Multiple Choice Questions
1. The classical principle of monetary neutrality states that changes in the money supply do not influence _________ variables and is thought most applicable in the _________ run.
a. Nominal, short
b. Nominal, long
c. Real, short
d. Real, long
2. If nominal GDP is $400, real GDP is $200, and the money supply is $100, then
a. The price level is ½, and velocity is 2.
b. The price level is ½, and velocity is 4.
c. The price level is 2, and velocity is 2.
d. The price level is 2, and velocity is 4.
3. According to the quantity theory of money, which variable in the quantity equation is most stable over long periods of time?
a. Money
b. Velocity
c. Price level
d. Output
4. Hyperinflations occur when the government runs a large budget _________, which the central bank finances with a substantial monetary _________.
a. Deficit, contraction
b. Deficit, expansion
c. Surplus, contraction
d. Surplus, expansion
5. According to the quantity theory of money and the Fisher effect, if the central bank increases the rate of money growth,
a. Inflation and the nominal interest rate both increase.
b. Inflation and the real interest rate both increase.
c. The nominal interest rate and the real interest rate both increase.
d. Inflation, the real interest rate, and the nominal interest rate all increase.
6. If an economy always has inflation of 10 percent per year, which of the following costs of inflation will it NOT suffer?
a. Shoe leather costs from reduced holdings of money
b. Menu costs from more frequent price adjustment
c. Distortions from the taxation of nominal capital gains
d. Arbitrary redistributions between debtors and creditors