24) It is estimated that if the inlation rate is lowered from 3 percent a year to 0 percent a
year, the growth rate of real GDP will rise by ________ percentage points a year.
A) 0.06 to 0.09
B) 1 to 3
C) 2.3
D) 3.2
E) 0
Skill: Level 1: Deinition
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
71
12.4 Chapter Figures
1) The demand for money curve is shown in the igure above. A movement from point B to
point C could be the result of
A) a fall in the nominal interest rate.
B) a decrease in the total beneit from holding money.
C) an increase in the quantity of money held by banks.
D) a rise in the real interest rate.
E) a rise in the real interest rate matched by an equal fall in the nominal interest rate.
Skill: Level 1: Deinition
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
72
2) The demand for money curve is shown in the igure above. What could shift the demand
for money curve rightward from the curve illustrated in the igure above?
A) a decrease in the supply of money
B) a decrease in real GDP
C) a fall in the real interest rate
D) a fall in the nominal interest rate.
E) an increase in the price level
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
3) The demand for money curve is shown in the igure above. What could shift the demand
for money curve rightward from the curve illustrated in the igure above?
A) a decrease in the supply of money
B) an increase in the supply of money
C) a fall in the inlation rate
D) a fall in the nominal interest rate
E) an increase in real GDP
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
73
4) The igure above shows the money market. At which interest rate are people selling
bonds and thereby changing the interest rate?
A) 6 percent
B) 5 percent
C) 4 percent
D) 6 percent and 4 percent
E) 6 percent, 5 percent, and 4 percent
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
12.5 Integrative Questions
1) The dominant factor why the nominal interest rate difers among nations is that ________
difers among nations.
A) potential GDP
B) the unemployment rate
C) inlation rate
D) the price level
E) the quantity of money
Skill: Level 5: Critical thinking
Section: Integrative
Status: Old
AACSB: Analytical thinking
2) If the inlation rate is zero, the nominal interest rate is
A) greater than the real interest rate.
B) less than the real interest rate.
C) equal to the real interest rate.
74
D) equal to the inlation rate.
E) positive and the real interest rate is negative.
Skill: Level 1: Deinition
Section: Integrative
Status: Old
AACSB: Analytical thinking
3) The long-run efect of a decrease in the growth rate of the quantity of money is a
A) lower real interest rate.
B) higher real interest rate.
C) lower nominal interest rate.
D) higher nominal interest rate.
E) higher inlation rate.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Relective thinking
4) The long-run efect of an increase in the growth rate of the quantity of money is a
A) lower real interest rate.
B) higher real interest rate.
C) lower nominal interest rate.
D) higher nominal interest rate.
E) lower inlation rate.
Skill: Level 2: Using deinitions
Section: Integrative
Status: Old
AACSB: Relective thinking
75
5) If the Fed wants to lower the nominal interest rate in the short run, the Fed ________ the
growth rate of the quantity of money.
A) raises
B) lowers
C) does not change
D) irst lowers and then raises
E) None of the above answers is correct because the premise of the question is wrong since
the Fed cannot afect the nominal interest rate, only the real interest rate.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
6) If the Fed wants to lower the nominal interest rate in the long run, the Fed ________ the
growth rate of the quantity of money.
A) raises
B) lowers
C) does not change
D) irst lowers and then raises
E) None of the above answers is correct because the premise of the question is wrong since
the Fed cannot afect the nominal interest rate, only the real interest rate.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
7) In the long run, the real interest rate is 3 percent, real GDP grows at 4 percent, velocity
is constant, and the quantity of money grows at 8 percent. The nominal interest rate is
A) 6 percent.
B) 7 percent.
C) 8 percent.
D) 10 percent.
E) 12 percent.
Skill: Level 5: Critical thinking
Section: Integrative
Status: Old
AACSB: Analytical thinking
76
8) In the long run, the real interest rate is 3 percent, real GDP grows at 4 percent, velocity
is constant, and the quantity of money grows at 6 percent. The nominal interest rate is
A) 3 percent.
B) 4 percent.
C) 5 percent.
D) 10 percent.
E) 6 percent.
Skill: Level 5: Critical thinking
Section: Integrative
Status: Old
AACSB: Analytical thinking
9) In the short run, an increase in the growth rate of the quantity of money ________ the
nominal interest rate and in the long run it ________ the nominal interest rate.
A) raises; raises
B) raises; lowers
C) lowers; raises
D) lowers; lowers
E) does not change; raises
Skill: Level 5: Critical thinking
Section: Integrative
Status: Old
AACSB: Analytical thinking
10) In the long run, an increase in the growth rate of the quantity of money ________ the
inlation rate and ________ the nominal interest rate.
A) raises; raises
B) raises; lowers
C) lowers; raises
D) lowers; lowers
E) raises; does not change
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
77
11) In the long run, when an economy experiences inlation, the price level ________ and the
nominal interest rate ________.
A) rises; remains constant
B) remains constant; rises
C) rises; rises
D) falls; rises
E) rises; falls
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Analytical thinking
12) During the 1990s, Canada had an average inlation rate of 1.5 percent while Columbia
had an average inlation rate of 21.5 percent. You would expect that nominal interest rates
in Canada are
A) less than nominal interest rates in Columbia.
B) equal to nominal interest rates in Columbia.
C) greater than nominal interest rates in Columbia.
D) unpredictably diferent from nominal interest rates in Columbia.
E) not comparable to nominal interest rates in Columbia.
Skill: Level 5: Critical thinking
Section: Integrative
Status: Old
AACSB: Analytical thinking
13) Inlation decreases the growth of capital because
i. when the after-tax real interest rate falls, savings decreases.
ii. velocity increases when inlation increases.
iii. the higher the inlation rate, the higher is the true income tax rate on income from
capital.
A) i only
B) ii only
C) iii only
D) i and iii
E) i, ii, and iii
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Relective thinking
78
14) In a period of hyperinlation, the velocity of circulation increases because
A) households and irms spend money as soon as they receive payment.
B) the nominal interest rate decreases.
C) potential GDP increases.
D) the real interest rate rises.
E) money is valuable everyone wants it.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Relective thinking
15) During a period of hyperinlation, as households and irms avoid holding money,
A) potential GDP increases.
B) long term savings accounts become more popular.
C) barter becomes more common.
D) capital investment increases.
E) the costs of inlation decrease.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Relective thinking
12.6 Essay: Money and the Interest Rate
1) What is the opportunity cost of holding money?
Skill: Level 1: Deinition
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
2) Why is the nominal interest rate the opportunity cost of holding money?
Skill: Level 1: Deinition
Section: Checkpoint 12.1
Status: Old
AACSB: Written and oral communication
3) What efect does an increase in the nominal interest rate have on the opportunity cost of
holding money and on the demand for money curve?
Skill: Level 1: Deinition
79
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
4) If the inlation rate is 3 percent and the real interest rate is 3 percent, then what is the
nominal interest rate?
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
5) If the real interest rate is 3 percent and the inlation rate is 2 percent, what is the
nominal interest rate?
Skill: Level 2: Using deinitions
Section: Checkpoint 12.1
Status: Old
AACSB: Analytical thinking
6) What factors lead to changes in the quantity demanded of money and what factors lead
to changes in the demand for money?
Skill: Level 1: Deinition
Section: Checkpoint 12.1
Status: Old
AACSB: Relective thinking
80