ECON303exam2chp7 Flashcards
(40 cards)
Suppose real money demand is L = 0.8 Y - 100,000 (r + πe). If the nominal money supply is 12,000, real output is 15,000, the real interest rate is .02, and the expected inflation rate is .01, then the price level is
A. 1
B. 3/4
C. 3
D. 4/3
A. 1
B. 3/4
C. 3
D. 4/3
Answer Key: D
If the interest elasticity of money demand is -0.1, by what percent does money demand change if the nominal interest rate rises from 2% to 3%?
A. -5%
B. 0%
C. 5%
D. -0.1%
A. -5%
B. 0%
C. 5%
D. -0.1%
Answer Key: A
Suppose the real money demand function is Md/P = 2400 + 0.2 Y - 10,000 (r + πe). Assume M = 5000, P = 2.0, and πe = .03. If Y were to increase from 4000 to 5000, then the
real interest rate would increase by how many percentage points?
A. 5 B. 7 C. 4 D. 2
D. 2
We shouldn’t be concerned about U.S. currency held abroad because
A. foreigners use it to buy U.S. bonds.
B. the currency will never return to the United States.
C. foreigners can’t spend it in their own countries.
D. it represents an interest-free loan to the United States.
D. it represents an interest-free loan to the United States.
If the nominal money supply doubles while real money demand is unchanged, what happens to the price level?
A. The price level increases by a factor of four.
B. The price level falls by one-half.
C. The price level is unchanged.
D. The price level doubles.
D. The price level doubles.
If real money demand doubles while the nominal money supply is unchanged, what happens to the price level?
A. The price level increases by a factor of four.
B. The price level doubles.
C. The price level falls by one-half.
D. The price level is unchanged.
C. The price level falls by one-half.
In some countries, prices in stores are listed in terms of U.S. dollars, rather than in units of the local currency. That’s most likely because
A. the country has experienced high rates of inflation
B. there is no other store of value.
C. the country’s political system is unstable.
D. interest rates are higher using U.S. dollars than using the local currency.
A. the country has experienced high rates of inflation
The most likely explanation for the high inflation rates that countries like Russia and the Ukraine have suffered is that
A. the flood of financial innovations has increased liquidity in these nations’ economies.
B. large inflows of foreign funds increase the money supply, causing inflation.
C. borrowing from the central bank is the most expedient method of funding the government’s expenditures.
D. without inflation, these countries would be unable to achieve high rates of growth.
C. borrowing from the central bank is the most expedient method of funding the government’s expenditures.
Velocity is defined as
A. real money stock/real GDP.
B. nominal money stock/nominal GDP.
C. mc2.
D. nominal GDP/nominal money stock.
D. nominal GDP/nominal money stock.
If the quantity of money demanded exceeds the quantity of money supplied, then
A. the quantity of nonmonetary assets demanded will still equal the quantity supplied, all else being equal.
B. you can make no conclusions about the relative supply and demand of nonmonetary assets.
C. the quantity of nonmonetary assets supplied exceeds the quantity demanded.
D. the quantity of nonmonetary assets demanded exceeds the quantity supplied.
C. the quantity of nonmonetary assets supplied exceeds the quantity demanded.
Money’s primary role in the economy comes from the benefits of lowering transactions costs and allowing specialization. This function of money is called
A. medium of exchange.
B. store of value.
C. standard of deferred payment.
D. unit of account.
A. medium of exchange.
If real income rises 4%, prices rise 1%, and nominal money demand rises 4%, what is the income elasticity of real money demand?
A. 3/4
B. 5/6
C. 1
D. 4/5
A. 3/4
The use of money is more efficient than barter because the introduction of money
A. reduces the need for economic specialization.
B. reduces the need to exchange goods.
C. reduces transaction costs.
D. reduces the need for other stores of value.
C. reduces transaction costs.
Suppose your bank raises its minimum-balance requirement for free checking on checking accounts by $500. You take $500 out of your passbook savings account and put it in your checking account. What is the overall effect on M1 and M2?
A. M1 rises by $500, M2 falls by $500.
B. M1 is unchanged, M2 falls by $500.
C. M1 rises by $500, M2 is unchanged.
D. M1 is unchanged, M2 is unchanged.
C. M1 rises by $500, M2 is unchanged.
If real money demand increases 5% and real money supply increases 10%, by about how much does the price level change?
A. Falls by 5%
B. Unchanged
C. Rises by 5%
D. Rises by 2%
C. Rises by 5%
A 10% decrease in real income usually leads to ________ in money demand.
A. a decrease of less than 10%
B. an increase
C. no change
D. a decrease of 10%
A. a decrease of less than 10%
If the quantity of money demanded exceeds the quantity of money supplied, then
A. the quantity of nonmonetary assets demanded will still equal the quantity supplied, all else being equal.
B. you can make no conclusions about the relative supply and demand of nonmonetary assets.
C. the quantity of nonmonetary assets supplied exceeds the quantity demanded.
D. the quantity of nonmonetary assets demanded exceeds the quantity supplied.
C. the quantity of nonmonetary assets supplied exceeds the quantity demanded.
In economics, money refers to
A. assets used and accepted as payment.
B. wealth.
C. currency.
D. income.
A. assets used and accepted as payment.
Which of the following is the most likely explanation for the causes behind the “case of the missing money”?
A. Government deficits increased the demand for money, draining it out of the private sector.
B. Increases in Eurodollar deposits drew money out of the American banking system.
C. Financial innovations, such as money market mutual funds, changed the demand for narrow definitions of money such as M1.
D. Higher prices in the 1970s reduced the demand for money.
C. Financial innovations, such as money market mutual funds, changed the demand for narrow definitions of money such as M1.
If the income elasticity of money demand is 3/4 and the interest elasticity of money demand is -1/4, by what percent does money demand rise if income rises 10% and the nominal interest rate rises from 4% to 5%?
A. 6.25%
B. 5.00%
C. 7.50%
D. 1.25%
D. 1.25%
If real GDP is $4 billion, the price level is 1.25, and the nominal money stock is $500 million, then velocity is
A. 0.1.
B. 100.
C. 10.
D. 1.
C. 10.
The ease and quickness with which an asset can be exchanged for goods, services, or other assets is its
A. risk.
B. velocity.
C. time to maturity.
D. liquidity.
D. liquidity.
The number of units of one good that trade for one unit of alternative goods can be determined most easily when
A. the goods all weigh about the same.
B. the goods are actively traded through barter.
C. there is one unit of account.
D. the goods are all new.
D. the goods are all new.
People in other countries want to hold U.S. dollars as a
A. unit of account.
B. standard of deferred payment.
C. medium of exchange.
D. store of value.
