Chapter 4: Money, Interest Rates, and Exchange Rates

HÍc trñc tuy¿n t¡i https://quizlet.com/_blsx01

1. The exchange rate between currencies depends on: the interest rate that can
be earned on deposits of those currencies and the expected future exchange rate.
2. Money serves as all of the following EXCEPT

A) a medium of exchange.
B) a unit of account.
C) a store of value.
D) a symbol that is made of or can be redeemed for a fixed amount of precious
metal.
E) a highly liquid asset.: a symbol that is made of or can be redeemed for a fixed
amount of precious metal.
3. 3) Money includes
A) currency.
B) checking deposits held by households and firms.
C) deposits in the foreign exchange markets.
D) currency and checking deposits held by households and firms.
E) futures and deposits in the foreign exchange market.: currency and checking
deposits held by households and firms
4. In the United States at the end of 2012, the total money supply, M1, amounted
to approximately: 16 percent of that year's GNP
5. Individuals base their demand for an asset on: the expected return, how risky
that expected return is, and the asset's liquidity
6. A family's summer house on Cape Cod pays a return in the form of: capital
gains and pleasure
7. In a world with money and bonds only

A) it is not risky to hold money.

B) it is risky to hold money.
C) risk is an important factor in the demand for money.
D) there is no relationship between risk and holding money.
E) assets become meaningless.: it is risky to hold money
8. Which one of the following statements is the MOST accurate?
A) A rise in the average value of transactions carried out by a household or a
firm causes its demand for money to fall.
B) A reduction in the average value of transactions carried out by a household
or a firm causes its demand for money to rise.
C) A rise in the average value of transactions carried out by a household or a
firm causes its demand for money to rise.
D) A rise in the average value of transactions carried out by a household or a
1/8
 Chapter 4: Money, Interest Rates, and Exchange Rates
HÍc trñc tuy¿n t¡i https://quizlet.com/_blsx01
firm causes its demand for real money to rise.
E) a decrease in the average value of transactions carried out by a household
or a firm causes its demand for real money to rise.: A rise in the average value of
transactions carried out by a household or a firm causes its demand for real money
to rise.
9. An individual's need for liquidity would increase if: the average value of
transactions carried out by the individual rose
10. The aggregate money demand depends on: the interest rate, price level, and
real national income.
11. If there is initially an

A) excess demand for money, the interest rate will fall, and the supply of money
it will rise.
B) excess supply of money, the interest rate will fall, and if there is initially an
excess demand, it will rise.
C) excess supply of money, the interest rate will rise, and if there is initially an
excess demand, it will fall.
D) excess supply of money, the interest rate will fall, and if there is also an
excess demand, it will fall rapidly.
E) excess supply of money, the interest rate will rise, and if there is also an
excess demand, itwill rise rapidly.: excess supply of money, the interest rate will
fall, and if there is initially an excess demand, it will rise
12. Which one of the following statements is the MOST accurate?
A) A decrease in the money supply lowers the interest rate while an increase
in the money supply raises the interest rate, given the price level and output.
B) An increase in the money supply lowers the interest rate while a fall in the
money supply raises the interest rate, given the price level.
C) An increase in the money supply lowers the interest rate while a fall in the
money supply raises the interest rate, given the output level.
D) An increase in the money supply lowers the interest rate while a fall in the
money supply raises the interest rate, given the price level and output.
E) An increase in the money supply does not usually affect the interest rate: An
increase in the money supply lowers the interest rate while a fall in the money supply
raises the interest rate, given the price level and output.
13. An increase in

A) nominal output raises the interest rate while a fall in real output lowers the
interest rate, given the price level and the money supply.
B) real output decreases the interest rate while a fall in real output increases
2/8
 Chapter 4: Money, Interest Rates, and Exchange Rates
HÍc trñc tuy¿n t¡i https://quizlet.com/_blsx01
the interest rate, given the price level.
C) real output raises the interest rate while a fall in real output lowers the
interest rate, given the money supply.
D) nominal output raises the interest rate while a fall in real output lowers the
interest rate, given the price level.
E) real output raises the interest rate while a fall in real output lowers the
interest rate, given the price level and the money supply.: real output raises the
interest rate while a fall in real output lowers the interest rate, given the price level
and the money supply.
14. The aggregate demand for money can be expressed by: Md = P × L(R,Y).
15. The aggregate real money demand schedule L(R,Y): slopes downward be-
cause a fall in the interest rate raises the desired real money holdings of each
household and firm in the economy.
16. For a given level of

A) nominal GNP, changes in interest rates cause movements along the L(R,Y)
schedule.
B) real GNP, changes in interest rates cause a decrease of the L(R,Y) schedule.
C) real GNP, changes in interest rates cause an increase of the L(R,Y) sched-
ule.
D) nominal GNP, changes in interest rates cause an increase in the L(R,Y)
schedule.
E) real GNP, changes in interest rates cause movements along the L(R,Y)
schedule.: real GNP, changes in interest rates cause movements along the L(R,Y)
schedule
17. The money supply schedule is

A) horizontal because MS is set by the central bank while P is taken as given.

