Question 1

Define asset market equilibrium and state the asset market equilibrium condition.

Accepted Answer

The answer of Define asset market equilibrium and state the...

Question 2

Bonds sold by the U.S.government that offer a certain real interest rate are known as

Accepted Answer

The description matches Treasury Inflation-Protected Securities (TIPS), which offer investors a certain real interest rate above inflation. Zero-coupon bonds pay no interest and are sold at a discount, savings bonds are typically sold to individuals, and denominational securities refer to bonds traded in certain denominations, which is not relevant to the question.

Question 3

Calculate the change in the price level for each of the following events,taken one at a time,with other variables unchanged.
(a)Money supply increases 10%.
(b)Money demand increases 5%.
(c)Money supply decreases 5% while money demand increases 5%.
(d)Money supply increases 15% while money demand increases 5%.

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The answer of Calculate the change in the price level...

Question 4

The most likely explanation for the high inflation rates that countries like Russia and the Ukraine have suffered is that

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The answer of The most likely explanation for the high...

Question 5

If the nominal money supply grows 6%,real income rises 2%,and the inflation rate is 5%,then the income elasticity of money demand is

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The answer of If the nominal money supply grows 6%,real...

Question 6

When a government prints money to finance its expenditures,it is likely to cause

Accepted Answer

When a government prints more money to finance its expenditures, the amount of money in circulation increases, which leads to a decrease in the value of money. This decrease in the value of money leads to an increase in prices, causing inflation. This not only impacts the economy but also affects the purchasing power of individuals and can lead to a rise in interest rates, decrease in foreign investment, and harm economic growth.

Question 7

If nominal money supply grows 3% and real money demand grows 8%,the inflation rate is

Accepted Answer

According to the quantity theory of money, the inflation rate is equal to the growth rate of the nominal money supply minus the growth rate of real money demand. 
In this case, the nominal money supply grew by 3%, but real money demand grew by 8%. Therefore, the inflation rate is -5%, which means there is actually deflation happening.

Question 8

Suppose real money demand is
L = 0.8 Y - 100,000 (r + ?e).
If the nominal money supply is 12,000,real output is 15,000,the real interest rate is .02,and the expected inflation rate is .01,then the price level is

Accepted Answer

To find the price level (P), use the equation for real money demand: L = 0.8Y - 100,000(r + ?e). Plug in the given values: L = 0.8(15,000) - 100,000(0.02 + 0.01) = 12,000 - 3,000 = 9,000. Since nominal money supply is 12,000, the price level P = nominal money supply / real money demand = 12,000 / 9,000 = 4/3.

Question 9

Suppose the money demand function is given by
Md/P = 640 + 0.1Y - 5000 (r + ?e).
Suppose the central bank changes the nominal money supply depending on income and inflation:
Ms = 1000 + 0.1Y - 4000?.
(a)If expected inflation equals actual inflation = 0.03,Y = 1000,and r = 0.02,calculate the price level.
(b)If inflation rises to 0.04 while the other variables remain as in part a,calculate the price level.
(c)If expected inflation rises to 0.04 while the other variables remain as in part a,calculate the price level.
(d)If the real interest rate rises to 0.03 while the other variables remain as in part a,calculate the price level.

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The answer of Suppose the money demand function is given...

Question 10

Assume that prices and wages adjust rapidly so that the markets for labor,goods,and assets are always in equilibrium.What are the effects of each of the following on output,the expected real interest rate,and the current price level?
(a)a temporary increase in taxes
(b)a reduction in the effective tax rate on capital
(c)an increase in expected inflation

Accepted Answer

The answer of Assume that prices and wages adjust rapidly...

Question 11

If real money demand increases 5% and real money supply increases 10%,by about how much does the price level change?

Accepted Answer

If real money demand increases by 5% and real money supply increases by 10%, it means that the amount of real money available in the economy has increased. There is more money chasing the same amount of goods and services which causes inflationary pressure on the economy. This increase in the supply of money exceeds the increase in the demand for it which means that there is likely to be a rise in the price level. Hence, the correct option is D, which says that the price level will rise by 5%.

Question 12

If the nominal money supply doubles while real money demand is unchanged,what happens to the price level?

Accepted Answer

According to the quantity theory of money, if the nominal money supply doubles while real money demand remains unchanged, the price level will also double. This is because an increase in the money supply without a corresponding increase in the demand for money leads to an excess supply of money, which causes people to spend more on goods and services, driving up prices.

Question 13

Suppose the real interest rate is 4% and the expected inflation rate is 3%.If the money supply increases by 10% and output,the real interest rate,and the expected inflation rate are unchanged,then the price level increases by

Accepted Answer

According to the quantity theory of money, if the money supply increases by 10% and output (real GDP), the real interest rate, and the expected inflation rate are unchanged, then the price level must also increase by the same percentage as the increase in the money supply, which is 10%. This is because, with output and velocity constant, an increase in the money supply directly translates to an increase in the price level.

