Chapter 5

Suppose that the money demand function takes the form (MP)d=L(i,Y)=Y5i, where 𝑖 is the nominal interest rate, and 𝑌 is the real output (income). What is the velocity of money in this economy? Y(5i) 5i 0 5i/Y

5i

Suppose a country has a money demand function (MP)d=kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. What is the average inflation rate?

8%

Suppose that the money demand function takes the form (MP)d=L(i,Y)=Y5i, where 𝑖 is the nominal interest rate, and 𝑌 is the real output (income). How will a permanent (once-and-for-all) increase in the level of interest rates affect the level and growth rate of velocity? A one-time increase in the nominal interest rate will cause a one-time increase in velocity, and the growth rate of velocity will now be positive. A one-time increase in the nominal interest rate will cause a one-time increase in velocity, but it will not affect the growth rate of velocity. A one-time increase in the nominal interest rate will cause a one-time increase in the growth rate of velocity, but it will not affect the level of velocity. A one-time increase in the nominal interest rate will cause a one-time increase in velocity, and the growth rate of velocity will now be negative.

A one-time increase in the nominal interest rate will cause a one-time increase in velocity, but it will not affect the growth rate of velocity.

Some economic historians have noted that during the period of the gold standard, gold discoveries were most likely to occur after a long deflation. What might explain this observation? The government knew where all the gold deposits were. When deflation went on for too long, the government would tip off prospectors to help alleviate the deflation. After a long period of deflation, an ounce of gold was worth a lot less in terms of goods and services. This created a greater incentive to look for new gold deposits. After a long period of deflation, the government would charter prospectors to find gold deposits to help alleviate the deflation. After a long period of deflation, an ounce of gold would buy more goods and services. This created a greater incentive to look for new gold deposits.

After a long period of deflation, an ounce of gold would buy more goods and services. This created a greater incentive to look for new gold deposits.

Which of these statements about nominal interest rate is TRUE? Nominal interest rate declines when the money growth rate rises. Nominal interest rate rises less than 1 percent for each 1 percentage point rise in the money growth rate. Nominal interest rate remains unchanged when the money growth rate rises. Nominal interest rate increases when the money growth rate rises.

Nominal interest rate increases when the money growth rate rises.

If consumption depends positively on the level of real balances, and real balances depend negatively on the nominal interest rate, then: a rise in money growth leads to a rise in both consumption and investment. a rise in money growth leads to a fall in consumption and a rise in investment. the classical dichotomy still holds. a rise in money growth leads to a rise in consumption and a fall in investment.

a rise in money growth leads to a fall in consumption and a rise in investment.

The economy of Macro Island is described by the quantity equation with constant velocity. All residents of Macro Island understand the quantity theory and use it to form their expectations of inflation. Real income grows at a steady 2 percent per year, and the nominal interest rate is 5 percent. In one year, people had expected the money supply to grow by 4 percent, but in fact it grew by only 3 percent. a. What was the inflation rate? [ Select ] ["3%", "1%", "2%", "4%"] b. What was the expected inflation rate? 2% c. What was the ex ante real interest rate? [ Select ] ["2%", "3%", "4%", "1%"] d. What was the ex post real interest rate? [ Select ] ["1%", "2%", "3%", "4%"] e. Did the deviation of inflation from what was expected hurt creditors or debtors? [ Select ] ["Creditors", "Debtors"]

a: 1% b: 2% c: 3% d: 4% e: debtors

The government of Lilliput relies on substantial seigniorage to finance its spending, while the government of Blefuscu does not rely on seigniorage at all. Otherwise, the two nations are similar. a. Lilliput has a [ Select ] ["higher", "lower"] rate of money growth. b. According to the ___________, the rate of inflation will be ________ in Lilliput. c. According to the __________, the [ Select ] ["nominal", "real"] interest rate will be [ Select ] ["higher", "lower"] in Lilliput. d. Residents of Lilliput hold [ Select ] ["lower", "higher"] real money balances and experience [ Select ] ["higher", "lower"] shoeleather costs. e. Firms in Lilliput face [ Select ] ["lower", "higher"] menu costs. f. If both nations tax nominal capital gains, the after-tax real return on savings is [ Select ] ["higher", "lower"] in Lilliput. g. Inflation uncertainty is probably [ Select ] ["higher", "lower"] in Lilliput.

a: higher b:quantity theory: higher c: fisher effect; nominal; higher d: lower; higher e: higher f: lower g: higher

If nominal wages cannot be cut, then the only way to reduce real wages is by: legislation. adjustments via inflation. productivity increases. unions.

adjustments via inflation

If inflation was 6 percent last year and a worker received a 4 percent nominal wage increase last year, then the worker's real wage: increased 4 percent. decreased 2 percent. decreased 6 percent. increased 2 percent.

decreased 2 percent

A small country might want to use the money of a large country rather than create its own money if the small country: needs the revenue for seigniorage. wants to control its real interest rate. is likely to be unstable, whereas the large country is likely to be stable. is likely to be stable, whereas the large country is likely to be unstable.

is likely to be unstable, whereas the large country is likely to be stable.

An example of a nominal variable is the: relative price of bread. money supply. real wage. quantity of goods produced in a year.

money supply

The concept of monetary neutrality in the classical model means that an increase in the money supply growth rate will increase: real gross domestic product. real interest rates. nominal interest rates. both saving and investment by the same amount.

nominal interest rates

Which of these is an example of a relative price? real interest rate capital stock dollar wage per hour price level

real interest rate

The theoretical separation of real and monetary variables is called: the Fisher effect. the classical dichotomy. monetary neutrality. the quantity theory of money.

the classical dichotomy

A newspaper article once reported that the U.S. economy was experiencing a low rate of inflation. It said that "low inflation has a downside: 45 million recipients of Social Security and other benefits will see their checks go up by just 2.8% next year." Policymakers link increases in Social Security and other benefits to inflation because the Bureau of Labor Statistics lobbied to link benefits to inflation in the 1980s. they wish to ensure that the real value of these benefits is constant over time. they are hoping to get more people in the U.S. interested in topics like inflation. they cannot link benefits to the stock market because of the Great Recession.

they wish to ensure that the real value of these benefits is constant over time.