Foundations of Macroeconomics, 7e (Bade/Parkin)
Chapter 12 Money, Interest, and Inlation
12.1 Money and the Interest Rate
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 proits that people and businesses would like to receive.
E) sum of checkable and savings deposits at banks.
Skill: Level 1: Deinition
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
2) The quantity of money demanded
A) is the total currency in circulation.
B) is the same as the money supply.
C) is equal to real GDP.
D) is the money that people choose to hold.
E) changes only when real GDP changes.
Skill: Level 1: Deinition
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
3) When you accumulate more money,
A) the marginal beneit 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.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
1
4) 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.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
5) As opportunity cost of holding money increases, people can
A) do nothing.
B) try to maximize marginal beneit.
C) ind a better job.
D) seek substitutes for money.
E) increase the demand for money but not the quantity of money they hold.
Skill: Level 3: Using models
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
6) 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.
Skill: Level 1: Deinition
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
2
7) The opportunity cost of holding money instead of an interest earning asset is the
A) real interest rate.
B) nominal interest rate.
C) inlation rate minus the nominal interest rate.
D) inlation rate.
E) inlation rate minus the real interest rate.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
8) The opportunity cost of holding money is the
A) nominal interest rate.
B) real interest rate.
C) inlation rate.
D) time it takes to go to the ATM or bank.
E) growth rate of real GDP.
Skill: Level 1: Deinition
Section: Checkpoint 12.1
Status: Revised
AACSB: Relective thinking
9) When the nominal interest rate falls, the opportunity cost of holding money
A) decreases and the demand for money curve shifts leftward.
B) decreases and there is a movement downward along the demand for money curve.
C) increases and there is a movement upward along the demand for money curve.
D) decreases and the demand for money curve shifts rightward.
E) increases and the demand for money curve shifts rightward.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
3
10) The quantity of money demanded will decrease if the
A) inlation rate decreases.
B) nominal interest rate decreases.
C) real interest rate decreases.
D) nominal interest rate increases.
E) price level rises.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
11) The lower the nominal interest rate, the
A) greater the demand for money.
B) greater the quantity of money demanded.
C) greater the quantity of money supplied.
D) smaller the demand for goods and services.
E) smaller the quantity of money demanded.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
12) The ________ the nominal interest rate, the ________ is the quantity of money demanded.
A) lower; greater
B) lower; smaller
C) higher; greater
D) more variable; smaller
E) None of the above because the nominal interest rate does not inluence the quantity of
money demanded.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
4
13) 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
inlation 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.
Skill: Level 4: Applying models
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
14) Suppose you can earn 5 percent on your savings account if you deposit $500 in it. The
inlation rate is 3 percent. The opportunity cost of holding the $500 as money is
A) $25.
B) $100.
C) $80.
D) $525.
E) $30.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
15) The relationship between the nominal interest rate, the real interest rate, and the
inlation rate is that the
A) real interest rate is equal to the nominal interest rate plus the inlation rate.
B) nominal interest rate is equal to the real interest rate plus the inlation rate.
C) real interest rate is equal to the nominal interest rate multiplied by the inlation rate.
D) nominal interest rate is equal to the real interest rate divided by the inlation rate.
E) nominal interest rate is equal to the real interest rate minus the inlation rate.
Skill: Level 1: Deinition
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
5
16) The real interest rate equals the
A) nominal interest rate – inlation rate.
B) (nominal interest rate ÷ inlation rate) × 100.
C) inlation rate – nominal interest rate.
D) (nominal interest rate × inlation rate)/100.
E) nominal interest rate ÷ inlation rate.
Skill: Level 1: Deinition
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
17) The diference between the nominal interest rate and the real interest rate is the
A) inlation rate.
B) unemployment rate.
C) GDP growth rate.
D) money growth rate minus the growth rate of real GDP.
E) price level.
Skill: Level 1: Deinition
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
18) In the long run, the nominal interest rate is
A) negatively related to the price level.