Question 14

If the nominal money supply grows 10%,the inflation rate is 6%,and the income elasticity of money demand is 1.0,then real income growth equals

Accepted Answer

Real income growth is calculated using the formula:

Real income growth = Nominal income growth - Inflation rate

Given that the nominal money supply grows by 10% and the income elasticity of money demand is 1.0, the nominal income growth will be 10% x 1.0 = 10%.

Substituting the values in the formula, we get:

Real income growth = 10% - 6% = 4%

Thus, the real income growth will be 4%, which corresponds to option D.

Question 15

If the nominal money supply grows 5%,real income falls 2%,and the income elasticity of money demand is 0.8,then the inflation rate is

Accepted Answer

The Fisher equation relates the nominal interest rate, inflation rate, and real interest rate.
Nominal interest rate = Real interest rate + Inflation rate
We can rearrange this equation to find the inflation rate:
Inflation rate = Nominal interest rate - Real interest rate
Given that the nominal money supply grows by 5%, we can assume that the nominal interest rate will also increase. However, we do not know the real interest rate, so we cannot directly calculate the inflation rate.

Instead, we can use the equation for money demand:
M/P = Y(1/i)^ε
where M is the nominal money supply, P is the price level, Y is real income, i is the nominal interest rate, and ε is the income elasticity of money demand.

We can rearrange this equation to solve for the price level:
P = M/(Y(1/i)^ε)

Since we know that M grows by 5% and Y falls by 2%, we can substitute in these values to find the percentage change in the price level:
ΔP/P = ΔM/M - ΔY/Y - ε(Δi/i)

ΔP/P = 5% - (-2%) - 0.8(Δi/i)
ΔP/P = 7% - 0.8(Δi/i)

We know that the percentage change in the nominal interest rate will be greater than zero, since the nominal money supply is growing. Therefore, the term -0.8(Δi/i) will be negative, which means that the inflation rate will be lower than 7%.

Based on the answer choices, the closest option to this value is 6.6%, which is choice C. Therefore, the correct answer is:

Answer: C
 We can use the equation for money demand to calculate the inflation rate, and based on the given information, the inflation rate is lower than 7% and closest to 6.6%, which is choice C.

Question 16

If the income elasticity of money demand is 3/4 and income increases 8%,by about how much does the price level change?

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The answer of If the income elasticity of money demand...

Question 17

Large differences in inflation rates among countries are almost always the result of large differences in

Accepted Answer

Large differences in inflation rates among countries are almost always the result of large differences in the growth rates of nominal money supplies. This is because inflation is primarily influenced by changes in the money supply. When a central bank increases the supply of money in an economy, it can lead to an increase in demand for goods and services, which can ultimately lead to higher prices (inflation). Therefore, differences in the growth rates of nominal money supplies can cause inflation rates to vary significantly between countries.

Question 18

Suppose the real money demand function is
Md/P = 2400 + 0.2 Y - 10,000 (r + ?e).
Assume M = 5000,P = 2.0,and ?e = .03.If Y were to increase from 4000 to 5000,then the real interest rate would increase by how many percentage points?

Accepted Answer

The real money demand function is Md/P = 2400 + 0.2Y - 10,000(r + ?e). Given M = 5000 and P = 2.0, the real money supply is 5000/2 = 2500. Initially, with Y = 4000, the equation becomes 2500 = 2400 + 0.2(4000) - 10,000(r + 0.03). Solving for r gives r = 0.05. When Y increases to 5000, the equation becomes 2500 = 2400 + 0.2(5000) - 10,000(r + 0.03). Solving for r gives r = 0.07. The increase in the real interest rate is 0.07 - 0.05 = 0.02, or 2 percentage points.

Question 19

Why did some of the formerly Communist countries of Eastern Europe have inflation rates over 100%,while others didn't? Which factor was more important in explaining the differing inflation rates,real money demand or nominal money supply? Why did the countries with high inflation rates allow inflation to get so high?

Accepted Answer

The answer of Why did some of the formerly Communist...

Question 20

If real money demand doubles while the nominal money supply is unchanged,what happens to the price level?

Accepted Answer

When real money demand doubles while the nominal money supply remains unchanged, it implies that for the same amount of money in the economy, people now want to hold twice as much real balance. This can only happen if the value of money increases, meaning that each unit of currency now buys more goods and services than before, which is equivalent to saying that the price level falls. Hence, the price level falls by one-half to adjust for the doubled demand in real terms.

Quiz 7: The Asset Market, Money, and Prices