1. The nominal interest rate is 6 percent and the real interest rate is 2.5 perc

Question

1. The nominal interest rate is 6 percent and the real interest rate is 2.5 percent. What is the inflation rate?

Select one:

a. 2.4%

b. 3.5%

c. 8.5%

d. 15%

2. If real output in an economy is 1,000 goods per year, the money supply is $300, and each dollar is spent an average of 4 times per year, then according to the quantity equation, the average price level is

Select one:

a. 3.33

b. 0.83

c. 1.2

d. 13.33

3. If velocity = 4, the quantity of money = 20,000, and the price level = 2.5, then the real value of output is

Select one:

a. 2000

b. 200000

c. 12500

d. 32000

4. Monetary neutrality means that a change in the money supply

Select one:

a. does not change real variables. Most economists think this is a good description of the economy in the short run and in the long run.

b. does not change real variables. Most economists think this is a good description of the economy in the long run

c. does not change nominal variables. Most economists think this is a good description of the economy in the short-run and the long run.

d. does not change nominal variables. Most economists think this is a good description of the economy in the long run but not the short run.

5. Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay makes

Select one:

a. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased.

b. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage decreased.

c. your real wage increase. If your real wage rose by a greater percentage than the price level, then your nominal wage also increased.

d. your real wage decrease. If your real wage rose by a greater percentage than the price level, then your nominal wage decreased.

6. When the money market is drawn with the value of money on the vertical axis, the price level decreases if

Select one:

a. either money demand or money supply shifts right.

b. either money demand or money supply shifts left.

c. money demand shifts right or money supply shifts left.

d. money demand shifts left or money supply shifts right.

Explanation / Answer

1. The nominal interest rate is 6 percent and the real interest rate is 2.5 percent.

Inflation rate = Nominal interest rate - real interest rate

Inflation rate = 6% - 2.5% = 3.5%.

So, correct option is C.

2. The equation for quantity theory of money is

Money supply(M) * Velocity of money(V) = Real output(Y) * Price level(P)

Now, if we put the value given in question, we will get

P = (300 * 4) / 1000 = 1.2.

So, the correct option is C.

3. The equation for quantity theory of money is

Money supply(M) * Velocity of money(V) = Real output(Y) * Price level(P)

Now, if we put the value given in question, we will get

Y = (4 * 20000) / 2.5 = 32000.

So, the correct answer is d.

4. Monetary neutrality means that a change in the money supply

b. does not change real variables. Most economists think this is a good description of the economy in the long run.

5. Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay makes

a. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased.

This is because salary is a nominal wage.

And as we know, real wage = nominal wage / price.

So, if nominal wage increases by a greater percentage than price, then real wage will also increase.

6. When the money market is drawn with the value of money on the vertical axis, the price level decreases if

c. money demand shifts right or money supply shifts left.

This is because money demand is a downward sloping curve and money supply is a upward rising curve. Now if money demand shifts to the right, then price level falls and same thing happen when money supply shifts to the left.

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