Question 1

According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by:
A)the Organization of Petroleum Exporting Countries (OPEC).
B)the U.S. Treasury.
C)the Fed.
D)private citizens.

Accepted Answer

According to the quantity theory of money, inflation is directly proportional to the amount of money in circulation. The Fed controls the money supply, making it the ultimate controller of the rate of inflation in the United States. OPEC's control over oil prices can have an impact on short-term inflation, but it is not the ultimate controller. The U.S. Treasury and private citizens do not have direct control over the money supply or inflation.

Question 2

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be percent.
A)3
B)4
C)9
D)11

Accepted Answer

A

Question 3

The demand for real money balances is generally assumed to:
A)be exogenous.
B)be constant.
C)increase as real income increases.
D)decrease as real income increases.

Accepted Answer

According to the quantity theory of money, the demand for money is directly proportional to nominal income. As real income is a component of nominal income, an increase in real income will lead to an increase in the demand for real money balances. Therefore, choice C is the correct answer.

Question 4

If the transactions velocity of money remains constant while the quantity of money doubles, the:
A)price of the average transaction must double.
B)number of transactions must remain constant.
C)price of the average transaction multiplied by the number of transactions must remain constant.
D)price of the average transaction multiplied by the number of transactions must double.

Accepted Answer

The equation of exchange, MV = PQ, where M is the quantity of money, V is the velocity of money, P is the price level, and Q is the quantity of transactions, implies that if M doubles and V remains constant, then PQ (the price of the average transaction multiplied by the number of transactions) must also double.

Question 5

Consider the money demand function that takes the form (M/P)d = kY, where M is the quantity of money, P is the price level, k is a constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average inflation rate in this economy?
A)3 percent
B)7 percent
C)10 percent
D)13 percent

Accepted Answer

According to the quantity theory of money, the inflation rate (π) can be calculated as π = growth rate of money supply (gM) − growth rate of real output (gY) − constant (k). Plugging in the given values, we get π = 10% − 3% − k. Since k is not given, we cannot calculate the exact inflation rate, but we know that it will be less than 7% (10% − 3% = 7% being the upper bound). Therefore, the best choice is B, which is the closest option to 7%.

Question 6

During the American Revolution, the price of gold measured in continental dollars increased to more than times its previous level.
A)2
B)10
C)50
D)100

Accepted Answer

During the American Revolution, the value of continental dollars decreased drastically due to inflation caused by the issuance of large amounts of paper money without adequate backing. As a result, the price of gold (which had a more stable value) measured in continental dollars increased dramatically, reaching up to 100 times its previous level in some cases. Therefore, the best choice is D.

Question 7

The real interest rate is equal to the:
A)amount of interest that a lender actually receives when making a loan.
B)nominal interest rate plus the inflation rate.
C)nominal interest rate minus the inflation rate.
D)nominal interest rate.

Accepted Answer

The real interest rate adjusts the nominal interest rate for the impact of inflation, so it is calculated as the nominal interest rate minus the inflation rate. This reflects the true cost of borrowing or the true return on saving after adjusting for inflation.

Question 8

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is times per year.
A)0.2
B)2
C)5
D)10

Accepted Answer

Transactions velocity is calculated by dividing the total amount of money exchanged in the economy (measured in dollars) by the average value of transactions (also measured in dollars). Thus, transactions velocity = Total amount of money / Average value of transactions.

In this case, the total amount of money is given as $200, and the average value of transactions is given as $10. Therefore, we can calculate transactions velocity as follows:

Transactions velocity = $200 / $10 = 20

This means that the money in the economy changes hands 20 times per year. However, the answer choices presented are in terms of decimals, so we need to convert this result:

Transactions velocity = 20 times per year = 20/100 = 0.2 times per year

Therefore, the correct answer is (A) 0.2.

Question 9

The income velocity of money increases and the money demand parameter k when people want to hold money.
A)increases; more
B)increases; less
C)decreases; more
D)decreases; less

Accepted Answer

When the income velocity of money increases, money is being spent more frequently, resulting in a higher demand for money. This means that people want to hold more money, leading to an increase in the money demand parameter k. Therefore, both the income velocity of money and the money demand parameter k increase.

Question 10

If the quantity of real money balances is kY, where k is a constant, then velocity is:
A)k.
B)1/k.
C)kP.
D)P/k.

Accepted Answer

Velocity (V) is defined as the ratio of nominal output (PY) to the quantity of real money balances (M/P). So, V = PY/(M/P), which can be simplified to V = kY/(M/P) = (kY/P)/(M/P) = (k/P)(Y/M). Since k is a constant, Y/M is the inverse of the quantity of real money balances (M/Y), which is also known as the velocity of money. Therefore, V = (k/P)(1/(M/Y)) = 1/k.

Question 11

Percentage change in P is approximately equal to the percentage change in:
A)M.
B)M minus percentage change in Y.
C)M minus percentage change in Y plus percentage change in velocity.
D)M minus percentage change in Y minus percentage change in velocity.

