Practice Test 30

Inflation can be measured by the:

Percentage change in the consumer price index

how is the money supply determind?

through the fed and open market operations

in order to maintain stable prices , a central bank must:

tightly control the money supply

when the money market is drawn with the value of money on the vertical axis, an increase in the money supply causes the equilibrium value of money:

to decrease, while the equilibrium quantity of money increases

wealth is redistributed from debtors to creditors when inflation is:

unexpectedly low

with the value of money on the vertical axis, the money supply curve is:

vertical because we assume the central bank controls the money supply

nominal variables:

anything measured in currency

real variables:

anything measured in physical units

monetary neutrality means that a change in the money supply:

does not change real variables. most economists think this is a good description of the economy in the long run but not the short run

To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the:

quantity theory of money

which of the following is an example of menu costs?

-deciding on new prices -printing new price lists -advertising new prices

classical theory of inflation:

-describes how money supply and money demand interact to ultimately determine the value of money -inflation decreases the value of money, because as the prices rise the purchasing power of the dollar decreases

monetary equilibrium:

a situation in which the market price has reached the level at which the quantity of money demanded equals the quantity of money supplied

if inflation is higher than what was expected:

creditors receive a lower real interest rate then they had anticipated

according the quantity theory of money, a 3% increase in the money supply:

causes the price level to rise by 3%

For a given real interest rate, an increase in inflation makes the after-tax real interest rate:

decrease, which discourages savings

if quantity increases then interest rate:

decreases

the sale of government bonds:

decreases money supply

as the price level rises, the value of money:

decreases, so people want to hold more of it

When the price level falls, the number of dollars needed to buy a representative basket of goods:

decreases, so the value of money rises

When the money market is drawn with the value of money on the vertical axis, as the price level decreases the quantity of money:

demanded decreases

money demand refers to:

how much wealth people want to hold in liquid form

if quantity decreases then interest rate:

increases

the purchase of government bonds:

increases money supply

hyperinflation:

out of control inflation, usually considered more than 50% per month

what determines how much wealth we allocate in the form of money vs non-monetary asssets?

price level

in the 1970, in response to recessions caused by an increase in the price of oil, the central banks in many countries increased their money supplies. the central banks might have done this by:

purchasing bonds on the open market, which would have lowered the value of money

wealth:

refers to the store of all value, including both money and nonmonetary assets like stocks and bonds

shoeleather cost refers to:

resources used to maintain lower money holdings when inflation is high

when the money market is drawn with the value of money on the vertical axis, if the federal reserve sells bonds, then the money supply curve:

shifts leftward, causing the value of money measured in terms of goods and services to rise

people go to the bank more frequently to reduce currency holdings when inflation is high. the sacrifice of time and convenience that is involved in doing that is referred to as:

shoeleather cost

how does the government obtain funds?

taxes, issue bonds, print money

the supply of money increases when:

the fed makes open-market operations

The supply of money is determined by:

the federal reserve system

fisher effect:

the one for one adjustment of the nominal interest rate to the inflation rate

money demand depends on:

the price level and the interest rate

according to the assumptions of the quantity theory of money, if the money supply increases 5 percent then:

the price level would rise by 5% and real GDP would be unchanged

velocity of money:

the rate at which money changes hands

the inflation tax refers to:

the revenue a government creates by printing money

inflation tax:

the revenue the government raises by creating money

classical dichotomy:

the theoretical separation of real and nominal variables