Question 1

If inflation turns out to be higher than people expected, wealth is redistributed to lenders from borrowers.

Accepted Answer

A) True 
 B)False

Question 2

What assumptions are necessary to argue that the quantity equation implies that increases in the money supply lead to proportional changes in the price level?

Accepted Answer

We must suppose that V is rela...

Question 3

An inflation tax is paid by those that hold money because inflation reduces the value of their money holdings.

Accepted Answer

A) True 
 B)False

Question 4

Using separate graphs, demonstrate what happens to the money supply, money demand, the value of money, and the price level if:
a.The central bank increases the money supply.
b.People decide to demand less money at each value of money.

Accepted Answer

a.The central bank increases the money...

Question 5

Which of the following statements is NOT true?

Accepted Answer

A)  Deflation refers to a situation in which the price level is falling.
B)  When the price level is falling there is always an incentive to delay spending, and so there is a negative effect on economic activity.
C)  Cutting interest rates to zero to fight deflation may not work, because the opportunities for profitable investment are likely to be limited.
D)  Deflation is good for workers, because with wages falling there will be plenty of employment opportunities.E) C) and D)
F) B) and C)

Question 6

An example of a real variable is

Accepted Answer

A)  the wage rate in rands.
B)  None of these answers are real variables.
C)  the price of corn.
D)  the nominal interest rate.
E)  the ratio of the value of wages to the price of fizzy drinks.F) C) and E)
G) A) and D)

Question 7

Money demand depends on

Accepted Answer

A)  the price level and the interest rate.
B)  the price levels but not the interest rate.
C)  the interest rates but not the price level.
D)  neither the price level nor the interest rate.E) All of the above
F) A) and B)

Question 8

Suppose that, because of inflation, a business in South Africa must calculate, print, and mail a new price list to its customers each month.This is an example of

Accepted Answer

A)  shoeleather costs.
B)  costs due to confusion and inconvenience.
C)  arbitrary redistributions of wealth.
D)  costs due to inflation induced tax distortions.
E)  menu costs.F) A) and B)
G) A) and C)

Question 9

In the long run, the demand for money is most dependent upon the

Accepted Answer

A)  level of prices.
B)  interest rate.
C)  availability of banking outlets.
D)  availability of credit cards.E) B) and C)
F) None of the above

Question 10

The Fisher effect is

Accepted Answer

A)  the one-for-one adjustment of the nominal interest rate to the rate of growth of real GDP.
B)  the one-for-one adjustment of the nominal interest rate to the inflation rate.
C)  the effect of changes in the velocity of money on the nominal interest rate.
D)  the effect of a current account deficit on the nominal interest rate.E) B) and C)
F) A) and D)

Question 11

Since, in classical economic theory, both the velocity of money and real output are assumed to be stable,

Accepted Answer

A)  changes in the quantity of money explain changes in the price level.
B)  changes in the quantity of money explain changes in real GDP.
C)  changes in the money supply cause changes in the velocity of money.
D)  prices are fixed.E) All of the above
F) A) and D)

Question 12

According to the classical view, to prevent price-level changes when real output is growing by 3 per cent per year, the money supply must

Accepted Answer

A)  decrease by 3 per cent per year.
B)  increase by 3 per cent per year.
C)  increase by more than 3 per cent per year.
D)  remain constant.E) A) and B)
F) B) and C)

Question 13

The Fisher effect suggests that, in the long run, if the rate of inflation rises from 3 per cent to 7 per cent, the nominal interest rate should increase by 4 percentage points and the real interest rate should remain unchanged.

