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What does the quantity theory of money try to explain?


A) how inflation determines economic growth
B) the relationship between the quantity of money and the price level
C) the determinants of relative prices in the economy
D) the relationship between inflation and unemployment

E) B) and C)
F) A) and D)

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What can a country increase in the long run by increasing its money growth rate?


A) the nominal wage divided by the price level
B) real output
C) real interest rates
D) the price level

E) B) and C)
F) None of the above

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When the money market is depicted in a graph with the value of money on the vertical axis,as the price level increases,what happens to the value of money?


A) It increases,so the quantity of money demanded increases.
B) It increases,so the quantity of money demanded decreases.
C) It decreases,so the quantity of money demanded decreases.
D) It decreases,so the quantity of money demanded increases.

E) C) and D)
F) A) and C)

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Assuming that velocity is stable,if real GDP grows by 10 percent this year,and if the money supply does not change this year,how does the price level and nominal GDP change?


A) The price level and nominal GDP will not change.
B) The price level will not change but nominal GDP will grow by 10 percent.
C) The price level will decrease by 10 percent and nominal GDP will stay the same.
D) The price level and nominal GDP will increase by 10 percent.

E) A) and D)
F) A) and C)

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(Challenging)Let ÄX denote a small change in the variable X.Starting from the quantity equation MV = PY,show that the following relation between percentage changes holds: ÄM / M + ÄV / V = ÄP / P + ÄY / Y.(Note: It should be emphasized that this relationship holds for small changes,say less than 5 percent.The larger the changes,the less precise are the results derived from this relationship.)

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The quantity equation must hold for any ...

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According to the quantity theory of money,when the money supply doubles,which variable doubles?


A) the price level
B) the velocity of money
C) the real GDP
D) the real wage rate

E) A) and B)
F) B) and C)

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Which statement best describes how the cost of unexpected inflation is distributed?


A) Unexpected inflation has a greater cost for those who borrow than those who save.
B) Unexpected inflation has a greater cost for those who hold a little money than for those who hold a lot of money.
C) Unexpected inflation has a greater cost for those whose wages increase by as much as inflation than those who are paid a fixed nominal wage.
D) Unexpected inflation has a greater cost for savers in high income tax brackets than for savers in low income tax brackets.

E) C) and D)
F) A) and B)

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The irrelevance of monetary changes for real variables is called monetary neutrality.Most economists accept monetary neutrality as a good description of the economy in the long run,but not the short run.

A) True
B) False

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Which statement best describes the effects of an open-market operation undertaken by the Bank of Canada?


A) If the Bank of Canada purchases bonds in the open market,then the money supply shifts right and the price level increases.
B) If the Bank of Canada sells bonds in the open market,then the money supply shifts right and the price level decreases.
C) If the Bank of Canada purchases bonds in the open market,then the money supply shifts left and the price level decreases.
D) If the Bank of Canada sells bonds in the open market,then the money supply shifts left and the price level increases.

E) A) and B)
F) None of the above

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What does the Fisher effect imply?


A) The nominal interest rate adjusts one for one with the inflation rate.
B) The growth rate of the money supply determines the inflation rate.
C) Real variables are heavily influenced by the monetary system.
D) The real interest rate adjusts one for one with the inflation rate.

E) B) and C)
F) None of the above

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Canada has never experienced deflation.

A) True
B) False

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What does nominal GDP measure?


A) the total quantity of final goods and services produced
B) the dollar value of the economy's output of final goods and services
C) the total income received from producing final goods and services in constant dollars
D) the percentage change in price level

E) A) and B)
F) A) and C)

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What is the immediate and longer-term effect of a decrease in the money supply?


A) A decrease in the money supply creates an excess supply of money that is eliminated by rising prices.
B) A decrease in the money supply creates an excess supply of money that is eliminated by falling prices.
C) A decrease in the money supply creates an excess demand for money that is eliminated by rising prices.
D) A decrease in the money supply creates an excess demand for money that is eliminated by falling prices.

E) A) and B)
F) C) and D)

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Velocity in the country of Aquilonia is always stable.In 2014,the money supply was $100 billion,nominal GDP was $500 billion,and the real interest rate was 3 percent.In 2015,the money supply was $105 billion,and real GDP did not change from its level in 2014.What was the approximate nominal interest rate in 2015?


A) 3 percent
B) 5 percent
C) 8 percent
D) 11 percent

E) None of the above
F) B) and D)

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If the nominal interest rate is 9 percent and the real interest rate is 4 percent,what is the inflation rate?


A) 3 percent
B) 5 percent
C) 8 percent
D) 11 percent

E) A) and B)
F) B) and C)

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Which inflation cost matters even if actual inflation and expected inflation are the same?


A) production costs
B) losses in real income
C) losses in tax revenue
D) menu costs

E) C) and D)
F) All of the above

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According to Hume,the classical dichotomy is useful for analyzing the economy because nominal variables are heavily influenced by developments in the monetary system,and real variables are not.

A) True
B) False

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The money supply curve shifts to the left when the Bank of Canada buys government bonds.

A) True
B) False

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Use a money supply and demand diagram to answer the following problem: "The introduction of automated teller machines was equivalent to an increase in money supply." Discuss this assertion.

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The introduction of automated teller mac...

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In a graph having the price level P on the vertical axis and the quantity of money M on the horizontal axis and considering V and Y independent on the price level or the quantity of money demanded,draw the Md - P curve that is implied by the quantity equation.Now,replace the price level in your graph with the value of money on the vertical axis and redraw the money demand curve.What do you observe?

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The graph having the value of money (1 /...

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