Chapter 5 Multiple Choice
22.According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be: a.increasing. b.decreasing. c.7percent. d.constant.
a
23.If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be ______ percent. a.3 b.4 c.9 d.11
a
26. Using decade-long data across countries from 2000-2010, countries with high money growth tend to have _____ inflation. a. high b. low c. constant d. decreasing
a
40.Evidence from the past 40 years in the United States supports the Fishereffect and shows that when the inflation rate is high, the ______ interest rate tends to be ______. a.nominal; high b.nominal; low c.real; high d.real; low
a
42.When a person purchases a 90-day Treasury bill, he or she cannot know the: a.ex post real interest rate. b.ex ante real interest rate. c.nominal interest rate. d.expected rate of inflation.
a
38. According to the quantity theory and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase: a. 2 percent. b. 3 percent. c. 5 percent d. 6 percent.
b
45.According to the Fisher effect, the nominal interest rate moves one-for-one with changes in the: a.inflation rate. b.expected inflation rate. c.ex antereal interest rate. d.ex postreal interest rate.
b
46.A positive relationship between nominal interest rates and inflation in the United States is obvious in: a.both recent data and nineteenth-century data. b.recent data but not nineteenth-century data. c.nineteenth-century data but not recent data. d.neither nineteenth-century data nor recent data.
b
8.Real money balances equal the: a.sum of coin, currency, and balances in checking accounts. b.amount of money expressed in terms of the quantity of goods and services it can purchase. c.number of dollars used as a medium of exchange. d.quantity of money created by the Federal Reserve.
b
9.If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200,000, then real balances in the economy equal: a.10. b.20,000. c.200,000. d.2,000,000.
b
Inflation tax" means that: a.as the price level rises, taxpayers are pushed into higher tax brackets. b.as the price level rises, the real value of money held by the public decreases. c.as taxes increase, the rate of inflation also increases. d.in a hyperinflation, the chief source of tax revenue is often the printing of money.
b
21.According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by: a.theOrganization of Petroleum Exporting Countries (OPEc.. b.the U.S. Treasury. c.the Fed. d.private citizens.
c
24.Percentage change in Pis approximately equal to the percentage change in: a.M. b.M minus percentage change in Y. c.M minus percentage change in Y plus percentage change in velocity. d.M minus percentage change in Y minus percentage change in velocity.
c
3.If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is ______ times per year. a.0.2 b.2 c.5 d.10
c
32.The real interest rate is equal to the: a.amount of interest that a lender actually receives when making a loan. b.nominal interest rate plus the inflation rate. c.nominal interest rate minus the inflation rate. d.nominal interest rate.
c
33.If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is: a.1 percent. b.6 percent. c.-4 percent. d.-5 percent.
c
39. In the classical model, according to the quantity theory and the Fisher equation, an increase in money growth increases: a. output. b. velocity c. the nominal interest rate. d. the real interest rate.
c
41.The ex ante real interest rate is equal to the nominal interest rate: a.minus the inflation rate. b.plus the inflation rate. c.minus the expected inflation rate. d.plus the expected inflation rate.
c
7. The transactions velocity of money indicates the _____ in a given period, while the income velocity of money indicates the _____ in a given period. a. number of transactions; amount of income earned b. quantity of money used for transactions; quantity of money paid as income c. number of times a dollar bill changes hands; number of times a dollar bill enters someone's income d. volume of transactions; flow of income
c
2.The definition of the transactions velocity of money is: a.money multiplied by prices divided by transactions. b.transactions divided by prices multiplied by money. c.money divided by prices multiplied by transactions. d.prices multiplied by transactions divided by money.
d
31.During the American Revolution, the price of gold measured in continental dollars increased to more than ______ times its previous level. a.2 b.10 c.50 d.100
d
36.The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the: a.money supply is constant. b.velocity is constant. c.inflation rate is constant. d.real interest rate is constant.
d
37. According to the quantity theory a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation a 5 percent increase in the rate of inflation increases the nominal interest rate by _____. a. 1; 5 b. 5; 1 c. 1; 1 d. 5; 5
d
4.If the transactions velocity of money remains constant while the quantity of money doubles, the: a.price of the average transaction must double. b.number of transactions must remain constant. c.price of the average transaction multiplied by the number of transactions must remain constant. d.price of the average transaction multiplied by the number of transactions must double.
d
47.The ex postreal interest rate will be greater than the ex antereal interest rate when the: a.rate of inflation is increasing. b.rate of inflation is decreasing. c.actual rate of inflation is greater than the expected rate of inflation. d.actual rate of inflation is less than the expected rate of inflation.
d
5.The quantity equation, viewed as an identity, is a definition of the: a.quantity of money. b.quantity of transactions. c.price level. d.transactions velocity of money.
