True/False Indicate whether the
statement is true or false.


1.

The real rate of interest is the nominal rate of interest less the expected
inflation rate.


2.

The real return on money is zero.


3.

An increase in the money growth rate affects household consumption, C.


4.

In the market clearing model, an increase in the money growth rate leads to an
increase in the inflation rate.


5.

In the market clearing model an increase in the money growth rate leads to a
decrease in the nominal interest rate.

Multiple Choice Identify the
choice that best completes the statement or answers the question.


6.

The actual inflation rate is:
a.  the change in the price level divided by the original price
level.  b.  The original price level divided the change in price level.  c.  the original price
level divided by the new price level.  d.  the new price level divided by the original
price level 


7.

If the price level last year was 110 and this year is 118, then the inflation
rate between last period and this period was:


8.

If the price level last year was 135 and this year is 142, then the inflation
rate between last period and this period was:
a.  4.9%.  b.  7%.  c.  5.1%.  d.  5.2%. 


9.

If the price level last year was 106 and this year is 102, then the inflation
rate between last period and this period was:
a.  3.8%.  b.  4%.  c.  3.8%.  d.  3.9%. 


10.

The unexpected inflation rate is:
a.  the expected inflation rate less the actual inflation rate.  b.  the expected
inflation rate divided by the actual inflation rate.  c.  the actual inflation rate less the expected
inflation rate.  d.  the actual inflation rate divided by the expected inflation
rate. 


11.

If the expected inflation rate is 5% and the actual inflation rate is 4%, then
the unexpected inflation rate is:


12.

If the expected inflation rate is 3% and the actual inflation rate is 5%, then
the unexpected inflation rate is:


13.

If the expected inflation rate is 5% and the unexpected inflation rate is 4%,
then the actual inflation rate is:


14.

If the expected inflation rate is 3% and the unexpected inflation rate is 2%,
then the actual inflation rate is:


15.

The real interest rate is
a.  the nominal interest rate plus the expected inflation rate.  b.  the nominal interest
rate divided by the expected inflation rate.  c.  the nominal interest rate less the expected
inflation.  d.  the expected inflation rate divided by the nominal rate of
interest. 


16.

If the nominal interest rate is 5% and the expected inflation rate is 2%, then
the expected real rate of interest is:


17.

If the nominal interest rate is 2% and the actual inflation rate is 5%, then the
actual real rate of interest is:


18.

When the real interest rate, r, can differ from the nominal interest rate, i,
then:
a.  money demand depends on the real rate of interest.  b.  consumption depends
on the real rate of interest.  c.  consumption depends on the nominal rate of
interest.  d.  money demand no longer depends on any interest rate. 


19.

An indexed bond is one:
a.  that pays a real rate of interest.  b.  that is indexed to the economic growth
rate.  c.  that is indexed to the expected inflation rate.  d.  that pays a nominal
rate of interest. 


20.

The data on countries around the world show that:
a.  the inflation rate is positively related to the growth of
currency.  b.  the inflation rate is unrelated to the growth in currency.  c.  the inflation rate
is inversely related to the growth of currency.  d.  countries with high currency growth rates have
higher real GDP. 


21.

The nominal rate of interest on money is:
a.  zero.  b.  real rate of return on money less the inflation
rate.  c.  minus the inflation rate.  d.  all of the
above. 


22.

The nominal rate of interest on money is:
a.  positive.  b.  real rate of return on money plus the inflation
rate.  c.  minus the inflation rate.  d.  all of the
above. 


23.

The real rate of interest on money is:
a.  zero.  b.  the nominal rate of return on money plus the
inflation rate.  c.  minus the inflation rate.  d.  all of the
above. 


24.

If the interest rate is 5% and the inflation rate is 3%, then the nominal rate
of return on money is:


25.

If the interest rate is 5% and the inflation rate is 3%, then the real rate of
return on money is:


26.

If the interest rate is 6% and the inflation rate is 2%, then the nominal rate
of return on money is:


27.

If the interest rate is 6% and the inflation rate is 2%, then the real rate of
return on money is:


28.

In the market clearing model money growth is modeled as:
a.  random.  b.  lumpsum transfers.  c.  via the purchase of
bonds.  d.  all of the above. 


29.

Lump sum transfers for money growth implies:
a.  we need to analyze how transfer affects GDP.  b.  we do not have to
analyze how households adjust their behavior to attract transfers.  c.  we need to analyze
how transfers affect capital.  d.  we need to model how households adjust their
behavior to attract transfers. 


30.

The expected rate of inflation is:
a.  the real rate of interest less the nominal rate of interest.  b.  the nominal interest
rate on nominal bonds less the interest rate on indexed bonds.  c.  the nominal rate of
interest plus the real rate of interest.  d.  the interest rate on indexed bonds less the
nominal interest rate on nominal bonds. 


31.

An increase in the money growth rate in the market clearing model causes:
a.  an increase in the nominal interest rate.  b.  a decrease in money
demand.  c.  an increase in the price level.  d.  all of the
above. 


