Chapter 12
Money, Interest, and Inflation
1) The quantity of money demanded is the
A) average daily volume of bank account withdrawals.
B) amount that people and businesses choose to hold.
C) fraction of cash holdings in an average investment portfolio.
D) income and volume of profits that people and businesses would like to receive.
E) sum of checkable and savings deposits at banks.
2) When you accumulate more money,
A) the marginal benefit of holding money decreases.
B) the opportunity cost of holding money decreases.
C) your marginal tax rate falls.
D) you earn a lower rate of interest on your checkable deposit.
E) the interest rate you are paid on your currency increases.
3) When the opportunity cost of holding money increases, then
A) people want to hold more money.
B) the real interest rate falls.
C) the nominal interest rate falls.
D) people want to hold less money.
E) the quantity of money supplied increases.
4) The opportunity cost of holding money is that you
A) run a greater risk of being robbed.
B) pay a higher tax rate.
C) forego interest on an alternative asset.
D) have trouble balancing your check book.
E) must make more trips to the bank to manage the money.
5) The opportunity cost of holding money instead of an interest earning asset is the
A) real interest rate.
B) nominal interest rate.
C) inflation rate minus the nominal interest rate.
D) inflation rate.
E) inflation rate minus the real interest rate.
6) The quantity of money demanded will decrease if the
A) inflation rate decreases.
B) nominal interest rate decreases.
C) real interest rate decreases.
D) nominal interest rate increases.
E) price level rises.
7) Mary has $1,000 and is considering purchasing a $1,000 bond that pays 7 percent
interest per year. Mary decides not to buy the bond and holds the $1,000 as cash. If the
inflation rate is 4 percent, the opportunity cost of holding the $1,000 as money is
A) $30.00.
B) $40.00.
C) $70.00.
D) $110.00.
E) $100.00.
8) The real interest rate equals the
A) nominal interest rate - inflation rate.
B) (nominal interest rate ÷ inflation rate) × 100.
C) nominal interest rate ÷ inflation rate.
D) (nominal interest rate × inflation rate)/100.
E) nominal interest rate ÷ inflation rate.
9) You have a $500 saving bond. The nominal interest rate is 10 percent, and the
inflation rate is 4 percent. After a year, in real terms you have earned
A) $70.
B) $40.
C) $50.
D) $30.
E) $510.
10) If the inflation rate is 5 percent and the real interest rate is 2.5 percent, then the
nominal interest rate is
A) -2.5 percent.
B) 2 percent.
C) 7.5 percent.
D) 2.5 percent.
E) 10 percent.
11) The demand for money curve shows the relationship between the quantity of money
demanded and
A) the nominal interest rate.
B) the real interest rate.
C) the inflation rate.
D) the price level.
E) real GDP.
12) Which of the following increases the quantity of money demanded?
A) a rise in the nominal interest rate
B) a rise in the inflation rate
C) a rise in the real interest rate
D) a fall in the nominal interest rate
E) an increase in real GDP
13) When the nominal interest rate falls, there is
A) an upward movement along the demand for money curve.
B) a downward movement along the demand for money curve.
C) a rightward shift of the demand for money curve.
D) a leftward shift of the demand for money curve.
E) no movement along the demand for money curve and the curve does not shift.
14) The demand for money curve slopes downward because a rise in the nominal
interest rate ________ the opportunity cost of holding money and therefore ________
the quantity of money demanded.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change
15) The demand for money depends on all of the following EXCEPT
A) the nominal interest rate.
B) real GDP.
C) financial technology.
D) the equation of exchange.
E) the price level.
16) As the economy enters a strong expansion in which real GDP increases, which of
the following occurs?
A) The demand for money curve shifts rightward.
B) The demand for money curve shifts leftward.
C) The demand for money decreases and there is a movement upward along the demand for
money curve.
D) The demand for money increases and there is a movement downward along the demand
for money
curve.
E) The nominal interest rate falls as the demand for money curve shifts leftward.
17) The demand for money is
A) positively related to the price level.
B) positively related to the nominal interest rate.
C) negatively related to the price level.
D) negatively related to real GDP.
E) positively related to the real interest rate.
18) If real GDP decreases, the
A) demand for money increases.
B) demand for money decreases.
