Question 1

-In the above figure, if the interest rate is 8 percent per year, the quantity of money demanded is

Accepted Answer

The quantity of money demanded is less than the quantity of money supplied, so the interest rate will change to bring the two quantities into equilibrium.

Question 2

If the nominal interest rate is above its equilibrium value, then

Accepted Answer

The answer of If the nominal interest rate is above...

Question 3

The opportunity cost of holding money is the

Accepted Answer

The opportunity cost of holding money is the nominal interest rate because it represents the foregone interest that could have been earned if the money were invested instead of being held as cash.

Question 4

When the Fed increases the quantity of money, the

Accepted Answer

When the Fed increases the quantity of money, the supply of money curve shifts rightward, leading to a lower equilibrium nominal interest rate.

Question 5

$$\begin{array} { c c c } 
\begin{array} { c } 
\text { Nominal interest rate } \
\text { (percent per year) }
\end{array} & \begin{array} { c } 
\text { Quantity of } \
\text { (trillions of demanded }
\end{array} & \begin{array} { c } 
\text { Quantity of } \
\text { money supplied } \
\text { (trillions of dollars) }
\end{array} \
\hline 5 & 2.9 & 2.5 \
6 & 2.8 & 2.5 \
7 & 2.7 & 2.5 \
8 & 2.6 & 2.5 \
9 & 2.5 & 2.5 \
10 & 2.4 & 2.5
\end{array}$$
-The above table has the demand and supply schedules for money.What is the equilibrium nominal interest rate?

Accepted Answer

The equilibrium nominal interest rate is where the quantity of money demanded equals the quantity of money supplied, which occurs at 9 percent.

Question 6

When the Fed increases the quantity of money,

Accepted Answer

The price level is typically slow to change in response to an increase in the quantity of money. This is because the increase in money supply needs time to circulate through the economy and affect prices.

Question 7

In the long run, what determines the value of money?

Accepted Answer

In the long run, the value of money is determined by money market equilibrium, where the supply and demand for money balance, influencing the price level and purchasing power.

Question 8

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.

Accepted Answer

The value of money is often considered as the inverse of the price level (i), and it is also defined as the quantity of goods and services that a unit of money will buy (iii).

Question 9

$$\begin{array} { c c c } 
\begin{array} { c } 
\text { Nominal interest rate } \
\text { (percent per year) }
\end{array} & \begin{array} { c } 
\text { Quantity of } \
\text { (trillions of demanded }
\end{array} & \begin{array} { c } 
\text { Quantity of } \
\text { money supplied } \
\text { (trillions of dollars) }
\end{array} \
\hline 5 & 2.9 & 2.5 \
6 & 2.8 & 2.5 \
7 & 2.7 & 2.5 \
8 & 2.6 & 2.5 \
9 & 2.5 & 2.5 \
10 & 2.4 & 2.5
\end{array}$$
-The above table has the demand and supply schedules for money.If the Fed increases the quantity of money by $0.1 trillion, the new equilibrium nominal interest rate is

Accepted Answer

The increase in the quantity of money supplied will shift the supply curve to the right, leading to a lower equilibrium nominal interest rate. The new equilibrium will be at the intersection of the new supply curve and the demand curve, which is at a nominal interest rate of 8 percent.

Question 10

Which of the following statements is correct?

Accepted Answer

The correct formula for calculating the nominal interest rate is to add the real interest rate and inflation rate. This is because the nominal interest rate includes both the real interest rate (the rate of return adjusted for inflation) and the expected inflation rate. Therefore, option B is the correct statement.

Question 11

-In the above figure, if the interest rate is 3 percent per year, the quantity of money demanded is

Accepted Answer

When the interest rate is 3 percent, the quantity of money demanded is greater than the quantity of money supplied, leading to upward pressure on the interest rate to restore equilibrium.

Question 12

The "value of money"

Accepted Answer

The value of money refers to the purchasing power of a unit of currency, or the amount of goods and services that can be purchased with a given amount of money. This is determined by supply and demand in the economy, rather than by government regulations or economic conditions alone. Therefore, option A is the correct answer.

Question 13

A change in financial technology that reduces the need to hold large cash balances ________ the demand for money and ________ the equilibrium nominal interest rate.

Accepted Answer

When the need to hold large cash balances reduces, people will have less demand for money because they can use other financial technology (such as mobile payments or credit cards) instead. This decrease in demand for money shifts the demand curve for money to the left, leading to a decrease in the equilibrium nominal interest rate. Therefore, the correct answer is option D, which states that a change in financial technology that reduces the need to hold large cash balances decreases the demand for money and lowers the equilibrium nominal interest rate.

Question 14

The demand for money curve shows the relationship between the quantity of money demanded and

Accepted Answer

The demand for money curve reflects the relationship between the quantity of money demanded and the nominal interest rate. As the nominal interest rate increases, the opportunity cost of holding money (which does not earn interest) also increases, thereby reducing the quantity of money demanded. Therefore, the demand for money curve slopes downward.

Question 15

The demand for money ________ when the ________.

Accepted Answer

According to the quantity theory of money, as the price level increases, people need more money to carry out their transactions. Therefore, the demand for money increases as the price level increases.

Question 16

-In the above figure, if the interest rate is 2 percent per year, the quantity of money demanded is

Accepted Answer

When the interest rate is 2 percent, the quantity of money demanded is greater than the quantity of money supplied, leading to upward pressure on the interest rate.

Question 17

$$\begin{array} { c c c } 
\begin{array} { c } 
\text { Nominal interest rate } \
\text { (percent per year) }
\end{array} & \begin{array} { c } 
\text { Quantity of } \
\text { (trillions of demanded }
\end{array} & \begin{array} { c } 
\text { Quantity of } \
\text { money supplied } \
\text { (trillions of dollars) }
\end{array} \
\hline 5 & 2.9 & 2.5 \
6 & 2.8 & 2.5 \
7 & 2.7 & 2.5 \
8 & 2.6 & 2.5 \
9 & 2.5 & 2.5 \
10 & 2.4 & 2.5
\end{array}$$
-The above table has the demand and supply schedules for money.Real GDP increases and, as a result, the demand for money increases by $0.2 trillion at each level of the nominal interest rate.The new equilibrium interest rate is

Accepted Answer

The new equilibrium interest rate is 5 percent because at that interest rate, the quantity of money demanded equals the quantity of money supplied.

Question 18

-In the above figure, the equilibrium interest rate is ________ and the equilibrium quantity of money is ________ trillion.

Accepted Answer

The answer of 
-In the above figure, the equilibrium interest...

Question 19

The quantity of money demanded

Accepted Answer

The quantity of money demanded is not infinite but rather depends on the balance between the benefit of having an additional dollar of money and the opportunity cost of holding that money. This balance is subjective and varies between individuals, and is ultimately what determines the demand for money in an economy. The Fed does not directly control the quantity of money demanded, but it can influence it through monetary policy.

Question 20

Every day ________ adjusts to make the quantity of money demanded equal the quantity of money supplied.

Accepted Answer

The nominal interest rate adjusts to balance the quantity of money demanded with the quantity of money supplied, as it influences the cost of borrowing and the incentive to hold money.

Quiz 12: Money, Interest, and Inflation