Saving, Investment and The Financial System (Questions) 2

Chapter 30: Money Growth and Inflation 1. In which of the following cases was the inflation rate 10 percent over the last year? A. One year ago the price index had a value of 110 and now it has a value of 120. B. One year ago the price index had a value of 120 and now it has a value of 132. C. One year ago the price index had a value of 126 and now it has a value of 140. D. One year ago the price index had a value of 145 and now it has a value of 163. 2. Deflation A. increases incomes and enhances the ability of debtors to pay off their debts. B. increases incomes and reduces the ability of debtors to pay off their debts. C. decreases incomes and enhances the ability of debtors to pay off their debts. D. decreases incomes and reduces the ability of debtors to pay off their debts. 3. The value of money falls as the price level A. rises, because the number of dollars needed to buy a representative basket of goods rises. B. rises, because the number of dollars needed to buy a representative basket of goods falls. C. falls, because the number of dollars needed to buy a representative basket of goods rises. D. falls, because the number of dollars needed to buy a representative basket of goods falls. 4. Suppose the money market, drawn with the value of money on the vertical axis, is in equilibrium. If the money supply increases, then at the old value of money there is an A. excess demand for money that will result in an increase in spending. B. excess demand for money that will result in a decrease in spending. C. excess supply of money that will result in an increase in spending. D. excess supply of money that will result in a decrease in spending. 5. In the 1970s, 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 A. selling bonds on the open market, which would have raised the value of money. B. purchasing bonds on the open market, which would have raised the value of money. C. selling bonds on the open market, which would have raised the value of money. D. purchasing bonds on the open market, which would have lowered the value of money. 6. 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 A. shifts rightward, causing the value of money measured in terms of goods and services to rise. B. shifts rightward, causing the value of money measured in terms of goods and services to fall. C. shifts leftward, causing the value of money measured in terms of goods and services to rise. D. shifts leftward, causing the value of money measured in terms of goods and services to fall. 7. The price level falls if either A. money demand or money supply shifts rightward. B. money demand shifts rightward or money supply shifts leftward. C. money demand shifts leftward or money supply shifts rightward. D. money demand or money supply shifts leftward. Figure 30-1 8. Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, then there is an excess A. demand for money that is represented by the distance between points A and C. B. demand for money that is represented by the distance between points A and B. C. supply of money that is represented by the distance between points A and C. D. supply of money that is represented by the distance between points A and B. 9. Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, then A. the quantity of money demanded is greater than the quantity supplied; the price level will rise. B. the quantity of money demanded is greater than the quantity supplied; the price level will fall. C. the quantity of money supplied is greater than the quantity demanded; the price level will rise. D. the quantity of money supplied is greater than the quantity demanded; the price level will fall. 10. Refer to Figure 30-1. When the money supply curve shifts from MS1 to MS2, A. the demand for goods and services decreases. B. the economy's ability to produce goods and services increases. C. the equilibrium price level decreases. D. None of the above is correct. 11. Refer to Figure 30-1. When the money supply curve shifts from MS1 to MS2, A. the equilibrium value of money decreases. B. the equilibrium price level decreases. C. the supply of money has decreased. D. the demand for goods and services will decrease. 12. Refer to Figure 30-1. If the current money supply is MS1, then A. there is no excess supply or excess demand if the value of money is 2. B. the equilibrium is at point C. C. there is an excess supply of money if the value of money is 1. D. None of the above is correct. 13. An associate professor of physics gets a $200 a month raise. She figures that with her new monthly salary she can buy more goods and services than she could buy last year. A. Her real and nominal salary have risen. B. Her real and nominal salary have fallen. C. Her real salary has risen and her nominal salary has fallen. D. Her real salary has fallen and her nominal salary has risen. 14. Suppose ice cream cones costs $3. Molly holds $60. What is the real value of the money she holds? A. $60. If the price of ice cream cones rises, to maintain the real value of her money holdings she need to hold more dollars. B. $60. If the price of ice cream cones rises, to maintain the real value of her money holdings she need to hold fewer dollars. C. 20 ice cream cones. If the price of ice cream cones rises, to maintain the real value of her money holdings she needs to hold more dollars. D. 20 ice cream cones. If the price of ice cream cones rises, to maintain the real value of her money holdings she needs to hold fewer dollars. 15. If M = 10,000, P = 2, and Y = 20,000, then velocity = A. 4. Velocity will rise if money changes hands more frequently. B. 4. Velocity will rise if money changes hands less frequently. C. 8. Velocity will rise if money changes hands more frequently. D. 8. Velocity will rise if money changes hands less frequently. 16. According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also A. either a rise in output or a rise in the rate at which money changes hands. B. either a rise in output or a fall in the rate at which money changes hands. C. either a fall in output or a rise in the rate at which money changes hands. D. either a fall in output or a fall in the rate at which money changes hands. 17. Suppose the money supply tripled, but at the same time velocity fell by half and real GDP was unchanged. According to the quantity equation the price level A. is 1.5 times its old value. B. is 3 times its old value. C. is 6 times its old value. D. is the same as its old value. 18. The inflation tax refers to A. the revenue a government creates by printing money. B. higher inflation which requires more frequent price changes. C. the idea that, other things the same, an increase in the tax rate raises the inflation rate. D. taxes being indexed for inflation. 19. In which case below does a person’s purchasing power from saving increase the least? A. the nominal interest rate = 10% and inflation = 8% B. the nominal interest rate = 9% and inflation = 6% C. the nominal interest rate = 8% and inflation = 4% D. the nominal interest rate = 7% and inflation = 2% 20. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases A. the inflation rate and real interest rates. B. the inflation rate, but not real interest rates. C. real interest rates, but not the inflation rate. D. neither the inflation rate nor real interest rates. 21. Higher inflation makes relative prices A. more variable, making it more likely that resources will be allocated to their best use. B. more variable, making it less likely that resources will be allocated to their best use. C. less variable, making it more likely that resources will be allocated to their best use. D. less variable, making it less likely that resources will be allocated to their best use. 22. The nominal interest rate is 4%, the inflation rate is 1% and the tax rate is 20%. Given U.S. tax laws, how is after-tax real return computed? A. .03(1-.20) B. .04(1 -.20) C. .04(1 - .20) - .01 D. None of the above is correct. Chapter 3: Interdependence and the Gains from Trade 1. A production possibilities frontier is a straight line when a. the more resources the economy uses to produce one good, the fewer resources it has available to produce the other good. b. an economy is interdependent and engaged in trade instead of self-sufficient. c. the rate of tradeoff between the two goods being produced is constant. d. the rate of tradeoff between the two goods being produced depends on how much of each good is being produced. 2. The following table contains some production possibilities for an economy for a given month. Sweaters Gloves 4 300 6 ? 8 100 If the production possibilities frontier is a straight line, then