Accepted Answer

A) True 
 B)False

Question 14

The nominal demand for money

Accepted Answer

A)  does not depend on interest rates.
B)  does not depend on the price level.
C)  is positively related to the price level.
D)  is positively related to the nominal interest rate.E) B) and D)
F) A) and B)

Question 15

Suppose the nominal interest rate is 7 per cent, while the money supply is growing at a rate of 5 per cent per year.If the government increases the growth rate of the money supply from 5 per cent to 9 per cent, the Fisher effect suggests that, in the long run, the nominal interest rate should become

Accepted Answer

A)  4 per cent.
B)  9 per cent.
C)  11 per cent.
D)  12 per cent.
E)  16 per cent.F) A) and B)
G) A) and C)

Question 16

The velocity of money is

Accepted Answer

A)  highly unstable.
B)  impossible to measure.
C)  the rate at which money loses its value.
D)  the rate at which inflation rises.
E)  the rate at which money changes hands.F) A) and E)
G) B) and C)

Question 17

Real economic variables measure

Accepted Answer

A)  value in the prices of some certain base year.
B)  value in the prices of the current year.
C)  nominal values adjusted for the current interest rate.
D)  nominal values adjusted for the current money supply.E) A) and C)
F) A) and B)

Question 18

If the nominal interest rate is 7 per cent and the inflation rate is 5 per cent, the real interest rate is 12 per cent.

Accepted Answer

A) True 
 B)False

Question 19

The supply of money is determined by

Accepted Answer

A)  the price level.
B)  the Treasury and the Budget Office.
C)  the South African Reserve Bank.
D)  the demand for money.E) A) and B)
F) A) and C)

Question 20

Which of the following statements is NOT true?

Accepted Answer

A)  Inflation is an economy wide phenomenon that concerns, first and foremost, the value of the economy's medium of exchange.
B)  The quantity theory states that the primary cause of inflation is growth in the supply of money.
C)  The so-called inflation tax does not affect those people whose incomes do not rise with inflation.
D)  Some inflation in any economy is desirable, because it is a sign that demand is present, that there is a reason to produce and invest, and that there is reward to be gained from enterprise.E) C) and D)
F) B) and C)

Exam 10: Money Growth and Inflation

Using separate graphs, demonstrate what happens to the money supply, money demand, the value of money, and the price level if: a.The central bank increases the money supply. b.People decide to demand less money at each value of money.

Correct Answerverified a.The central bank increases the money...View AnswerShow Answer

If the nominal interest rate is 7 per cent and the inflation rate is 5 per cent, the real interest rate is 12 per cent.

Correct AnswerverifiedShow Answer

An example of a real variable is

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If inflation turns out to be higher than people expected, wealth is redistributed to lenders from borrowers.

Correct AnswerverifiedShow Answer

The Fisher effect is

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Suppose that, because of inflation, a business in South Africa must calculate, print, and mail a new price list to its customers each month.This is an example of

Correct AnswerverifiedShow Answer

The nominal demand for money

Correct AnswerverifiedShow Answer

Money demand depends on

Correct AnswerverifiedShow Answer

Which of the following statements is NOT true?

Correct AnswerverifiedShow Answer

The Fisher effect suggests that, in the long run, if the rate of inflation rises from 3 per cent to 7 per cent, the nominal interest rate should increase by 4 percentage points and the real interest rate should remain unchanged.

Correct AnswerverifiedShow Answer

Which of the following statements is NOT true?

Correct AnswerverifiedShow Answer

According to the classical view, to prevent price-level changes when real output is growing by 3 per cent per year, the money supply must

Correct AnswerverifiedShow Answer

What assumptions are necessary to argue that the quantity equation implies that increases in the money supply lead to proportional changes in the price level?

Correct AnswerverifiedWe must suppose that V is rela...View AnswerShow Answer

An inflation tax is paid by those that hold money because inflation reduces the value of their money holdings.

Correct AnswerverifiedShow Answer

In the long run, the demand for money is most dependent upon the

Correct AnswerverifiedShow Answer

The velocity of money is

Correct AnswerverifiedShow Answer

Real economic variables measure

Correct AnswerverifiedShow Answer

Since, in classical economic theory, both the velocity of money and real output are assumed to be stable,

Correct AnswerverifiedShow Answer

The supply of money is determined by

Correct AnswerverifiedShow Answer

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We must suppose that V is rela...
View Answer

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