Deck 30: 1: Sec 301 Mc the Classical Theory of Inflation

Question 1

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

Answer 1

B

Question 2

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.

Answer 2

A

Question 3

With the value of money on the vertical axis,the money supply curve is

A)upward-sloping.
B)downward-sloping.
C)horizontal.
D)vertical.

Answer 3

C

Question 4

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

Question 5

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.

Question 6

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.

Question 7

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.

Question 8

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.

Question 9

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.

Question 10

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.

Question 11

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.

Question 12

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.

Question 13

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.

Question 14

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.

Question 15

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.

Question 16

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.

Question 17

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.

Question 18

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

Question 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.

Question 20

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.

Question 21

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.

Question 22

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.

Question 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.

Question 24

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.

Question 25

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.

Question 26

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.

Question 27

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.

Question 28

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.

Question 29

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.

Question 30

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.

Question 31

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.

Question 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.

Question 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

Question 34

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.

Question 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.

Question 36

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.

Question 37

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.

Question 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.

Question 39

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.

Question 40

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.

Question 41

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.

Question 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.

Question 43

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.

Question 44

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.

Question 45

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.

Question 46

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.

Question 47

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.

Question 48

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.

Question 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.

Question 50

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.

Question 51

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.

Question 52

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.

Question 53

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.

Question 54

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.

Question 55

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.

Question 56

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.

Question 57

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.

Question 58

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.

Question 59

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.

Question 60

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.

Question 61

When the money market is drawn with the value of money on the vertical axis,if money supply and money demand both shift to the right

A)the price level must have risen
B)the price level must have fallen.
C)the price level rises if money supply shifts farther than money demand.
D)the price level falls if money supply shifts farther than money demand.

Question 62

Consider the money market drawn with the value of money on the vertical axis.If money demand is unchanged and the price level rises,then

A)the money supply must have increased,perhaps because the Fed bought bonds.
B)the money supply must have increased,perhaps because the Fed sold bonds.
C)the money supply must have decreased,perhaps because the Fed bought bonds.
D)the money supply must have decreased,perhaps because the Fed sold bonds.

Question 63

When the money market is drawn with the value of money on the vertical axis,a decrease in the money supply leads people to

A)spend more so the value of a dollar rises.
B)spend more so the value of a dollar falls.
C)spend less so the value of a dollar rises.
D)spend less so the value of a dollar falls.

Question 64

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.

Question 65

Figure 30-1
Refer to Figure 30-1.If the money supply is MS₂ and the value of money is 2,then there is an excess

A)demand for money that is represented by the distance between points A and C.
B)demand for money that is represented by the distance between points A and B.
C)supply of money that is represented by the distance between points A and C.
D)supply of money that is represented by the distance between points A and B.

Question 66

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.

Question 67

When the money market is drawn with the value of money on the vertical axis,the price level increases if

A)either money demand or money supply shifts right.
B)either money demand or money supply shifts left.
C)money demand shifts right or money supply shifts left.
D)money demand shifts left or money supply shifts right.

Question 68

Figure 30-1
Refer to Figure 30-1.If the money supply is MS₂ and the value of money is 2,then

A)the quantity of money demanded is greater than the quantity supplied;the price level will rise.
B)the quantity of money demanded is greater than the quantity supplied;the price level will fall.
C)the quantity of money supplied is greater than the quantity demanded;the price level will rise.
D)the quantity of money supplied is greater than the quantity demanded;the price level will fall.

Question 69

Figure 30-1
Refer to Figure 30-1.When the money supply curve shifts from MS₁ to MS₂,

A)the equilibrium value of money decreases.
B)the equilibrium price level decreases.
C)the supply of money has decreased.
D)the demand for goods and services will decrease.

Question 70

When the money market is drawn with the value of money on the vertical axis,the value of money decreases if

A)either money demand or money supply shifts right.
B)either money demand or money supply shifts left.
C)money demand shifts right or money supply shifts left.
D)money demand shifts left or money supply shifts right.

Question 71

The value of money falls.This might be because the Federal Reserve

A)bought bonds,which increased the money supply.
B)bought bonds,which decreased the money supply.
C)sold bonds,which increased the money supply.
D)sold bonds,which decreased the money supply.

Question 72

Suppose there is a surplus in the money market.

A)This could have been created by an increase in the money supply.The value of money will rise.
B)This could have been created by an increase in the money supply.The value of money will fall.
C)This could have been created by a decrease in the money supply.The value of money will rise.
D)This could have been created by a decrease in the money supply.The value of money will fall.

Question 73

When the money market is drawn with the value of money on the vertical axis,if the Fed sells bonds then

A)the money supply and the price level increase.
B)the money supply and the price level decrease.
C)the money supply increases and the price level decreases.
D)the money supply increases and the price level increases.

Question 74

When the money market is drawn with the value of money on the vertical axis,if the Federal Reserve buys bonds,then the money supply curve

A)shifts rightward,causing the value of money measured in terms of goods and services to rise.
B)shifts rightward,causing the value of money measured in terms of goods and services to fall.
C)shifts leftward,causing the value of money measured in terms of goods and services to rise.
D)shifts leftward,causing the value of money measured in terms of goods and services to fall.

Question 75

The price level rises if either

A)money demand shifts rightward or money supply shifts leftward;this rise in the price level is associated with a rise in the value of money.
B)money demand shifts rightward or money supply shifts leftward;this rise in the price level is associated with a fall in the value of money.
C)money demand shifts leftward or money supply shifts rightward;this rise in the price level is associated with a rise in the value of money.
D)money demand shifts leftward or money supply shifts rightward;this rise in the price level is associated with a fall in the value of money.

Question 76

When the money market is drawn with the value of money on the vertical axis,the price level increases if

A)money demand shifts right and decreases if money supply shifts right.
B)money demand shifts right and decreases if money supply shifts left.
C)money demand shifts left and decreases if money supply shifts right.
D)money demand shifts left and decreases if money supply shifts left.

Question 77

When the money market is drawn with the value of money on the vertical axis,if money demand shifts leftward,then initially there is an

A)excess demand for money which causes the price level to rise.
B)excess demand for money which causes the price level to fall.
C)excess supply of money which causes the price level to rise.
D)excess supply of money which causes the price level to fall.

Question 78

When the money market is drawn with the value of money on the vertical axis,the price level decreases if

A)either money demand or money supply shifts right.
B)either money demand or money supply shifts left.
C)money demand shifts right or money supply shifts left.
D)money demand shifts left or money supply shifts right.

Question 79

The price level rises if either

A)money demand or money supply shifts rightward.
B)money demand shifts rightward or money supply shifts leftward.
C)money demand shifts leftward or money supply shifts rightward.
D)money demand or money supply shifts leftward.

Question 80

Figure 30-1
Refer to Figure 30-1.When the money supply curve shifts from MS₁ to MS₂,

A)the demand for goods and services decreases.
B)the economy's ability to produce goods and services increases.
C)the equilibrium price level decreases.
D)None of the above is correct.