Accepted Answer

According to the quantity theory of money, the percentage change in price level (P) is equal to the percentage change in money supply (M) minus the percentage change in real output (Y) plus the percentage change in velocity (V). Therefore, the best choice is C, which is M minus percentage change in Y plus percentage change in velocity.

Question 12

According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be:
A)increasing.
B)decreasing. 7
C)percent.
D)constant.

Accepted Answer

According to the quantity theory of money, the equation is MV=PY, where M is the money supply, V is velocity, P is the price level, and Y is real output. If M is growing at 10% and Y is growing at 3%, but V is increasing at a faster rate due to financial innovation, there will be an excess supply of money in the economy. This excess will lead to an increase in the price level (inflation). Therefore, the rate of inflation must be increasing.

Question 13

The quantity theory of money assumes that:
A)income is constant.
B)velocity is constant.
C)prices are constant.
D)the money supply is constant.

Accepted Answer

The quantity theory of money assumes that velocity is constant, meaning that the rate at which money changes hands in the economy is stable. It also assumes that the money supply is proportional to the price level in the economy, and that changes in the money supply have a direct impact on prices. It does not assume that income or prices are constant.

Question 14

The rate of inflation is the:
A)median level of prices.
B)average level of prices.
C)percentage change in the level of prices.
D)measure of the overall level of prices.

Accepted Answer

The rate of inflation is the percentage change in the level of prices. It is not the median, average, or measure of the overall level of prices, but rather it specifically refers to the change in price levels over time.

Question 15

Real money balances equal the:
A)sum of coin, currency, and balances in checking accounts.
B)amount of money expressed in terms of the quantity of goods and services it can purchase.
C)number of dollars used as a medium of exchange.
D)quantity of money created by the Federal Reserve.

Accepted Answer

Real money balances refer to the purchasing power of the money supply, meaning the amount of goods and services that can be purchased with the money available. This is distinct from nominal money balances, which simply count the total amount of money in circulation without accounting for changes in price levels or purchasing power.

Question 16

Using decade-long data across countries from 2000-2010, countries with high money growth tend to have inflation.
A)high
B)low
C)constant
D)decreasing

Accepted Answer

The statement directly states that countries with high money growth tend to have inflation, indicating that the inflation rate is high. Therefore, the best choice is A, high.

Question 17

The quantity equation for money, by itself:
A)may be thought of as a definition for velocity.
B)implies that the velocity of money is constant.

Accepted Answer

The quantity equation for money, MV = PY, defines velocity (V) as the ratio of nominal GDP (PY) to the money supply (M), thus it can be thought of as a definition for velocity. It does not imply that velocity is constant.

Question 18

"Inflation tax" means that:
A)as the price level rises, taxpayers are pushed into higher tax brackets.
B)as the price level rises, the real value of money held by the public
C)decreases. as taxes increase, the rate of inflation also increases.
D)in a hyperinflation, the chief source of tax revenue is often the printing of money.

Accepted Answer

Inflation tax refers to the decrease in the real value of money held by the public as the price level rises, effectively acting as a "tax" on holding money.

Question 19

If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200,000, then real balances in the economy equal:
A)10.
B)20,000.
C)200,000.
D)2,000,000.

Accepted Answer

Real balances, or the purchasing power of the money supply, can be found by dividing the quantity of money by the average price level in the economy. Therefore, real balances = $200,000/$10 = $20,000.

Question 20

The transactions velocity of money indicates the in a given period, while the income velocity of money indicates the in a given period.
A)number of transactions; amount of income earned
B)quantity of money used for transactions; quantity of money paid as income
C)number of times a dollar bill changes hands; number of times a dollar bill enters someone's income
D)volume of transactions; flow of income

Accepted Answer

The transactions velocity of money refers to the number of times a unit of currency changes hands in a given period, whereas the income velocity of money refers to the number of times a unit of currency enters someone's income in a given period.

Quiz 5: The Open Economy

According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by:

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be percent.

The demand for real money balances is generally assumed to:

If the transactions velocity of money remains constant while the quantity of money doubles, the:

During the American Revolution, the price of gold measured in continental dollars increased to more than times its previous level.

The real interest rate is equal to the:

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is times per year.

The income velocity of money increases and the money demand parameter k when people want to hold money.

If the quantity of real money balances is kY, where k is a constant, then velocity is:

Percentage change in P is approximately equal to the percentage change in:

According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be:

The quantity theory of money assumes that:

The rate of inflation is the:

Real money balances equal the:

Using decade-long data across countries from 2000-2010, countries with high money growth tend to have inflation.

The quantity equation for money, by itself:

"Inflation tax" means that:

If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200,000, then real balances in the economy equal:

The transactions velocity of money indicates the in a given period, while the income velocity of money indicates the in a given period.