B) horizontal because MS is set by the central bank.
C) vertical because MS is set by the households and firms while P is taken as
given.
D) vertical because MS and P are set by the central bank.
E) vertical because MS is set by the central bank while P is taken as given.: -
vertical because MS is set by the central bank while P is taken as given.
18. If individuals are holding more money than they desire: they will attempt to
reduce their liquidity by using money to purchase interest-bearing assets
19. If there is an excess supply of money: the interest rate falls
20. A reduction in a country's money supply causes: its currency to appreciate
in the foreign exchange market
3/8
 Chapter 4: Money, Interest Rates, and Exchange Rates
HÍc trñc tuy¿n t¡i https://quizlet.com/_blsx01
21. An increase in a country's money supply causes: its currency to depreciate
in the foreign exchange market while a reduction in the money supply causes its
currency to appreciate.
22. Which one of the following statements is the MOST accurate?
A) Given PUS, when the money supply rises, the dollar interest rate declines
and the dollar depreciates against the euro.
B) Given YUS, when the money supply rises, the dollar interest rate declines
and the dollar depreciates against the euro.
C) Given PUS and YUS, when the money supply decreases, the dollar interest
rate declines and the dollar depreciates against the euro.
D) Given PUS and YUS, when the money supply rises, the dollar interest rate
declines and the dollar appreciates against the euro.
E) Given PUS and YUS, when the money supply rises, the dollar interest rate
declines and the dollar depreciates against the euro: Given PUS and YUS, when
the money supply rises, the dollar interest rate declines and the dollar depreciates
against the euro
23. Given PUS and YUS

A) An increase in the European money supply causes the euro to appreciate

against the dollar, but it does not disturb the U.S. money market equilibrium.
B) An increase in the European money supply causes the euro to appreciate
against the dollar, and it creates excess demand for dollars in the U.S. money
market.
C) An increase in the European money supply causes the euro to depreciate
against the dollar, and it creates excess demand for dollars in the U.S. money
market.
D) An increase in the European money supply causes the euro to depreciate
against the dollar, but it does not disturb the U.S. money market equilibrium.
E) An increase in the European money supply causes the euro to depreciate
against the dollar, and disturbing the U.S. money market equilibrium.: An
increase in the European money supply causes the euro to depreciate against the
dollar, but it does not disturb the U.S. money market equilibrium
24. An economy's long-run equilibrium is

A) the equilibrium that would occur if prices were perfectly flexible.

B) the equilibrium that would occur if prices were perfectly flexible and always
adjusted immediately.
C) the equilibrium that would occur if prices were perfectly flexible and always
adjusted immediately to preserve full employment.
4/8
 Chapter 4: Money, Interest Rates, and Exchange Rates
HÍc trñc tuy¿n t¡i https://quizlet.com/_blsx01
D) the equilibrium that would occur if prices were perfectly fixed to preserve
full employment.
E) the equilibrium that would occur if prices were perfectly fixed at the full
employment point.: the equilibrium that would occur if prices were perfectly flexible
and always adjusted immediately to preserve full employment
25. A permanent increase in a country's money supply: causes a proportional
increase in its price level.
26. A change in the level of the supply of money: has no effect on the long-run
values of the interest rate and real output.
27. Changes in the money supply growth rate: need not be neutral in the long run
28. A sustained change in the monetary growth rate will: eventually affect equi-
librium real money balances by raising the money interest rate
29. Money demand behavior may

A) change as a result of demographic trends or financial innovations such as

electronic cash-transfer facilities.
B) change only as a result of demographic trends.
C) change only as a result of financial innovations such as electronic
cash-transfer facilities.
D) not change as a result of demographic trends or financial innovations such
as electronic cash-transfer facilities.
E) change as a result of demographic trends but not as a result of financial
innovations such as electronic cash-transfer facilities.: change as a result of
demographic trends or financial innovations such as electronic cash-transfer facili-
ties
30. Using year-by-year data from 1987-2007 shows that

