12.2 Money, the Price Level, and Inlation
1) In the long-run, money market equilibrium determines
A) the value of money.
B) the nominal interest rate
C) the real interest rate.
D) real GDP.
E) velocity.
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
2) The “value of money”
A) is the quantity of goods and services that a unit of money can buy.
B) is determined by Fed regulations.
C) increases during inlationary periods.
D) increases during economic expansions.
E) is directly related to the price level.
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
3) Which of the following applies to the “value of money”?
i. It is the inverse of the price level.
ii. The value of money falls during economic expansions.
iii. It is the quantity of goods and services that a unit of money will buy.
A) i and iii
B) i, ii and iii
C) iii only
D) ii and iii
E) i and ii
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
41
4) In the long run, what determines the value of money?
A) the government budget balance
B) international trade
C) money market equilibrium
D) equilibrium in the loanable funds market
E) real GDP
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
5) If the quantity of money supplied ________ the quantity demanded, in the long run the
value of money ________.
A) exceeds; falls as people spend their surplus money
B) exceeds; rises as people buy bonds
C) is less than; falls as people spend their surplus money
D) is less than; does not change unless the Fed increases the money supply
E) equals; equals zero
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
6) The long-run money demand curve shows
A) that the value of money inluences the quantity of money that households and irms plan
to hold.
B) that the value of money is directly related to the quantity of money demanded.
C) the relationship between real GDP and money demand.
D) the relationship between potential GDP and money demand.
E) how the Fed determines the appropriate interest rate.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
42
7) If the Fed increases the quantity of money, in the short run the ________ and in the long
run the ________.
A) price level rises; the nominal interest rate falls
B) nominal interest rate falls; the price level falls
C) nominal interest rate rises; the price level falls
D) nominal interest rate falls; the price level rises
E) nominal interest rate rises; the price level rises
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
8) In the igure above, in the long run what happens if the Fed increases the quantity of
money by 5 percent?
A) The value of money falls by 5 percent and there will be a movement down along the
LRMD curve.
B) The real interest rate falls and the LRMD curve shifts rightward.
C) The nominal interest rate rises by 5 percent.
D) The price level rises by 5 percent and the LRMD shifts leftward.
E) The value of money rises by 5 percent.
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
43
9) In the igure above, what happens if the Fed increases the quantity of money by 8
percent?
A) The LRMD curve shifts rightward to restore equilibrium.
B) The value of money falls to 0.92 and there is a movement downward along the LRMD.
C) The price level falls to 1.08.
D) The interest rate rises to 1.08.
E) The value of money rises to 1.08.
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
10) In the long run, an increase in the quantity of money ________ the value of money and
________ the price level.
A) raises; raises
B) raises; does not change
C) lowers; lowers
D) lowers; does not change
E) lowers; raises
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
11) In the long run, when the Fed increases the quantity of money, the
A) price level rises.
B) nominal interest rate falls.
C) demand for money decreases.
D) price level falls.
E) real interest rate rises.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
44
12) In the long run, an increase in the quantity of money leads to
A) an equal percentage increase in the real interest rate.
B) a smaller percentage increase in the real interest rate.
C) an equal percentage increase in the price level.
D) a smaller percentage increase in the price level.
E) no efect on the price level or on real GDP.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
13) In the long run, an increase in the quantity of money, other things remaining the same,
A) increases the price level.
B) decreases the price level.
C) increases real GDP.
D) decreases real GDP.
E) has no efect on the price level or real GDP.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
14) Other things remaining the same, in the long run ________ in the quantity of money
brings an equal percentage ________.
A) an increase; decrease in the price level
B) a decrease; decrease in the price level
C) a decrease; increase in the price level
D) a decrease; increase in the nominal interest rate
E) an increase; increase in the real interest rate
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
45
15) The proposition that in the long run when real GDP equals potential GDP, an increase in
the quantity of money leads to an equal percentage increase in the price level is the called
the quantity theory of
A) constant velocity.
