PRACTICE TEST 22

(Bassam AbuAlFoul)

Chapter 22 Stabilizing the Economy: The Role of the Central Bank Part I. Multiple Choice: Choose the best answer for the following questions.
1. The velocity of money is: a. the rate at which the price index for consumer goods rises. b. the multiple by which an increase in government expenditures will cause output to rise. c. set by the Board of Governors of the Federal Reserve System. d. the rate at which money changes hands. 2. As the price level increases: a. the quantity of money demanded falls. b. the value of money falls. c. the money supply will decrease. d. real GDP will increase. 3. According to monetary neutrality: a. a change in the money supply will not affect real variables. b. a change in the money supply will affect only real variables. c. a change in the money supply will not affect nominal variables. d. a change in the money supply will affect both nominal and real variables. 4. A decrease in the price level indicates: a. that the economy has experienced deflation. b. the existence of inflation. c. a decline in real GDP. d. that either inflation or deflation may exist. 5. According to the quantity equation, if the supply of money increases: a. the price level falls. b. real output falls. c. the nominal value of output (P x Y) will increase. d. velocity increases. 6. Suppose the nominal interest rate is 7%. The rate of inflation is 2%. The real interest rate is: a. 2%. b. 5%. c. 7%. d. 9%. 7. One of the main determinants of the quantity of money demanded is: a. the price level. b. monetary policy. c. nominal GDP. d. the unemployment rate. 8. The equation of exchange states that: a. MY = V. b. MV = PY. c. M/V = PY. d. M/V = Y.

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9. The "shoeleather" costs of inflation refer to: a. the redistributive consequences of inflation. b. the negative effect inflation has on long-term investment. c. the fact that people waste resources by trying to avoid inflation. d. the fact that people have to do a lot more walking to find affordable goods. 10. According to the Fisher effect, an increase in the money supply will: a. cause an increase in inflation and higher nominal interest rates. b. cause an increase in inflation and higher real interest rates. c. cause a decrease in inflation and lower nominal interest rates. d. cause a decrease in inflation and lower real interest rates. 11. According to the quantity theory of money: a. the price level varies in proportion to the money supply. b. an increase in the money supply reduces velocity. c. an increase in the money supply increases velocity. d. an increase in the money supply boosts real output. 12. When the money supply increases: a. the value of money will increase. b. the demand for money will increase. c. the value of money will decrease. d. the demand for money will decrease. 13. The primary result of inflation is: a. a decline in prices. b. a rise in wages. c. a decline in the value of money. d. a rise in personal wealth. 14. The theoretical separation of nominal and real variables is known as: a. Engel's law. b. the classical dichotomy. c. Gresham's law. d. Newton's law. 15. Given the quantity theory of money, if the quantity of money were doubled, then prices would: a. fall 50 percent. b. double. c. increase fourfold. d. decrease fourfold. 16. If the monetary authorities continue over time to expand the supply of money more rapidly than real output, the probable result will be: a. inflation. b. lower money interest rates. c. an increase in real aggregate supply. d. a decline in the velocity of money. 17. Suppose the rate of inflation is 2% and the real interest rate is 5%. The nominal interest rate will be: a. 3%. b. -3%. c. 7%. d. -7%.

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18. As the price level increases: a. the money supply will fall. b. the quantity of money demanded will increase. c. the quantity of money demanded will decrease. d. there will be no change in the quantity of money demanded. 19. The cost of printing new price lists is an example of: a. relative-price variability. b. shoeleather costs. c. menu costs. d. reallocatin costs. 20. The money supply is NOT responsive to changes in the price level because: a. it is fixed by the Central Bank. b. it is fixed at a 2 percent per year growth rate. c. it is elastic. d. it only responds to changes in the output of goods and services. 21. 18. In 1997, GDP was equal to $5,463 billion while the M1 money supply was $826 billion. What was the velocity of money? a. 3.6 b. 6.6 c. 8 d. 15 22. An example of the "shoeleather" costs of inflation is: a. the redistribution of income in favor of households. b. the redistribution of income in favor of government. c. the impairment of investment and long-term growth. d. Sara withdraws money from the bank everyday rather than once a week. 23. A period of generally falling prices is called: a. hyperinflation. b. inflation. c. deflation. d. contraction.

Part II: Internet:

You are also encouraged to visit the web site for your textbook which is rich in learning resources and materials related to each chapter. In addition, you can test your knowledge with the online quizzes. The internet address was provided in the course syllabus. Here it is again: http://highered.mcgrawhill.com/sites/007712961x/student_view0/index.html

ANSWERS (For Part I):

1. 2. 3. 4. 5. 6. 7. 8. d. the rate at which money changes hands. b. the value of money falls. a. a change in the money supply will not affect real variables. a. that the economy has experienced deflation. c. the nominal value of output (P x Y) will increase. b. 5%. a. the price level. b. MV = PY.

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9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.

c. the fact that people waste resources by trying to avoid inflation. a. cause an increase in inflation and higher nominal interest rates. a. the price level varies in proportion to the money supply. c. the value of money will decrease. c. a decline in the value of money. b. the classical dichotomy. b. double. a. inflation. c. 7%. b. the quantity of money demanded will increase. c. menu costs. a. it is fixed by the Central Bank. b. 6.6 d. Sara withdraws money from the bank everyday rather than once a week. c. deflation.

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