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1. The classical theory of inflation
a.
is also known as the quantity theory of money.
b.
was developed by some of the earliest economic thinkers.
c.
is used by most modern economists to explain the long-run determinants of the inflation rate.
d.
All of the above are correct.
2. The quantity theory of money
a.
is a fairly recent addition to economic theory.
b.
can explain both moderate inflation and hyperinflation.
c.
argues that inflation is caused by too little money in the economy.
d.
All of the above are correct.
3. To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the
a.
quantity theory of money.
b.
price-index theory of money.
c.
theory of hyperinflation.
d.
disequilibrium theory of money and inflation.
4. When the price level falls, the number of dollars needed to buy a representative basket of goods
a.
increases, so the value of money rises.
b.
increases, so the value of money falls.
c.
decreases, so the value of money rises.
d.
decreases, so the value of money falls.
5. When the price level rises, the number of dollars needed to buy a representative basket of goods
a.
increases, and so the value of money rises.
b.
increases, and so the value of money falls.
c.
decreases, and so the value of money rises.
d.
decreases, and so the value of money falls
6. If the CPI rises, the number of dollars needed to buy a representative basket of goods
a.
increases, and so the value of money rises.
b.
increases, and so the value of money falls.
c.
decreases, and so the value of money rises.
d.
decreases, and so the value of money falls
7. When there is inflation, the number of dollars needed to buy a representative basket of goods
a.
increases, and so the value of money rises.
b.
increases, and so the value of money falls.
c.
decreases, and so the value of money rises.
d.
decreases, and so the value of money falls
8. The value of money falls as the price level
a.
rises, because the number of dollars needed to buy a representative basket of goods rises.
b.
rises, because the number of dollars needed to buy a representative basket of goods falls.
c.
falls, because the number of dollars needed to buy a representative basket of goods rises.
d.
falls, because the number of dollars needed to buy a representative basket of goods falls.
9. The value of money rises as the price level
a.
rises, because the number of dollars needed to buy a representative basket of goods rises.
b.
rises, because the number of dollars needed to buy a representative basket of goods falls.
c.
falls, because the number of dollars needed to buy a representative basket of goods rises.
d.
falls, because the number of dollars needed to buy a representative basket of goods falls.
10. If the number of dollars needed to buy a representative basket of goods falls, the price level
a.
falls, so the value of money falls.
b.
falls, so the value of money rises.
c.
rises, so the value of money falls.
d.
rises, so the value of money rises.
11. When inflation rises people will
a.
demand more money so the price level rises.
b.
demand more money so the price level falls.
c.
demand less money so the price level rises.
d.
demand less money so the price level falls.
12. Suppose an economy produces only ice cream cones. If the price level rises, the value of currency
a.
rises, because one unit of currency buys more ice cream cones.
b.
rises, because one unit of currency buys fewer ice cream cones.
c.
falls, because one unit of currency buys more ice cream cones.
d.
falls, because one unit of currency buys fewer ice cream cones.
13. If P denotes the price of goods and services measured in terms of money, then
a.
1/P represents the value of money measured in terms of goods and services.
b.
P can be interpreted as the inflation rate.
c.
the supply of money influences the value of P, but the demand for money does not.
d.
All of the above are correct.
14. The supply of money is determined by
a.
the price level.
b.
the Treasury and Congressional Budget Office.
c.
the Federal Reserve System.
d.
the demand for money.
15. When we assume that the supply of money is a variable that the central bank controls, we
a.
must then assume as well that the demand for money is not influenced by the value of money.
b.
must then assume as well that the price level is unrelated to the value of money.
c.
are ignoring the fact that, in the real world, households are also suppliers of money.
d.
are ignoring the complications introduced by the role of the banking system.
16. If P denotes the price of goods and services measured in terms of money, then
a.
1/P represents the value of money measured in terms of goods and services.
b.
P can be regarded as the “overall price level.”
c.
an increase in the value of money is associated with a decrease in P.
d.