B) inlation.
C) money.
D) equal change.
E) the long run.
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
16) When real GDP equals potential GDP, the quantity theory of money says that an
increase in the quantity of money brings an equal percentage
A) increase in the price level.
B) increase in real GDP.
C) decrease in the price level.
D) decrease in velocity.
E) decrease in real GDP.
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
17) Using the quantity theory of money, in the long run a 3 percent increase in the quantity
of money leads to a 3 percent
A) increase in the price level.
B) increase in the real interest rate.
C) decrease in the price level.
D) decrease in the real interest rate.
E) increase in real GDP.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
46
18) The average number of times in a year each dollar is used to buy goods and service is
called
A) velocity of circulation.
B) inlation.
C) circulation rate.
D) nominal GDP.
E) rate of circulation speed.
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
19) The “velocity of circulation” refers to the
A) ratio between the quantity of money and the price level.
B) average number of times in a year each dollar is used to buy goods and services.
C) average number of times a dollar is deposited and withdrawn from a bank account.
D) average speed with which the Fed increases or decreases the quantity of money.
E) average speed with which the nominal interest rate changes when the inlation rate
changes.
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
20) The velocity of circulation is deined as the
A) average number of times in a year that each dollar is used to buy goods and services.
B) quantity of money supplied by the Fed.
C) quantity of money demanded at equilibrium.
D) price level obtained when the money market is at its equilibrium.
E) speed with which changes in the interest rate spread throughout the economy.
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
47
21) The velocity of circulation is equal to
A) the price level divided by real GDP.
B) the price level multiplied by the quantity of money.
C) nominal GDP divided by the quantity of money.
D) the quantity of money divided by the price level and then multiplied by real GDP.
E) the quantity of money divided by nominal GDP.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
22) According to the equation of exchange, the
A) quantity of money multiplied by the inlation rate equals nominal GDP.
B) velocity of circulation is always smaller than the inlation rate.
C) quantity of money divided by the inlation rate equals real GDP.
D) quantity of money multiplied by the velocity of circulation equals nominal GDP.
E) quantity of money minus the velocity of circulation equals real GDP minus the price
level.
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
23) The equation of exchange shows that
A) P = (M ÷ V) × Y.
B) P = (M × Y) ÷ V.
C) P = (V × M) × Y.
D) P = (M × V) ÷ Y.
E) P – Y = M + V.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
48
24) Velocity is V, the quantity of money is M, the price level is P, and real GDP is Y. Which
of the following formulas is correct?
A) V = (P × Y) ÷ M
B) V = (P + Y) × M
C) Y = V × M
D) Y = (P × M) ÷ V
E) Y = (P + M) – V
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
25) If the quantity of money is $6 billion and nominal GDP is $9 billion, the velocity of
circulation is
A) 0.67.
B) 3.
C) 1.5.
D) 36.
E) 54.
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
26) If nominal GDP is $6.0 trillion and the quantity of money is $1.5 trillion, then the
A) price level is 110.
B) price level is 120.
C) velocity of circulation is 4.
D) velocity of circulation is 10.
E) price level is 4.00.
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
49
27) If real GDP is $200, the price level is 2.5, and velocity is 5, then the quantity of money
is
A) $200.
B) $100.
C) $750.
D) $1,000.
E) $500.
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
28) Suppose the quantity of money and real GDP do not change. If velocity increases, then
the
A) price level will rise.
B) price level will fall.
C) real interest rate will rise.
D) real interest rate will fall.
E) inlation rate will fall.
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
29) According to the equation of exchange, if velocity and real GDP do not change, a 3
percent increase in the quantity of money
A) raises the price level by 3 percent.
B) raises the price level by 3 ÷ (velocity).
C) lowers the price level by 3 ÷ (real GDP).
D) lowers the price level by 3 percent.
E) raises the price level by less than 3 percent.
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
50