Chapter 17- Money Growth and Inflation

Figure 30-2. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. 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.

A

If M = 4,000, P = 1.5, and Y= 6,000, what is velocity? a. 2.25 b. 3.00 c. 6.50 d. None of the above is correct.

A

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.

A

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

B

On a given morning, Franco sold 40 pairs of shoes for a total of $80 at his shoe store. a. The $80 is a real variable. The quantity of shoes is a nominal variable. b. The $80 is a nominal variable. The quantity of shoes is a real variable. c. Both the $80 and the quantity of shoes are nominal variables. d. Both the $80 and the quantity of shoes are real variables.

B

The nominal interest rate is 6 percent and the real interest rate is 2 percent. What is the inflation rate? a. 3 percent. b. 4 percent. c. 8 percent. d. 12 percent.

B

There is evidence that the rate at which money changed hands rose during the German hyperinflation. This means that a. velocity rose. If monetary neutrality holds the rise in velocity increased the ratio M/P. b. velocity rose. If monetary neutrality holds the rise in velocity decreased the ratio M/P. c. velocity fell. If monetary neutrality holds the fall in velocity increased the ratio M/P. d. velocity fell. If monetary neutrality holds the fall in velocity decreased the ratio M/P.

B

When the money market is drawn with the value of money on the vertical axis, if the money supply rises a. the price level and the value of money rise. b. the price level rises and the value of money falls. c. the price level falls and the value of money rises. d. the price level and the value of money fall.

B

You put money into an account and earn a real interest rate of 4 percent. Inflation is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest? a. 1.2 percent b. 2.8 percent c. 4.8 percent d. None of the above is correct.

B

Banks advertise a. the real interest rate, which is how fast the dollar value of savings grows. b. the real interest rate, which is how fast the purchasing power of savings grows. c. the nominal interest rate, which is how fast the dollar value of savings grows. d. the nominal interest rate, which is how fast the purchasing power of savings grows.

C

Darla puts her money into a bank account that earns interest. One year later she sees that the account has 6 percent more dollars and that her money will buy 7.5 percent more goods. a. The nominal interest rate was 13.5 percent and the inflation rate was 7.5 percent. b. The nominal interest rate was 13.5 percent and the inflation rate was 1.5 percent. c. The nominal interest rate was 6 percent and the inflation rate was -1.5 percent. d. The nominal interest rate was 6 percent and the inflation rate was 7.5 percent.

C

Money demand refers to a. the total quantity of financial assets that people want to hold. b. how much income people want to earn per year. c. how much wealth people want to hold in liquid form. d. how much currency the Federal Reserve decides to print.

C

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.

C

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.

C

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.

D

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

D

If when the money supply changes, real output and velocity do not change, then a 2 percent increase in the money supply a. decreases the price level by 2 percent. b. decreases the price level by less than 2 percent. c. increases the price level by less than 2 percent. d. increases the price level by 2 percent.

D

The nominal interest rate is 3 percent and the inflation rate is 2 percent. What is the real interest rate? a. 6 percent b. 5 percent c. 1.5 percent d. 1 percent

D

When we assume that the supply of money is a variable that the central bank controls, we a. must then assume as well that the demand for money is not influenced by the value of money. b. must then assume as well that the price level is unrelated to the value of money. c. are ignoring the fact that, in the real world, households are also suppliers of money. d. are ignoring the complications introduced by the role of the banking system.

D