Question 1

Central banks have perfect control over the money supply in their economies.

True

False

Question 2

The nominal interest rate is a better measure of the opportunity cost of holding money than the real interest rate because in addition to the real interest rate it includes the loss of money's value due to inflation.

True

False

Question 3

How does an increase in the money supply affect the LM curve?

The LM curve remains unaffected.

The LM curve becomes steeper.

The shift in the LM curve depends on the foreign money supply.

The LM curve becomes flatter.

The change in the LM curve cannot be predicted.

Question 4

After the unification of the East and West German economies in 1990, the East German mark (EDM) was replaced by the West German mark (DM). A contested issue in the debates over the terms of unification was the rate at which the EDM and DM were to be exchanged for each other. Some argued that DM 1 must be set equal to EDM 2, while others favored a one-to-one relationship. In the end, the government of Germany decided to apply the DM 1=EDM 1 exchange rate for the first 3000 Eastern marks that each former East German citizen wanted to convert and maintain an exchange rate of DM 1=EDM 2 for any additional amounts of EDM offered for exchange. Suppose the German government had decided to apply the 1:1 rate to all East German marks.

Assuming that all other policies as well as production levels would have remained the same, compared to what actually happened to the dollar-DM exchange rate, the dollar value of the DM __________.

would have been higher

could have been higher or lower in unpredictable ways

would have been the same

would have been lower

Question 5

If the central bank of Turkey temporarily increases the money supply of the country, given other parameters, what will happen to the equilibrium interest rate in Turkey? How will this policy affect the exchange rate of Turkish lira vis--vis the euro?

The equilibrium interest rate will rise, and the exchange rate of Turkish lira will appreciate.

The equilibrium interest rate will decline, and the exchange rate of Turkish lira will appreciate.

The equilibrium interest rate will decline, and the exchange rate of Turkish lira will depreciate.

The equilibrium interest rate will rise, and the exchange rate of Turkish lira will remain unchanged.

Question 6

Assuming that the real interest rate and the real GDP growth are given in the long run, an increase in the rate of growth of money supply over many years _________.

leads to a lower nominal interest rate

leads to a higher nominal interest rate

has no effect on the nominal interest rate

has an ambiguous effect on the nominal interest rate

Question 7

Assuming that the price level and the real GDP are given in the short run, a temporary increase in money supply _________.

leads to a lower nominal interest rate

leads to a higher nominal interest rate

has no effect on the nominal interest rate

has an ambiguous effect on the nominal interest rate

Question 8

It is observed that the money supply in the US increases. Which of the following might have caused this movement?

Fed must have bought government bonds.

Fed must have set a higher minimum reserve requirement.

Fed must have increased the discount rate.

Fed must have sold government bonds.

Question 9

Which of the following explains why the demand for money is proportional to PY where P is the price level and Y is the GDP? Check all that apply.

Money is a medium of exchange.

Demand for money rises with the volume of transactions.

Money is a store of value.

Holding money has an opportunity cost.

Question 10

Given the money demand curve, an increase in money supply will cause which of the following changes?

No change in the interest rate

Decrease the interest rate

May increase or decrease the interest rate depending on the exchange rate

Increase the interest rate

Lower bond prices