C) quantity of money demanded increases.
D) supply of money decreases.
E) supply of money increases.
19) Advances in financial technology
A) must increase the demand for money.
B) must decrease the demand for money.
C) have no effect on the demand for money or on the supply of money.
D) might increase or decrease the demand for money.
E) affect only the supply of money.
20) The increased use of credit cards leads to
A) a rightward shift in the demand for money curve.
B) a movement upward along the demand for money curve.
C) a leftward shift in the demand for money curve.
D) a movement downward along the demand for money curve.
E) no movement along the demand curve for money nor a shift in the demand curve.
21) In the above figure, a movement from point A to point B represents
A) an increase in the demand for money that might be the result of an increase in real GDP.
B) a decrease in the demand for money that might be the result of a fall in the price level.
C) a decrease in the quantity of money demanded.
D) an increase in the quantity of money demanded.
E) an increase in the demand for money that might be the result of a fall in the price level.
22) In the above figure, a movement from point B to point C represents
A) an increase in the demand for money that might be the result of an increase in real GDP.
B) a decrease in the demand for money that might be the result of an increase in real GDP.
C) a decrease in the quantity of money demanded.
D) a increase in the quantity of money demanded.
E) an increase in the demand for money that might be the result of a fall in the price level.
23) The supply of money curve is
A) upward sloping, showing the influence of the interest rate.
B) horizontal because interest rates are fixed at any one moment.
C) vertical because the quantity of money is fixed at any one moment.
D) downward sloping, showing the negative influence of the interest rate.
E) horizontal because the Fed controls the quantity of money supplied.
24) In the money market, if the nominal interest rate is below the equilibrium level,
A) the quantity of money demanded exceeds the quantity of money supplied.
B) the quantity of money supplied exceeds the quantity of money demanded.
C) asset prices will rise.
D) the demand for money curve will shift leftward.
E) the supply of money curve will shift leftward.
25) If the nominal interest rate is less than the equilibrium nominal interest rate
determined in the money market, then in the short run households and firms
A) sell financial assets.
B) buy financial assets.
C) raise the price level.
D) lower the price level.
E) increase real GDP.
26) When the Fed changes the quantity of money, there is an immediate effect on
A) the nominal interest rate.
B) real GDP.
C) the price level but not the inflation rate.
D) the inflation rate but not the price level.
E) the price level and the inflation rate.
27) In the money market, in the short run in order to decrease the nominal interest
rate, the Fed must
A) increase the quantity of money.
B) increase the discount rate.
C) decrease the demand for money.
D) decrease the quantity of money.
E) directly lower the interest rate and not change either the demand for money or the supply
of money.
28) Other things the same, if the Fed increases the quantity of money, the supply of
money curve shifts
A) rightward and the nominal interest rate decreases.
B) leftward and the nominal interest rate increases.
C) rightward and the real interest rate increases.
D) leftward and the real interest rate increases.
E) leftward and the nominal interest rate decreases.
29) When real GDP increases, the demand for money ________ and, as a result, the
equilibrium nominal interest rate ________.
A) rises; decreases
B) rises; increases
C) falls; decreases
D) falls; increases
E) rises; probably changes but more information is needed to determine if it rises or falls
30) In the above figure, if the interest rate is 8 percent per year, the quantity of money
demanded is
A) less than the quantity of money supplied and the interest rate will change.
B) greater than the quantity of money supplied and the interest rate will change.
C) less than the quantity of money supplied and the demand curve for money will shift.
D) greater than the quantity of money supplied and the demand curve for money will shift.
E) greater than the quantity of money supplied and the supply curve of money will shift.
31) In the above figure, the equilibrium interest rate is ________ and the equilibrium
quantity of money is ________ trillion.
A) 8 percent; $1.2
B) 4 percent; $0.6
C) 4 percent; $1.2
D) 8 percent; $0.6
E) 0 percent; $1.2
32) In the above figure, if the interest rate is 3 percent per year, the quantity of money
demanded is
A) less than the quantity of money supplied and the interest rate will change.
B) greater than the quantity of money supplied and the interest rate will change.
C) less than the quantity of money supplied and the demand for money curve will shift.
D) greater than the quantity of money supplied and the demand for money curve will shift.