All of the above are correct.
17. With the value of money on the vertical axis, the money supply curve is
a.
upward-sloping.
b.
downward-sloping.
c.
horizontal.
d.
vertical.
18. With the value of money on the vertical axis, the money supply curve is
a.
upward sloping because people supply a larger quantity of money when the value of money increases.
b.
downward sloping because people supply a larger quantity of money when the value of money decreases.
c.
horizontal because we assume the central bank controls the money supply
d.
vertical because we assume the central bank controls the money supply.
19. The supply of money increases when
a.
the price level falls.
b.
the interest rate increases.
c.
the Fed makes open-market purchases.
d.
money demand increases.
20. In the long run, money demand and money supply determine
a.
the value of money and the real interest rate.
b.
the value of money but not the real interest rate.
c.
the real interest rate but not the value of money.
d.
neither the value of money nor the real interest rate.
21. In the long run, money demand and money supply determine
a.
the price level and the real interest rate.
b.
the price level but not the real interest rate.
c.
the real interest rate but not the price level.
d.
neither the price level nor the real interest rate.
22. Money demand refers to
a.
the total quantity of financial assets that people want to hold.
b.
how much income people want to earn per year.
c.
how much wealth people want to hold in liquid form.
d.
how much currency the Federal Reserve decides to print.
23. The primary reason people hold money is
a.
to keep wealth in a less liquid form.
b.
to use it as a medium of exchange.
c.
to use it for investment.
d.
to earn interest.
24. Money demand depends on
a.
the price level and the interest rate.
b.
the price level but not the interest rate.
c.
the interest rate but not the price level.
d.
neither the price level nor the interest rate.
25. As the price level decreases, the value of money
a.
increases, so people must hold less money to purchase goods and services.
b.
increases, so people must hold more money to purchase goods and services.
c.
decreases, so people must hold more money to purchase goods and services.
d.
decreases, so people must hold less money to purchase goods and services.
26. As the price level rises, the value of money
a.
increases, so people must hold less money to purchase goods and services.
b.
increases, so people must hold more money to purchase goods and services.
c.
decreases, so people must hold more money to purchase goods and services.
d.
decreases, so people must hold less money to purchase goods and services.
27. When the Consumer Price Index increases from 100 to 120
a.
more money is needed to buy the same amount of goods, so the value of money falls.
b.
more money is needed to buy the same amount of goods, so the value of money rises.
c.
less money is needed to buy the same amount of goods, so the value of money falls.
d.
less money is needed to buy the same amount of goods, so the value of money rises.
28. When the Consumer Price Index falls from 110 to 100
a.
there is inflation of 9.1% and the value of money decreases.
b.
there is deflation of 9.1% and the value of money increases.
c.
there is deflation of 10% and the value of money increases.
d.
there is inflation of 10% and the value of money decreases.
29. As the Consumer Price Index increases, the value of money
a.
falls, so people hold more money to buy the goods and services they want.
b.
falls, so people hold less money to buy the goods and services they want.
c.
rises, so people hold more money to buy the goods and services they want.
d.
rises, so people hold less money to buy the goods and services they want.
30. When the money market is drawn with the value of money on the vertical axis, as the price level increases the quantity
of money
a.
demanded increases.
b.
demanded decreases.
c.
supplied increases.
d.
supplied decreases.
31. When the money market is drawn with the value of money on the vertical axis, as the price level decreases the
quantity of money
a.
demanded increases.
b.
demanded decreases.
c.
supplied increases.
d.
supplied decreases.
32. If the value of a dollar falls, then the quantity of money demanded
a.
rises, meaning people want to hold more of their wealth in a liquid form.
b.
rises, meaning people desire to work more so their income rises.
c.
falls, meaning people want to hold less of their wealth in a liquid form.
d.
falls, meaning people want to work less so their income falls.