B) positively related to the price level.
C) negatively related to the inlation rate.
D) positively related to the inlation rate.
E) not related to the price level or the inlation rate.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
6
19) You have a $500 saving bond. The nominal interest rate is 10 percent, and the inlation
rate is 4 percent. After a year, in real terms you have earned
A) $70.
B) $40.
C) $50.
D) $30.
E) $510.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
20) You have a $500 saving bond. If the nominal interest rate is 10 percent, then the
inlation rate must be
A) zero, otherwise you would sell the bond.
B) 10 percent if in real terms you earned $200.
C) 4 percent if in real terms you earned $70.
D) 4 percent if in real terms you earned $30.
E) 10 percent if in real terms you earned $100.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: New
AACSB: Analytical thinking
21) Suppose the nominal interest rate on a savings bond is 7 percent a year and the
inlation rate is 4.5 percent a year. How much is the real interest rate?
A) 1.56 percent
B) 11.5 percent
C) 2.5 percent
D) 7 percent
E) 4.5 percent
Skill: Level 3: Using models
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
7
22) If the inlation rate is 2.5 percent and the nominal interest rate is 10 percent, then the
real interest rate is
A) 2.5 percent.
B) 7.5 percent.
C) -7.5 percent.
D) -2.5 percent.
E) 12.5 percent.
Skill: Level 3: Using models
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
23) If the inlation 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.
Skill: Level 3: Using models
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
24) If the real interest rate is 8 percent and the inlation rate is 2.5 percent, then the
nominal interest rate is
A) 10.5 percent.
B) 2.5 percent.
C) 5.5 percent.
D) 8 percent.
E) 3.2 percent.
Skill: Level 3: Using models
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
8
25) Barbara is willing to loan $10,000 if she can earn a real interest rate of 6 percent.
Everything else the same, if the inlation rate is 2 percent, she would agree to loan the
$10,000 if the nominal interest rate is
A) 4 percent.
B) 10 percent.
C) 3 percent.
D) 8 percent.
E) 12 percent.
Skill: Level 3: Using models
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
26) Barbara is willing to loan $10,000 if she can earn a real interest rate of 6 percent.
Everything else the same, if the inlation rate is 2 percent, she would agree to loan the
$10,000 if the nominal interest rate is ________ because ________.
A) 8 percent; she would earn more than her desired amount of 6 percent
B) 4 percent or higher; she would not earn her desired amount of 6 percent if the nominal
interest rate was any lower
C) 4 percent or lower; she would not earn her desired amount of 6 percent if the nominal
interest rate was any higher
D) 8 percent or higher; she would not earn her desired amount of 6 percent if the nominal
interest rate was any lower
E) 8 percent or lower; she would not earn her desired amount of 6 percent if the nominal
interest rate was any higher
Skill: Level 3: Using models
Section: Checkpoint 12.1
Status: New
AACSB: Analytical thinking
27) Assume you have a credit card balance of $2,000 at 15 percent and the inlation rate is
3 percent. What are the nominal and real interest rates?
A) 15 percent nominal and 3 percent real
B) 3 percent nominal and 12 percent real
C) 15 percent nominal and 12 percent real
D) 15 percent nominal and 18 percent real
E) 12 percent nominal and 15 percent real
Skill: Level 3: Using models
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
9
28) The nominal interest rate is 12 percent and the inlation rate is 4 percent. The
opportunity cost of holding a dollar for a year is
A) 12 cents.
B) 16 cents.
C) 88 cents.
D) 8 cents.
E) 48 cents.
Skill: Level 1: Deinition
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
29) The opportunity cost of holding money
A) increases as the nominal interest rate increases.
B) decreases as the nominal interest rate increases.
C) does not change with the changes in the nominal interest rate.
D) is ixed at all interest rates.
E) is the price level.
Skill: Level 1: Deinition
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
30) 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 inlation rate.
D) the price level.
E) real GDP.
Skill: Level 1: Deinition
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
10