CHAPTER 5.2

The value of money rises as the price level

• rises, because the number of dollars needed to buy a representative basket of goods rises.
• rises, because the number of dollars needed to buy a representative basket of goods falls.
• falls, because the number of dollars needed to buy a representative basket of goods rises.
• falls, because the number of dollars needed to buy a representative basket of goods falls.

When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of money

• increases, so the quantity of money demanded increases.
• increases, so the quantity of money demanded decreases.
• decreases, so the quantity of money demanded decreases.
• decreases, so the quantity of money demanded increases.

When the money market is drawn with the value of money on the vertical axis, an increase in the price level causes a

• shift to the right of the money demand curve.
• shift to the left of the money demand curve.
• movement to the left along the money demand curve.
• movement to the right along the money demand curve.

When the money market is drawn with the value of money on the vertical axis, if there is a surplus of money then

• the value of money rises which will make people desire to hold more money.

• the value of money rises which will make people desire to hold less money.

• the value of money falls which will make people desire to hold more money.

• the value of money falls which will make people desire to hold less money.

When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is an

• excess demand for money, so the price level will rise.
• excess demand for money, so the price level will fall.
• excess supply of money, so the price level will rise.
• excess supply of money, so the price level will fall.

Suppose the money market, drawn with the value of money on the vertical axis, is in equilibrium. If the money supply increases, then at the old value of money there is an

• excess demand for money that will result in an increase in spending.
• excess demand for money that will result in a decrease in spending.
• excess supply of money that will result in an increase in spending.
• excess supply of money that will result in a decrease in spending.

When the money market is drawn with the value of money on the vertical axis, an increase in the money supply shifts the money supply curve to the

• right, lowering the price level.
• right, raising the price level.
• left, raising the price level.
• left, lowering the price level.

Open-market purchases by the Fed make the money supply

• increase, which makes the value of money increase.
• increase, which makes the value of money decrease.
• decrease, which makes the value of money decrease.
• decrease, which makes the value of money increase.

The price level falls. This might be because the Federal Reserve

• bought bonds which raised the money supply.
• bought bonds which reduced the money supply.
• sold bonds which raised the money supply.
• sold bonds which reduced the money supply.

When the money market is drawn with the value of money on the vertical axis, if money demand shifts leftward, then initially there is an

• excess demand for money which causes the price level to rise.
• excess demand for money which causes the price level to fall.
• excess supply of money which causes the price level to rise.
• excess supply of money which causes the price level to fall.