Practice Quizzes

A bank has $300 in cash in its vault, $4,000 in loans to customers, and $800 in deposits at the Federal Reserve. The bank's reserves are:

$1,100.

Which statement is true regarding money and the money supply?

Money can affect the level of real aggregate output.

The short-run Phillips curve is:

downward sloping because there is a trade-off between inflation and unemployment rates in the short run.

Maria Moneybags keeps $1,000 in her sock drawer for three consecutive years. Over these years, the inflation rate is 25% each year. After three years, what is the cumulative real inflation tax paid.

$610

Fiat money is:

paper money with no intrinsic value.

Refer to Figure: Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6%, no inflation, and no expectation of inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation will:

rise to 2%

A large inflation tax does NOT cause people to:

sell gold.

The notion that the real quantity of money is always at its long-run equilibrium level is associated with the _____ of the price level.

classical model

An increase in the demand for loanable funds would MOST likely be caused by a(n):

increase in expected business opportunities.

If inflation increases from 2 percent to 4 percent, then the demand for money MOST likely will:

increase.

If the Federal Reserve buys Treasury bills, then the money supply will _____ and the interest rate will _____.

increase; decrease

In the long run, an increase in the money supply will cause prices to _____ and money demand to _____, so that interest rates do not change.

increase; increase

Interest rates on short-term assets tend to:

move together

Inflation does NOT reduce purchasing power if:

nominal wages rise at the same rate as prices.

_____ reduces aggregate demand.

Contractionary monetary policy

Maria Moneybags keeps $1,000 in her sock drawer for a year, then continues to keep the $1,000 in her drawer again for a second year. Calculate the real value of this $1,000 at the beginning of the second year. Over the year, the inflation rate is again 10%. What is the real inflation tax for the second year?

$90.91-The real value of $1,000 at the beginning of the second year is $1,000/1.10 = $909.09, as the real purchasing power of money decreases due to inflation. So the real inflation tax paid for the second year is not simply $100. For more help, section Money and Inflation.

Okun's law suggests that a _____% increase in a positive output gap _____ the unemployment rate by _____%.

1; decreases; 0.5

If you are paid $10,500 in one year on a $10,000 loan made today, then your annual interest rate is _____%.

5

Refer to Figure: Short-Run Phillips Curve. The natural rate of unemployment is _____%.

5

In the economy of Scottopia, policy makers want to lower the unemployment rate and raise real GDP by using monetary policy. Based on the accompanying diagram, in the long run this policy will result in a higher aggregate price level but no change in real GDP because:

AD will shift right and SRAS will shift left. - If policy makers want to lower the unemployment rate and raise real GDP, they will engage in expansionary monetary policy, which will shift AD rightward. In the short run, real GDP is higher and unemployment is lower. However, the aggregate price level has risen and over time, as workers are able to renegotiate wages, SRAS will shift leftward . In the long run, equilibrium output returns to Y1 and the aggregate price level rises further. The only result is that the increase in the money supply leads to an equal-percentage increase in the aggregate price level but no change in real GDP.

Policies that reduce inflation are popular with voters because they lead to higher output and lower unemployment.

False

An inflation tax is the effect on the public of a reduction in the value of money caused by inflation.

True

In the short run, a lower unemployment rate may be achieved at the cost of a higher inflation rate.

True

Policies that expand output and decrease unemployment are popular with voters but are likely to cause inflation later.

True

The worst inflation in the United States in modern times occurred in the late 1970s, when prices were increasing at an annual rate of 13%.

True

Refer to Table: Combinations of Unemployment and Inflation. Which combination could lie on the same long-run Phillips curve?

W and Y

Expansionary monetary policy

_____ increases aggregate demand.

In the figure, if the economy is originally in equilibrium at Point A at potential output, then an increase in the money supply will shift the:

aggregate demand curve to AD 2.

In order to increase the money supply, the Federal Reserve:

buys Treasury bills.

Long-term interest rates:

largely reflect the average expectation in the market about what's going to happen to short-term interest rates in the future.

The inability to use monetary policy because the nominal rate of interest cannot fall below zero is called:

liquidity trap.

The cost of disinflation is the:

loss of real GDP in the process.