ECO Exam 1 (Chapter 5)

Consider the money demand function that takes the form (M/P)d = kY, where M is 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?

7 percent

Equilibrium in the market for goods and services determines the ______ interest rate and the expected rate of inflation determines the ______ interest rate.

ex ante real; ex ante nominal

The ex ante real interest rate is based on _____ inflation, while the ex post real interest rate is based on _____ inflation.

expected; actual

The quantity theory of money assumes that:

velocity is constant.

The costs of unexpected inflation, but not of expected inflation, are:

the arbitrary redistribution of wealth between debtors and creditors

All of the following are costs of fully expected inflation except that expected inflation

causes lower real wages.

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:

increasing

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:

inflation of 1 percent and the nominal interest rate of 1 percent.

If nominal wages cannot be cut, then the only way to cut real wages is by:

inflation.

The income velocity of money:

is defined in the identity MV = PY.

The real return on holding money is:

minus the inflation rate.

The characteristic of the classical model that the money supply does not affect real variables is called

monetary neutrality

The opportunity cost of holding money is the:

nominal interest rate.

The rate of inflation is the:

percentage change in the level of prices

In practice, in order to stop a hyperinflation, in addition to stopping monetary growth, the government must

raise taxes and reduce government spending.

The inconvenience associated with reducing money holdings to avoid the inflation tax is called:

shoeleather costs.

If the nominal interest increases, then:

the demand for money decreases.

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.

the productive capability of the economy; the money supply

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is

-4 percent.

Consider the money demand function that takes the form (M/P)d = Y/4i, where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy?

4i

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.

3

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:

3 percent.

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 _____.

5; 5

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ______ percent.

7

The ex post real interest rate will be greater than the ex ante real interest rate when the:

actual rate of inflation is less than the expected rate of inflation

"Inflation tax" means that

as the price level rises, the real value of money held by the public decreases

If the demand for money depends on the nominal interest rate, then via the quantity theory and the Fisher equation, the price level depends on:

both the current and expected future money supply.

If the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and ______ the price level.

decrease; increase

If inflation is 6 percent and a worker receives a 4 percent wage increase, then the worker's real wage

decreased 2 percent.

The income velocity of money increases and the money demand parameter k ______ when people want to hold ______ money.

decreases; less

According to the classical theory of money, inflation does not make workers poorer because wages increase:

in proportion to the increase in the overall price level.

The right of seigniorage is the right to:

print money