ECON 303 Exam 2

Taken from homeworks; quantitative questions not included

The demand for real money balances is generally assumed to:

increase as real income increases.

If the quantity of real money balances is kY, where k is a constant, then velocity is:

1/k.

If velocity is constant and, in addition, the factors of production and the production function determine real gross domestic product (GDP), then:

the price level is proportional to the money supply.

According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by:

the Federal Reserve.

velocity equation

(P x Y)/M

quantity equation

M x V = P x Y

price level equation

nominal GDP/real GDP

quantity equation in growth rates

ΔM/M + ΔV/V = ΔP/P + ΔY/Y

inflation rate

ΔP/P

ex post real interest rate

i - π

ex ante real interest rate

i - Eπ

The inflation tax is paid:

by all holders of money.

The real interest rate is equal to the:

nominal interest rate minus the inflation rate.

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate implied by the Fisher equation:

increases by 1 percent.

The ex ante real interest rate is equal to the nominal interest rate:

minus the expected inflation rate.

When a person purchases a 90-day Treasury bill, he or she cannot know the:

ex post real interest rate.

The ex post real interest rate will be greater than the ex ante real interest rate when the:

actual rate of inflation is less than the expected rate of inflation.

The opportunity cost of holding money is the:

nominal interest rate.

All else equal, if the nominal interest rate increases, then the:

demand for money decreases.

If the Fed announces that it will raise the money supply in the future but does not change the money supply today,

both the nominal interest rate and the current price level will increase.

If the money supply is held constant, then an increase in the nominal interest rate will _____ the demand for money and _____ the price level.

decrease; increase

The quantity theory of money assumes that:

velocity is constant.

Real money balances equal the:

amount of money expressed in terms of the quantity of goods and services it can purchase.

The rate of inflation is the:

percentage change in the overall level of prices.