Problem Set 10

Econ 201 (03 and 04) Spring 2002

(Dr. Tin-Chun Lin)

  1. A decrease in the quantity of money will cause

(A)Both the price level and real GDP to decline in the short run; but in the long run, only the price level will fall as real GDP returns to its initial level.

(B)Both the price level and real GDP to increase in the short run; but in the long run, only the price level will rise as real GDP returns to its initial level.

(C)The price level to fall in the short run; but in the long run, the price level will return to its initial level.

(D)The price level to fall and real GDP to rise in both the short run and the long run.

(E)None of above.

(Answer: (A))

  1. According to the quantity theory of money, an increase in the quantity of money will lead to an increase in the price level

(A)As well as increasing both real GDP and the velocity of circulation.

(B)As well as increasing real GDP but decreasing the velocity of circulation.

(C)As well as decreasing real GDP but increasing the velocity of circulation.

(D)But have no effect on real GDP and the velocity of circulation.

(E)As well as increasing real GDP but have no effect on the velocity of circulation.

(Answer: (D))

  1. If the price level is 2, real GDP is $100 billion, and the quantity of money is $40 billion, then the velocity of circulation is

(A)2.5

(B)4

(C)5

(D)10

(E)50

(Answer: (C))

  1. Which of the following is not one of the main policy tools of the Fed?

(A)Required reserve ratios.

(B)Currency ratio.

(C)Discount rate.

(D)Open market operations.

(E)None of above.

(Answer: (B))

  1. The discount rate is the interest rate at which

(A)Banks charge their very best loan customers.

(B)Banks pay on certificates of deposit.

(C)The Fed pays on reserve held by banks.

(D)The commercial bank charges when it lends reserves to banks.

(E)The Fed charges when it lends reserves to banks.

(Answer: (E))

  1. If households and firms find that their holdings of real money are less than desired, they will

(A)Sell financial assets which will cause interest rates to rise.

(B)Sell financial assets which will cause interest rates to fall.

(C)Buy financial assets which will cause interest rates to rise.

(D)Buy financial assets which will cause interest rates to fall.

(E)Sell financial assets which will cause interest rates to be constant.

(Answer: (A))

  1. If real GDP increases, the demand curve for real money will shift to the

(A)Left, and the interest rate will rise.

(B)Left, and the interest rate will fall.

(C)Right, and the interest rate will rise.

(D)Right, and the interest rate will fall.

(E)Left, but the interest rate will not change.

(Answer: (C))

  1. Suppose that the country A has a constant population, capital stock, and technology. In year 1, real GDP was $400 million, the price level was 2, and the velocity of circulation of money was 20. In year 2, the quantity of money was 20 percent higher than in year 1.
  1. What was the quantity of money in country A in year 1? (Answer: $40 million)
  2. What was the quantity of money in country A in year 2? (Answer: $48 million)
  3. What was the price level in year 2? (Answer: 2.4)
  4. What was the level of real GDP in year 2? (Answer: $400 million)
  5. What was the velocity of circulation in year 2? (Answer: 20)
  1. Which of the following will cause the demand curve for real money to shift to the left?

(A)An increase in real GDP.

(B)The expanded use of credit cards.

(C)An increase in the price level.

(D)An increase in the quantity of money supplied.

(E)An increase in the interest rate.

(Answer: (B))

  1. (True of False) An increase in the demand for real money will cause the interest rate to fall.

(Answer: False)

  1. (True or False) If the Fed wants to lower interest rates, it should sell government securities in the open market.

(Answer: False)