Holding money provides a benefit ________.A. because it is a means of paymentB. because its opportunity cost is lowC. which is constant no matter how much money is heldD. because most money is in bank deposits
The opportunity cost of holding money _______.A. is determined by the inflation rateB. is zero because money earns no interestC. equals the nominal interest rate on bondsD. equals the real interest rate on bonds
Answer: C By holding money rather than bonds, the holder loses thereturn on the bonds, which is the nominal interest rate
The quantity of money demanded increases if _______.A. the supply of money increasesB. the nominal interest rate fallsC. banks increase the interest rate on depositsD. the price of a bond falls
Answer: B The nominal interest rate is the opportunity cost of holdingmoney, so a decrease in the nominal interest rate increases thequantity of money demanded.
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If the Fed increases the quantity of money, people will be holding________.A. too much money, so they buy bonds and the interest rate risesB. too much money, so they buy bonds and the interest rate fallsC. the quantity of money they demand and banks will hold more moneyD. more money and will increase their demand for money
Answer: B People initially are holding more money than they want, sothey buy bonds in order to hold less money, which raises theprice of bonds and lowers their interest rate.
In the long run, money market equilibrium determines the _______.A. real interest rateB. price levelC. nominal interest rateD. economic growth rate
If the quantity theory of money is correct and other things remain thesame, an increase in the quantity of money increases _______.A. nominal GDP and the velocity of circulationB. the price level and potential GDPC. real GDPD. nominal GDP and the price level
Answer: D An increase in the quantity of money has no effect on realGDP or velocity, so an increase in the quantity of money raisesthe price level and hence also raises nominal GDP.
In the long run with a constant velocity of circulation, the inflation rate______.A. is constant and equals the money growth rateB. equals the money growth rate minus the growth rate of real GDPC. equals the growth rate of real GDP minus the growth rate of moneyD. is positive if the economic growth rate is positive
Answer: B If velocity is constant, the growth rate of velocity is 0 percent,so the equation of exchange demonstrates that answer B iscorrect.
The costs of inflation do not include _______.A. the cost of running around to compare prices at different outletsB. the increased opportunity cost of holding moneyC. the tax on money held by individuals and businessesD. an increase in saving and investment