rate of inflation causes a 1 percent rise in the

nominal interest rate.

Government revenue raised through the printing of money is called

seignorage.

One purpose of money is to transfer purchasing power from the present into the future. This function of money is called

store of value.

The expected future money supply does not have an effect on

the future price level.

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?

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

Which of the following is not a social cost of inflation?

The money that people hold loses value due to the inflation tax.

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

The price level

Which of the following statements is false?

If inflation is higher than the nominal interest rate, then the real interest rate must be negative.

Consider the following table: Year Inflation Rate Nominal Interest Rate 1 5% 10% 2 10% 5% By how much has the real interest rate changed between year 1 and year 2?

It has decreased 10 percent.

Which of the following is not a function of money?

It is a means of production.

Of all of the following that could be used as money, which would be most likely to be characterized as fiat money?

Salt

Which of the following is a type of open-market operation?

The Fed sells Treasury bills to the public.

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

The velocity of money

Incorrect. The correct answer is B. The demand for real balances is a negative function of the nominal interest rate. If expected inflation increases, the nominal interest rate will increase and the demand for real balances will fall. See Section 4-5.

V rose, M and Y were constant

According to the quantity equation, which of the following might happen if the money supply increases?

Velocity is constant, prices are constant, and total output increases.

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 ex ante real interest rate differs from the ex post real interest rate only when

actual inflation differs from expected inflation.

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

In the quantity equation, V represents the

rate at which money circulates in the economy.

When the government raises revenue by printing money, it imposes an "inflation tax" because the

real value of money holdings falls.