32.

An increase in the money growth rate in the market clearing model causes:
a.  an increase in the nominal interest rate.  b.  an increase in money
demand.  c.  a decrease in the price level.  d.  all of the
above. 


33.

An increase in the money growth rate in the market clearing model causes:
a.  a decrease in the nominal interest rate.  b.  a decrease in money
demand.  c.  an increase in consumption.  d.  all of the
above. 


34.

An increase in the money growth rate in the market clearing model causes:
a.  a decrease in the nominal interest rate.  b.  an increase in
consumption.  c.  an increase in the price level.  d.  all of the
above. 


35.

An increase in the money growth rate in the market clearing model causes:
a.  an increase in the nominal interest rate.  b.  a decrease in money
demand.  c.  an increase in the inflation rate.  d.  all of the
above. 


36.

An increase in the money growth rate in the market clearing model causes:
a.  a decrease in the nominal interest rate.  b.  an increase in money
demand.  c.  an increase in the inflation rate.  d.  all of the
above. 


37.

The growth rate of real money balances is:
a.  the growth rate of nominal money less the inflation rate.  b.  the growth rate of
nominal money divided by the inflation rate.  c.  the growth rate of nominal money plus the
inflation rate.  d.  the inflation rate divided by the growth rate of nominal
money. 


38.

When the rate of growth rate of money is constant:
a.  the inflation rate equals the growth rate of money.  b.  the nominal interest
rate is the real rate of interest plus the growth rate of money.  c.  real money balance
are fixed over time.  d.  all of the
above. 


39.

When the rate of growth rate of money is constant:
a.  the inflation rate equals the growth rate of money.  b.  the nominal interest
rate rises.  c.  real money balance are declining.  d.  all of the
above. 


40.

When the rate of growth rate of money is constant:
a.  the inflation rate is growing.  b.  the nominal interest rate is the real rate of
interest plus the growth rate of money.  c.  real money balance are
declining.  d.  all of the above. 


41.

When the rate of growth rate of money is constant:
a.  the inflation rate is growing.  b.  the nominal interest rate is
declining.  c.  real money balance are constant over time.  d.  all of the
above. 


42.

Real revenue from printing money is approximately:
a.  the nominal interest rate times real money balances.  b.  the money growth
rate times real money balances.  c.  the real interest rate times nominal money
balances.  d.  the money growth rate times nominal money balances. 


43.

If the inflation rate is 3% and the nominal interest rate is 5% and the money
growth rate increases to 5%, then we would expect the nominal interest rate to be:


44.

If the inflation rate is 3% and the nominal interest rate is 5% and the money
growth rate increases to 5%, then we would expect the inflation rate to be:


45.

If the inflation rate is 3% and the nominal interest rate is 5% and the money
growth rate increases to 5%, then we would expect real money balances to:
a.  fall.  b.  increase.  c.  remain
unchanged.  d.  to fluctuate. 


46.

If the inflation rate is 2% and the nominal interest rate is 4% and the money
growth rate increases to 3%, then we would expect the nominal interest rate to be:


47.

If the inflation rate is 2% and the nominal interest rate is 4% and the money
growth rate increases to 5%, then we would expect the inflation rate to be:


48.

A decrease in the money growth rate in the market clearing model causes:
a.  a decrease in the nominal interest rate.  b.  an increase in money
demand.  c.  a decrease in the price level.  d.  all of the
above. 


49.

A decrease in the money growth rate in the market clearing model causes:
a.  a decrease in the nominal interest rate.  b.  a decrease in money
demand.  c.  an increase in the price level.  d.  all of the
above. 


50.

A decrease in the money growth rate in the market clearing model causes:
a.  an increase in the nominal interest rate.  b.  an increase in money
demand.  c.  an increase in the price level.  d.  all of the
above. 


51.

A decrease in the money growth rate in the market clearing model causes:
a.  an increase in the nominal interest rate.  b.  a decrease in money
demand.  c.  a decrease in the price level.  d.  all of the
above. 


52.

A decrease in the money growth rate in the market clearing model causes:
a.  a decrease in the nominal interest rate.  b.  an increase in money
demand.  c.  a decrease in the inflation rate.  d.  all of the
above. 


53.

A decrease in the money growth rate in the market clearing model causes:
a.  an increase in the nominal interest rate.  b.  a decrease in money
demand.  c.  an increase in the inflation rate.  d.  all of the
above. 


54.

If the inflation rate is 3% and the nominal interest rate is 5% and the money
growth rate decreases to 2%, then we would expect the inflation rate to be:


55.

If the inflation rate is 3% and the nominal interest rate is 5% and the money
growth rate increases to 2%, then we would expect the nominal interest rate to be:

Short Answer


56.

Derive the relationship between nominal and real interest rates.


57.

After allowing for inflation expectations why does real money demand still
depend on the nominal rate of interest?


58.

What advantages are there to modeling money growth as lumpsum transfers?


59.

What happens in the market clearing model when the money growth rate
increases?


60.

What is the government revenue from printing money?
