Test 8

If nominal GDP is $400, real GDP is $200, and the money supply is $100, then

• the price level is ½, and velocity is 2.

• the price level is ½, and velocity is 4.

• the price level is ½, and velocity is 4.

• the price level is 2, and velocity is 2

Answer explanation

Real GDP is equal to nominal GDP divided by the price level: Real GDP = Nominal GDP / Price lvl. 200 = 400 / Price lvl. Price lvl = 2.The quantity equation states that the quantity of money (M) times the velocity of money (V) equals the price of output (P) times the amount of output (Y). Substituting the values from the problem yields the following: M x V = P x Y; 100 x V = 2 x 200; V = 400 / 100 = 4)

Hyperinflations occur when the government runs a large budget .............., which the central bank finances with a substantial monetary . ...............

• surplus, contraction

• deficit, expansion

• deficit, contraction

• surplus, expansion

 If an economy always has inflation of 10 percent per year, which of the following costs of inflation will it NOT suffer?

• arbitrary redistributions between debtors and creditors

• menu costs from more frequent price adjustment

• distortions from the taxation of nominal capital gains

• shoeleather costs from reduced holdings o f money

In which of the following cases was the inflation rate 12 percent over the last year?

• One year ago the price index had a value o f 145 and now it has a value of 163

• One year ago the price index had a value o f 110 and now it has a value of 120

• One year ago the price index had a value of 120 and now it has a value of 132

• One year ago the price index had a value o f 134 and now it has a value of 150

Deflation 

• decreases incomes and enhances the ability of debtors to pay off their debts

• increases incomes and enhances the ability of debtors to pay off their debts

• increases incomes and reduces the ability of debtors to pay off their debts

• decreases incomes and reduces the ability of debtors to pay off their debts

The classical theory of inflation

• is also known as the quantity theory of money.

• was developed by some of the earliest economic thinkers

• is used by most modern economists to explain the long-run determinants of the inflation rate

• All

If the CPI rises, the number of dollars needed to buy a representative basket of goods

• decreases, and so the value of money rises

• increases, and so the value of money falls

• increases, and so the value of money rises

• decreases, and so the value of money falls

When inflation rises people will

• demand more money so the price level falls

• demand less money so the price level falls

• demand more money so the price level rises

• demand less money so the price level rises

If P denotes the price of goods and services measured in terms of money, then

• 1/P represents the value of money measured in terms of goods and services

• P can be regarded as the “overall price level.”

• an increase in the value of money is associated with a decrease in P

• All

The supply of money increases when

• the interest rate increases

• the State Bank of Vietnam makes open-market purchases

• money demand increases

• the price level falls