Question 1

In the money market, if real GDP increases, then the demand for money_{--------------------} and the equilibrium nominal interest rate_{--------------------} .

Accepted Answer

When real GDP increases, people engage in more transactions, which increases the demand for money. As a result, the equilibrium nominal interest rate rises due to the higher demand for money.

Question 2

The real interest rate equals the

Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate.

Question 3

The long-run effect of an increase in the growth rate of the quantity of money is a

Accepted Answer

In the long run, an increase in the growth rate of the quantity of money typically leads to higher inflation, which results in a higher nominal interest rate according to the Fisher effect.

Question 4

Because the inflation rate is so high Wanda refuses to carry cash. Even though it is a bother, she now goes to the ATM twice as often to get the cash she needs. Wanda's actions are an example of the

Accepted Answer

Wanda's actions are an example of shoe-leather costs of inflation, which refer to the increased inconvenience and effort people expend to avoid holding cash during high inflation periods.

Question 5

The "value of money"

Accepted Answer

The "value of money" is the quantity of goods and services that a unit of money can buy.

Question 6

If the price level falls, the

Accepted Answer

When the price level falls, people need less money to buy the same amount of goods and services, so the demand for money decreases.

Question 7

In the money market, if the quantity of money supplied exceeds the quantity of money demanded, the nominal interest rate will_{--------------------} and the prices of assets will_{--------------------} .

Accepted Answer

When the quantity of money supplied exceeds the quantity demanded, there is excess money in the economy. This leads to a decrease in the nominal interest rate as people are willing to lend money at lower rates. As interest rates fall, the prices of assets typically increase because lower interest rates make borrowing cheaper, encouraging investment in assets.

Question 8

The opportunity cost of holding money is the

Accepted Answer

The opportunity cost of holding money is the nominal interest rate, as it represents the foregone interest that could have been earned if the money was invested instead of being held as cash.

Question 9

The equation of exchange shows that

Accepted Answer

The equation of exchange is given by MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is the real output. Solving for P gives P = (M × V) ÷ Y.

Question 10

High inflation

Accepted Answer

High inflation erodes the purchasing power of money, making it less effective as a store of value.

Quiz 12: Money, Interest, and Inflation

In the money market, if real GDP increases, then the demand for money-------------------- and the equilibrium nominal interest rate-------------------- .