d
50.The real return on holding money is: a.the real interest rate. b.minus the real interest rate. c.the inflation rate. d.minus the inflation rate.
d
14.Consider the money demand function that takes the form (M/P)d=kY, where Mis the quantity of money, P is the price level, k is a constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average inflation rate in this economy?a.3percent b.7percent c.10percent d.13percent
b
17.The quantity theory of money assumes that: a.income is constant. b.velocity is constant. c.prices are constant. d.the money supply is constant.
b
25.Using average rates of money growth and inflation in the United States over many decades, Friedman and Schwartz found that decades of high money growth tended to have ______ rates of inflation and decades of low money growth tended to have ______ rates of inflation. a.high; high b.high; low c.low; low d.low; high
b
43.Equilibrium in the market for goods and services determines the ______ interest rate and the expected rate of inflation determines the ______ interest rate. a.ex antereal; ex antenominal b.ex postreal; ex postnominal c.ex antenominal; ex postreal d.ex postnominal; ex postreal
a
44. The ex ante real interest rate is based on _____ inflation, while the ex post real interest rate is based on _____ inflation. a. expected; actual b. core; actual c. actual; expected d. expected; core
a
48.In recent U.S. experience, inflation has: a.been persistent from year to year, whereas in the nineteenth century inflation had little persistence. b.been persistent from year to year, and this was also true in the nineteenth century. c.not been persistent from year to year, although it was persistent in the nineteenth century. d.not been persistent from year to year, and the same was true in the nineteenth century.
a
49.The opportunity cost of holding money is the: a.nominal interest rate .b.real interest rate. c.federal funds rate. d.prevailing Treasury bill rate.
a
6.The income velocity of money: a.is defined in the identity MV= PY. b.is defined in the identity MV= PT. c.is the same thing as the transactions velocity of money. d.is the same as the number of times a dollar bill changes hands.
a
11.If the quantity of real money balances is kY, where k is a constant, then velocity is: a.k. b.1/k. c.kP. d.P/k.
b
29. The inflation tax is paid: a. only by the central bank. b. by all holders of money. c. only by government bond holders. d. equally by every household.
b
18.If income velocity is assumed to be constant, but no other assumptions are made, the level of ______ is determined by M. a.prices b.income c.transactions d.nominal GDP
d
27.The right of seigniorage is the right to: a.levy taxes on the public. b.borrow money from the public. c.draft citizens into the armed forces. d.print money.
d
16.The quantity equation for money, by itself: a.may be thought of as a definition for velocity. b.implies that the velocity of money is constant. c.implies that the price level is proportional to the money supply. d.implies that real gross domestic product (GDP) is proportional to the money supply.
a
19.If velocity is constant and, in addition, the factors of production and the production function determine real GDP, then: a.the price level is proportional to the money supply. b.real GDP is proportional to the money supply. c.the price level is fixed. d.nominal GDP is fixed.
a
12.If the demand for real money balances is proportional to real income, velocity will: a.increase as income increases. b.increase as income decreases. c.vary directly with the interest rate. d.remain constant.
d
13.When the demand for money parameter, k, is large, the velocity of money is ______ and money is changing hands ______ a.large; frequently b.large; infrequently c.small; frequently d.small; infrequently
d
15.The income velocity of money increases and the money demand parameter k______ when people want to hold ______ money. a.increases; more b.increases; less c.decreases; more d.decreases; less
d
20.In the long run,according to the quantity theory of money and the classical macroeconomic theory, if velocity is constant, then ______ determines real GDP and ______ determines nominal GDP. a.the productive capability of the economy; the money supply b.the money supply; the productive capability of the economy c.velocity; the money supply d.the money supply; velocity
a
1.The rate of inflation is the: a.median level of prices. b.average level of prices. c.percentage change in the level of prices. d.measure of the overall level of prices.
c
10.The demand for real money balances is generally assumed to: a.be exogenous. b.be constant. c.increase as real income increases. d.decrease as real income increases.
c
30.The percentage of government revenue raised by printing money has usually accounted for: a.more than 10 percent of government revenue in the United States .b.less than 3 percent of government revenue in the United States. c.less than 3 percent of government revenue in Italy. d.less than 3 percent of government revenue in Greece.
b
34.If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must: a.increase by 2 percent. b.increase by 1 percent .c.remain constant. d.decrease by 1 percent.
b
35.If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in: a.inflation of 1 percent and the nominal interest rate of less than 1 percent. b.inflation of 1 percent and the nominal interest rate of 1 percent. c.inflation of 1 percent and the nominal interest rate of more than 1 percent. d.both inflation and the nominal interest rate of less than 1 percent.
b