E) greater than the quantity of money supplied and the supply of money curve will shift.
33) When the Fed increases the quantity of money,
A) the price level immediately increases.
B) the price level is slow to change.
C) the nominal interest rate immediately increases but the real interest rate does not change.
D) real GDP immediately decreases.
E) both the nominal interest rate and real interest rate immediately increase.
34) The "value of money"
A) is the quantity of goods and services that a unit of money can buy.
B) is determined by Fed regulations.
C) increases during inflationary periods.
D) increases during economic expansions.
E) is directly related to the price level.
35) The long-run money demand curve shows
A) that the value of money influences the quantity of money that households and firms plan
to hold.
B) that the value of money is directly related to the quantity of money demanded.
C) the relationship between real GDP and money demand.
D) the relationship between potential GDP and money demand.
E) how the Fed determines the appropriate interest rate.
36) In the figure above, in the long run what happens if the Fed increases the quantity
of money by 5 percent?
A) The value of money falls by 5 percent and there will be a movement down along the
LRMD curve.
B) The real interest rate falls and the LRMD curve shifts rightward.
C) The nominal interest rate rises by 5 percent.
D) The price level rises by 5 percent and the LRMD shifts leftward.
E) The value of money rises by 5 percent.
37) In the figure above, what happens if the Fed increases the quantity of money by 8
percent?
A) The LRMD curve shifts rightward to restore equilibrium.
B) The value of money falls to 0.92 and there is a movement downward along the LRMD.
C) The price level falls to 1.08.
D) The interest rate rises to 1.08.
E) The value of money rises to 1.08.
38) In the long run, an increase in the quantity of money ________ the value of money
and ________ the price level.
A) raises; raises
B) raises; does not change
C) lowers; lowers
D) lowers; does not change
E) lowers; raises
39) When real GDP equals potential GDP, the quantity theory of money says that an
increase in the quantity of money brings an equal percentage
A) increase in the price level.
B) increase in real GDP.
C) decrease in the price level.
D) decrease in velocity.
E) decrease in real GDP.
40) The speed with which a dollar circulates as people use it to buy a good or service is
called
A) velocity of circulation.
B) inflation.
C) circulation rate.
D) nominal GDP.
E) rate of circulation speed.
41) The velocity of circulation is equal to
A) the price level divided by real GDP.
B) the price level multiplied by the quantity of money.
C) nominal GDP divided by the quantity of money.
D) the quantity of money divided by the price level and then multiplied by real GDP.
E) the quantity of money divided by nominal GDP.
42) If the quantity of money is $6 billion and nominal GDP is $9 billion, the velocity of
circulation is
A) 0.67.
B) 3.
C) 1.5.
D) 36.
E) 54.
43) If real GDP is $200, the price level is 2.5, and velocity is 5, then the quantity of
money is
A) $200.
B) $100.
C) $750.
D) $1,000.
E) $500.
44) If real GDP and the velocity of circulation do not change and the quantity of money
grows by 3 percent, then in the long the inflation rate is
A) 3 percent.
B) 0 percent.
C) -3 percent.
D) larger than than 3 percent.
E) More information is needed to answer the question.
45) Suppose that real GDP grows by 3 percent a year, the quantity of money grows 6
percent a year, and velocity grows by 1 percent. In the long run, the inflation rate
equals
A) 9 percent.
B) 4 percent.
C) 5 percent.
D) 12 percent.
E) 10 percent.
46) Hyperinflation is defined as periods of
A) negative price changes.
B) low inflation.
C) inflation over 50 percent per month.
D) inflation under 10 percent per year.
E) inflation over 25 percent per year
Essay:
1) What is the opportunity cost of holding money?
2) If the inflation rate is 3 percent and the real interest rate is 3 percent, then what is
the nominal interest rate?
3) What factors lead to changes in the quantity demanded of money and what factors
lead to changes in the demand for money?
4) How would a widespread adoption of credit cards affect the demand for money and
the demand for money curve?
5) Suppose velocity does not change. Then, in the long run, a growth rate of the
quantity of money that exceeds growth in real GDP has what effect?
6) The quantity of money is $1 billion, the price level is 1.10, and real GDP is $10
billion. What is the velocity of money?
Answer: The velocity of money equals 11.