HW3

The money supply will decrease if the:

currency-deposit ratio increases

The interest rate charged on loans by the Federal Reserve to banks is called the:

discount rate

Quantitative easing is most closely akin to:

open-market operations

The quantity equation, viewed as an identity, is a definition of the:

transactions velocity of money

Percentage change in P is approximately equal to the percentage change in:

M minus the percentage change in Y plus the percentage change in velocity

The real interest rate is equal to the:

NOMINAL INTEREST rate MINUS the INFLATION RATE

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 if the Quantity Theory of Money holds?

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

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the monetary base equals:

$150 Billion

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals:

2.5

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:

20,000

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

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?

6

The monetary base consists of:

Currency Held by the public, plus reserves held by banks

Hyperinflation usually starts when:

governments are forced to print money to finance their spending.

Using decade-long data across countries from 2000-2010, countries with high money growth tend to have _____ inflation.

high

The rate of inflation is the:

percentage change in the level of prices

The currency-deposit ratio is determined by:

preferences of households about the form of money they wish to hold

In the quantity equation, V represents the:

rate at which each unit of money circulates in the economy

Variables expressed in terms of PHYSICAL units or quantities are called ______ variables.

real

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the:

real interest rate is constant

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

real value of money holdings falls

Between August 1929 and March 1933, the money supply fell 28 percent. At that time the monetary base ______ and the currency-deposit and reserve-deposit ratios both ______.

rose; rose

The revenue raised by printing money is called:

seigniorage

The major source of government revenue in most countries that are experiencing hyperinflation is:

seigniorage (Q63)

According to the QTM, ultimate control over the rate of inflation in the US is exercised by

the Fed

The size of monetary base is determined by

the Federal Reserve

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

the arbitrary redistribution of wealth between debtors and creditors.

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

the inflation rate

According to the classical dichotomy, when the money supply decreases, _____ will decrease.

the price level

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

the price level

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

the velocity of money

The quantity theory of money assumes that:

velocity is constant

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

shoeleather costs.

In the quantity equation, the total output of the economy Y is used instead of transactions T because:

transactions are harder to measure than income

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

double

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

expected; actual

The inflation tax is paid:

by all holders of money

In the case of an unanticipated inflation

creditors with an unindexed contract are HURT because they get LESS than they expected in real terms.

Inflation ______ the variability of relative prices and ______ allocative efficiency.

increases; decreases

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

When the Fed makes an open-market sale, it:

decreases the monetary base (B).

One possible benefit from inflation is:

if nominal wages are fixed, inflation decreases real wages.

The general demand function for real balances depends on the level of income and the:

nominal interest rate

The demand for real money balances is generally assumed to:

increase as real income increases.

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must:

increase by 1 percent.

If many banks fail, this is likely to:

increase the ratio of currency to deposits.

A general increase in the price level is called

inflation

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

lenders to borrowers

An increase in the expected rate of inflation will:

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

The quantity equation for money, by itself:

may be thought of as a definition for velocity

The costs of reprinting catalogs and price lists because of inflation are called:

menu costs.

The ex ante real interest rate is equal to the nominal interest rate:

minus the EXPECTED inflation rate

The real return on holding money is:

minus the INFLATION RATE

Variables expressed in terms of MONEY are called ______ variables.

nominal

The Fisher effect states that a 1 percent rise in the rate of inflation causes a 1 percent rise in the:

nominal interest rate

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

It has decreased by 10 percentage points

To increase the monetary base, the Fed can:

conduct open-market purchases.

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.

5

Using the quantity equation MV = PY, which of the following might happen if the money supply increases?

Velocity is constant, prices rise, and total is constant

"Inflation tax" means that:

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

One possible benefit of moderate inflation is:

better functioning labor markets.

The reserve-deposit ratio is determined by:

business policies of banks and the law regulating banks

According to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices ______ each year and give workers ______ raises.

less; smaller

Excess reserves are reserves that banks keep:

above the legally required amount

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

actual inflation differs from expected inflation

Real money balances equal the:

amount of money expressed in terms of the quantity of goods and services it can purchase.