33. When the money market is drawn with the value of money on the vertical axis, as the price level increases which of
the following increases?
a.
the quantity of money demanded and the quantity of money supplied
b.
the quantity of money demanded but not the quantity of money supplied
c.
the quantity of money supplied but not the quantity of money demanded
d.
neither the quantity of money supplied nor the quantity of money demanded
34. When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value
of money
a.
increases, so the quantity of money demanded increases.
b.
increases, so the quantity of money demanded decreases.
c.
decreases, so the quantity of money demanded decreases.
d.
decreases, so the quantity of money demanded increases.
35. When the money market is drawn with the value of money on the vertical axis, as the price level decreases, the value
of money
a.
increases, so the quantity of money demanded increases.
b.
increases, so the quantity of money demanded decreases.
c.
decreases, so the quantity of money demanded decreases.
d.
decreases, so the quantity of money demanded increases.
36. When the money market is drawn with the value of money on the vertical axis, the money demand curve slopes
a.
upward, because at higher prices people want to hold more money.
b.
downward, because at higher prices people want to hold more money.
c.
downward, because at higher price people want to hold less money.
d.
upward, because at higher prices people want to hold less money.
37. When the money market is drawn with the value of money on the vertical axis, a decrease in the price level causes a
a.
movement to the right along the money demand curve.
b.
movement to the left along the money demand curve.
c.
shift to the right of the money supply curve.
d.
shift to the left of the money supply curve.
38. When the money market is drawn with the value of money on the vertical axis, an increase in the price level causes a
a.
shift to the right of the money demand curve.
b.
shift to the left of the money demand curve.
c.
movement to the left along the money demand curve.
d.
movement to the right along the money demand curve.
39. When the money market is drawn with the value of money on the vertical axis,
a.
money demand slopes upward and money supply is horizontal.
b.
money demand slopes downward and money supply is horizontal.
c.
money demand slopes upward and money supply is vertical.
d.
money demand slopes downward and money supply is vertical.
40. When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when
the quantity demanded and quantity supplied of money are equal due to adjustments in
a.
the value of money.
b.
real interest rates.
c.
nominal interest rates.
d.
the money supply.
41. When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when
the quantity demanded and quantity supplied of money are equal due to adjustments in
a.
nominal interest rates.
b.
real interest rates.
c.
the price level.
d.
the money supply.
42. When the money market is drawn with the value of money on the vertical axis, if the price level is above the
equilibrium level, there is an
a.
excess demand for money, so the price level will rise.
b.
excess demand for money, so the price level will fall.
c.
excess supply of money, so the price level will rise.
d.
excess supply of money, so the price level will fall.
43. When the money market is drawn with the value of money on the vertical axis, if the price level is below the
equilibrium level, there is an
a.
excess demand for money, so the price level will rise.
b.
excess demand for money, so the price level will fall.
c.
excess supply of money, so the price level will rise.
d.
excess supply of money, so the price level will fall.
44. When the money market is drawn with the value of money on the vertical axis, if the price level is below the
equilibrium level, there is an
a.
excess demand for money, so the price level will rise.
b.
excess demand for money, so the price level will fall.
c.
excess supply of money, so the price level will rise.
d.
excess supply of money, so the price level will fall.
45. When the money market is drawn with the value of money on the vertical axis, if the value of money is above the
equilibrium level,
a.
the price level will rise.
b.
the value of money will rise.
c.
money demand will shift leftward.
d.
money demand will shift rightward.
46. When the money market is drawn with the value of money on the vertical axis, if there is a shortage of money then
a.
the value of money rises which will make people desire to hold more money.
b.
the value of money rises which will make people desire to hold less money.
c.
the value of money falls which will make people desire to hold more money.
d.
the value of money falls which will make people desire to hold less money.
47. Suppose the money market, drawn with the value of money on the vertical axis, is in equilibrium. If the money supply
increases, then at the old value of money there is an
a.
excess demand for money that will result in an increase in spending.
b.
excess demand for money that will result in a decrease in spending.
c.
excess supply of money that will result in an increase in spending.
d.
excess supply of money that will result in a decrease in spending.
48. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply shifts
the money supply curve to the
a.
right, lowering the price level.
b.
right, raising the price level.
c.
left, raising the price level.
d.
left, lowering the price level.
49. When the money market is drawn with the value of money on the vertical axis, if the money supply rises
a.
the price level and the value of money rise.
b.
the price level rises and the value of money falls.
c.
the price level falls and the value of money rises.
d.
the price level and the value of money fall.
50. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply
a.
increases the price level and increases the value of money.
b.
increases the price level and decreases the value of money.
c.
decreases the price level and increases the value of money.
d.
decreases the price level and decreases the value of money.
51. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply causes
the equilibrium value of money
a.
and equilibrium quantity of money to increase.
b.
and equilibrium quantity of money to decrease.
c.
to increase, while the equilibrium quantity of money decreases.
d.
to decrease, while the equilibrium quantity of money increases.
52. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply
creates an excess
a.
supply of money, causing people to spend more.
b.
supply of money, causing people to spend less.
c.
demand for money, causing people to spend more.
d.
demand for money, causing people to spend less.
53. A decrease in the money supply creates an excess
a.
supply of money that is eliminated by rising prices.
b.
supply of money that is eliminated by falling prices.
c.
demand for money that is eliminated by rising prices.
d.
demand for money that is eliminated by falling prices.
54. The supply of money increases when
a.
the value of money increases.
b.
the interest rate increases.
c.
the Federal Reserve purchases bonds.
d.
velocity increases.
55. If the Fed increases the money supply, then 1/P
a.
falls, so the value of money falls.
b.
falls, so the value of money rises.
c.
rises, so the value of money falls.
d.
rises, so the value of money rises.
56. The economy of Mainland uses gold as its money. If the government discovers a large reserve of gold on their land
a.
the supply of money decreases and the value of money rises.
b.
the supply of money increases and the value of money falls.
c.
the demand for money increases and the value of money rises.
d.
the demand for money decreases and the value of money falls.
57. In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away much
gold, which was in use as a medium of exchange. We would predict that this increase in gold
a.
raised both the price level and the value of gold in Cairo.
b.
raised the price level, but decreased the value of gold in Cairo.
c.
lowered the price level, but increased the value of gold in Cairo.
d.
lowered both the price level and the value of gold in Cairo.
58. In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks in many countries
increased their money supplies. The central banks might have done this by
a.
selling bonds on the open market, which would have raised the value of money.
b.
purchasing bonds on the open market, which would have raised the value of money.
c.
selling bonds on the open market, which would have raised the value of money.
d.
purchasing bonds on the open market, which would have lowered the value of money.
59. Open-market purchases by the Fed make the money supply
a.
increase, which makes the value of money increase.
b.
increase, which makes the value of money decrease.
c.
decrease, which makes the value of money decrease.
d.
decrease, which makes the value of money increase.
60. Open-market purchases by the Fed
a.
make the price level and value of money fall.
b.
make the price level rise, and make the value of money fall.
c.
make the price level and make the value of money rise.
d.
make the price level fall, and make the value of money rise.
61. Which of the following is correct?
a.
If the Fed purchases bonds in the open market, then the money supply curve shifts right. A change in the price
level does not shift the money supply curve.
b.
If the Fed sells bonds in the open market, then the money supply curve shifts right. A change in the price level
does not shift the money supply curve.
c.
If the Fed purchases bonds, then the money supply curve shifts right. An increase in the price level shifts the
money supply curve right.
d.
If the Fed sells bonds, then the money supply curve shifts right. A decrease in the price level shifts the money
supply curve right.
62. When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve sells bonds, then
the money supply curve
a.
shifts right, causing the price level to rise.
b.
shifts right, causing the price level to fall.
c.
shifts left, causing the price level to rise.
d.
shifts left, causing the price level to fall.
