Multiple-Choice Review Questions

1. Based on the equation of exchange, if M = 100, V = 3, and Y = 150, then P =
(A) 1/2.
(B) 1.
(C) 1.5.
(D) 2.
(E) 600.

2. According to the quantity theory of money, a decrease in the money supply would
(A) raise the price level and output in the economy.
(B) lower the price level and output in the economy.
(C) raise the price level in the economy.
(D) lower the price level in the economy.
(E) raise the price level and lower output in the economy.

3. According to the assumptions of the quantity theory of money, if the money supply increases by 5 percent, then
(A) nominal and real GDP would rise by 5 percent.
(B) nominal GDP would rise by 5 percent; real GDP would be unchanged.
(C) nominal GDP would be unchanged; real GDP would rise by 5 percent.
(D) neither nominal GDP nor real GDP would change.
(E) nominal GDP would be unchanged; the price level would rise by 5 percent.

4. According to the classical dichotomy, if the money supply rises 5 percent, then
(A) the velocity of money will fall 5 percent.
(B) the price level will rise almost proportionally.
(C) the GDP deflator will fall 5 percent.
(D) the price level will fall about 5 percent.
(E) real GDP rises 5 percent.

5. According to the classical dichotomy, which of the following is influenced by monetary factors?
(A) Nominal wages
(B) Unemployment
(C) Real GDP
(D) Tonnage of steel produced in the U.S.
(E) The standard of living

6. The principle of monetary neutrality implies that an increase in the money supply will
(A) increase real GDP and the price level.
(B) increase real GDP but not the price level.
(C) increase the price level but not real GDP.
(D) increase neither the price level nor real GDP.
(E) increase the price level and employment.

7. Which of the following is not a financial intermediary in the U.S. economy?
(A) The U.S. Mint
(B) Commercial banks
(C) Investment banks
(D) Savings and loan associations
(E) Credit unions

8. The nominal interest rate is 6 percent, and the inflation rate is 2 percent. What is the real interest rate?
(A) -4 percent
(B) 3 percent
(C) 4 percent
(D) 8 percent
(E) 12 percent

9. If the real interest rate is above its equilibrium value, then there will be
(A) an excess supply of loanable funds that pushes the real interest rate down.
(B) an excess supply of loanable funds that pushes the real interest rate up.
(C) a shortage of loanable funds that pushes the real interest rate down.
(D) a shortage of loanable funds that pushes the real interest rate up.
(E) a shortage of loanable funds that increases lending.

10. If the demand for loanable funds decreases, then the equilibrium real interest rate
(A) rises but the equilibrium quantity of funds remains unchanged.
(B) rises and the equilibrium quantity of funds increases.
(C) rises and the equilibrium quantity of funds decreases.
(D) falls and the equilibrium quantity of funds decreases.
(E) falls and the equilibrium quantity of funds increases.

11. Imagine an economy that previously banned foreign investors now opens its doors to these lenders. We would expect to see the equilibrium real interest rate
(A) rise and the equilibrium quantity of funds to decrease.
(B) rise but the equilibrium quantity of funds to remain unchanged.
(C) fall and the equilibrium quantity of funds to increase.
(D) fall and the equilibrium quantity of funds to decrease.
(E) rise and the equilibrium quantity of funds to increase.

12. Suppose our federal government needs to borrow more money than ever before. We would expect to see the equilibrium real interest rate
(A) fall and the equilibrium quantity of funds to increase.
(B) fall and the equilibrium quantity of funds to decrease.
(C) rise and the equilibrium quantity of funds to decrease.
(D) rise and the equilibrium quantity of funds to increase.
(E) rise but the equilibrium quantity of funds to remain unchanged.

13. If foreigners decide to invest more in our economy than previously, then we would expect to see the real interest rate
(A) fall and the equilibrium quantity of funds to increase.
(B) fall and the equilibrium quantity of funds to decrease.
(C) rise and the equilibrium quantity of funds to decrease.
(D) rise and the equilibrium quantity of funds to increase.

(E) rise but the equilibrium quantity of funds to remain unchanged.
14. Which of the following shifts the demand for money to the left?
(A) An increase in the price level
(B) An increase in the money supply
(C) A decrease in the price level
(D) A decrease in the money supply
(E) An increase in the nominal interest rate

15. Which of the following shifts the supply of money to the left?
(A) An increase in the price level
(B) An increase in the money supply
(C) A decrease in the price level
(D) A decrease in the money supply
(E) An increase in the nominal interest rate

Free-Response Review Questions

1.Use the equation of exchange to explain why a 10 percent increase in the money supply would lead to an almost proportional increase in the price level.

2.If the price level rises, will the supply or the demand for money be affected? Will it increase or decrease? Explain why.

3.Would a person demand more or less money when the nominal interest rate increases to significantly higher levels? Explain why.