A) there is a strong positive relation between average Latin American mon-

ey-supply growth and inflation.
B) there is a strong negative relation between average Latin American mon-
ey-supply growth and inflation.
C) there is a strong positive relation between average Latin American mon-
ey-supply growth and deflation.
D) it is difficult to find a strong positive relation between average Latin Amer-
ican money-supply growth and inflation.
E) there is a weak positive relation between average Latin American mon-
ey-supply growth and inflation.: there is a strong positive relation between aver-
age Latin American money-supply growth and inflation

5/8
 Chapter 4: Money, Interest Rates, and Exchange Rates
HÍc trñc tuy¿n t¡i https://quizlet.com/_blsx01
31. Which one of the following statements is the MOST accurate?
A) A permanent increase in a country's money supply causes a proportional
long-run depreciation of its currency against foreign currencies.
B) A temporary increase in a country's money supply causes a proportional
long-run depreciation of its currency against foreign currencies.
C) A permanent increase in a country's money supply causes a proportional
long-run appreciation of its currency against foreign currencies.
D) A permanent increase in a country's money supply causes a proportional
short-run depreciation of its currency against foreign currencies.
E) A permanent increase in a country's money supply causes a propor-
tional short-run appreciation of its currency against foreign currencies.: A
permanent increase in a country's money supply causes a proportional long-run
depreciation of its currency against foreign currencies.
32. The long run effects of money supply change: no effect on the long-run
values of the interest rate or real output, a proportional change in the price level's
long-run value in the same direction.
33. What term means an explosive and seemingly uncontrollable inflation in
which money loses value rapidly and may even go out of use?: hyperinflation
34. The most extreme inflationary conditions occurred

A) in Zimbabwe in 2008.
B) in Chile in 2012.
C) in Eastern Europe in the 1990s.
D) in Western Europe in the 1980s.
E) in Germany in 20013.: in Zimbabwe in 2008
35. For main industrial countries such as Japan and the U.S: there is much more
month-to-month variability of the exchange rate, suggesting that price levels are
relatively sticky in the short run
36. Which one of the following statements is the MOST accurate?

A) There is a lively academic debate over the possibility that seemingly sticky
wages and prices are in reality quite fixed.
B) There is a lively academic debate over the possibility that seemingly sticky
wages and prices are in reality much more sticky than theory assumes.
C) There is a lively academic debate over the possibility that seemingly sticky
wages and prices are in reality quite flexible.
D) There is no debate over the possibility that wages and prices are sticky in
the long run.
E) There is no debate over the possibility that wages and prices are sticky in
6/8
 Chapter 4: Money, Interest Rates, and Exchange Rates
HÍc trñc tuy¿n t¡i https://quizlet.com/_blsx01
the short run: There is a lively academic debate over the possibility that seemingly
sticky wages and prices are in reality quite flexible
37. During hyperinflation, exploding inflation causes real money demand to: -
fall over time, and this additional monetary change makes money prices rise even
more quickly than the money supply itself rises.
38. In a classic paper, Columbia University economist Phillip Cagan drew the
line between inflation and hyperinflation at an inflation rate of
A) 50 percent per month.
B) 10 percent per month.
C) 20 percent per month.
D) 5 percent per month.
E) 25 percent per month: 50 percent per month
39. In a classic paper, Columbia University economist Phillip Cagan drew the
line between inflation and hyperinflation at an inflation rate of
A) more than 120 percent per year.
B) more than 100 percent per year.
C) more than 200 percent per year.
D) more than 12,000 percent per year.
E) more than 1,000 percent per year.: more than 12,000 percent per year
40. In a world where the price level could adjust immediately to its new
long-run level after a money supply increase: The dollar interest rate would fall
because prices would adjust immediately and prevent the money supply from rising
41. After a permanent increase in the money supply,: the exchange rate over-
shoots in the short run
42. A change in the money supply creates demand and cost pressures that
lead to future increases in the price level from which main sources?
I. Excess demand for output and labor
II. Inflationary expectations
III. Raw materials prices

A) I
B) II
C) II and III
D) I and II
E) I, II, and III: I, II, and III
43. In Zimbabwe, the government stopped the country's hyperinflation by: -
switching to foreign currencies. that are relatively stable

7/8
 Chapter 4: Money, Interest Rates, and Exchange Rates
HÍc trñc tuy¿n t¡i https://quizlet.com/_blsx01
44. Which of the following can help to explain why higher inflation may lead
to currency appreciations?: Most central banks adjust their policy interest rates
expressly so as to keep inflation in check
45. Which one of the countries below announces inflation targets?: Canada
46. Michael Woodford says the following is an advantage of interest-rate in-
struments for central banks.: Conduct monetary policy even if checking deposits
pay interest at competitive rates
47. Inflation targeting was initiated by which central bank in 1989?: New
Zealand

8/8