Chapter 12

Foundations of Macroeconomics, 7e, GE (Bade/Parkin)
Chapter 12 Money, Interest, and Inflation
9) When the nominal interest rate falls, the opportunity cost of holding money
A) decreases and the demand for money curve shifts leftward.
B) decreases and there is a movement downward along the demand for money curve.
C) increases and there is a movement upward along the demand for money curve.
D) decreases and the demand for money curve shifts rightward.
E) increases and the demand for money curve shifts rightward.
Answer: B
12) The ________ the nominal interest rate, the ________ is the quantity of money demanded.
A) lower; greater
B) lower; smaller
C) higher; greater
D) more variable; smaller
E) None of the above because the nominal interest rate does not influence the quantity of money
demanded.
Answer: A
13) Mary has $1,000 and is considering purchasing a $1,000 bond that pays 7 percent interest per year.
Mary decides not to buy the bond and holds the $1,000 as cash. If the inflation rate is 4 percent, the
opportunity cost of holding the $1,000 as money is
A) $30.00.
B) $40.00.
C) $70.00.
D) $110.00.
E) $100.00.
Answer: C
18) In the long run, the nominal interest rate is

A) negatively related to the price level.
B) positively related to the price level.
C) negatively related to the inflation rate.
D) positively related to the inflation rate.
E) not related to the price level or the inflation rate.
Answer: D
19) You have a $500 saving bond. The nominal interest rate is 10 percent, and the inflation rate is 4
percent. After a year, in real terms you have earned
A) $70.
B) $40.
C) $50.
D) $30.
E) $510.
Answer: D
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20) You have a $500 saving bond. If the nominal interest rate is 10 percent, then the inflation rate must be
A) zero, otherwise you would sell the bond.
B) 10 percent if in real terms you earned $200.
C) 4 percent if in real terms you earned $70.
D) 4 percent if in real terms you earned $30.
E) 10 percent if in real terms you earned $100.
Answer: D
22) If the inflation rate is 2.5 percent and the nominal interest rate is 10 percent, then the real interest rate
is
A) 2.5 percent.
B) 7.5 percent.
C) -7.5 percent.
D) -2.5 percent.
E) 12.5 percent.
Answer: B
25) Barbara is willing to loan $10,000 if she can earn a real interest rate of 6 percent. Everything else the
same, if the inflation rate is 2 percent, she would agree to loan the $10,000 if the nominal interest rate is
A) 4 percent.
B) 10 percent.
C) 3 percent.
D) 8 percent.
E) 12 percent.
Answer: D
26) Barbara is willing to loan $10,000 if she can earn a real interest rate of 6 percent. Everything else the
same, if the inflation rate is 2 percent, she would agree to loan the $10,000 if the nominal interest rate is
________ because ________.
A) 8 percent; she would earn more than her desired amount of 6 percent
B) 4 percent or higher; she would not earn her desired amount of 6 percent if the nominal interest rate
was any lower
C) 4 percent or lower; she would not earn her desired amount of 6 percent if the nominal interest rate was
any higher
D) 8 percent or higher; she would not earn her desired amount of 6 percent if the nominal interest rate
was any lower
E) 8 percent or lower; she would not earn her desired amount of 6 percent if the nominal interest rate was
any higher
Answer: D
27) Assume you have a credit card balance of $2,000 at 15 percent and the inflation rate is 3 percent. What
are the nominal and real interest rates?
A) 15 percent nominal and 3 percent real
B) 3 percent nominal and 12 percent real
C) 15 percent nominal and 12 percent real
D) 15 percent nominal and 18 percent real
E) 12 percent nominal and 15 percent real
Answer: C
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32) When the nominal interest rate falls, there is
A) an upward movement along the demand for money curve.
B) a downward movement along the demand for money curve.
C) a rightward shift of the demand for money curve.
D) a leftward shift of the demand for money curve.
E) no movement along the demand for money curve and the curve does not shift.
Answer: B
33) An increase in the nominal interest rate leads to

A) a rightward shift in the demand for money curve.
B) a movement upward along the demand for money curve.
C) a leftward shift in the demand for money curve.
D) a movement downward along the demand for money curve.
E) neither a shift in nor a movement along the demand for money curve.
Answer: B
35) The demand for money schedule shows the ________ relationship between money demand and the
nominal interest rate which means that as the ________.
A) negative; nominal interest rate increases, the opportunity cost of holding money increases
B) negative; nominal interest rate increases, the opportunity cost of holding money decreases
C) positive; nominal interest rate increases, the opportunity cost of holding money increases
D) positive; nominal interest rate increases, the opportunity cost of holding money decreases
E) negative; opportunity cost of holding money increases, the nominal interest rate increases
Answer: A
37) As the nominal interest rate increases, the opportunity cost of holding money ________ and the
quantity of money demanded ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change because people need money
Answer: B
38) If the interest rate rises from 1 percent to 3 percent, the ________ decreases and the opportunity cost of
holding money ________.
A) quantity of money demanded; rises
B) quantity of money demanded; falls
C) quantity of money supplied; rises
D) quantity of money supplied; falls
E) demand for money; rises
Answer: A
40) As the economy enters a strong expansion in which real GDP increases, which of the following
occurs?
A) The demand for money curve shifts rightward.
B) The demand for money curve shifts leftward.
C) The demand for money decreases and there is a movement upward along the demand for money
curve.
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D) The demand for money increases and there is a movement downward along the demand for money
curve.
E) The nominal interest rate falls as the demand for money curve shifts leftward.
Answer: A
43) If the price level increases, the

A) demand for money increases.
B) demand for money decreases.
C) quantity of money demanded increases.
D) quantity of money demanded decreases.
E) demand for money does not change and the quantity of money demanded does not change.
Answer: A
44) Suppose that the price level does not change while real GDP decreases. As a result,
A) the demand for money increases and the demand for money curve shifts rightward.
B) the supply of money curve shifts leftward.
C) the supply of money curve shifts rightward.
D) the quantity of money demanded decreases and there is a movement downward along the demand for
money curve.
E) the demand for money decreases so that households and firms hold smaller amounts of money.
Answer: E
47) If the price level rises, there is

A) an upward movement along the demand for money curve and the curve does not shift.
B) a downward movement along the demand for money curve and the curve does not shift.
E) no movement along the demand curve for money and the curve does not shift.
Answer: C
48) If the price level falls, the

D) quantity of money demanded decreases.
E) demand for money does not change and the quantity of money demanded does not change.
Answer: B
49) The ________ the price level, the ________.

A) higher; greater the demand for money
B) higher; smaller the demand for money
C) lower; greater the demand for money
D) higher; greater the supply of money
E) higher; smaller the supply of money
Answer: A
50) An increase in the price level leads to a

A) rightward shift in the demand for money curve.
B) movement upward along the demand for money curve and no shift of the curve.
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C) leftward shift in the demand for money curve.
D) movement downward along the demand for money curve and no shift of the curve.
E) rightward shift of the supply of money curve.
Answer: A
51) An increase in the price level leads to ________ in the demand for money, and an increase in real GDP
leads to ________ in the demand for money.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
E) no change; an increase
Answer: A
52) If real GDP decreases, the

D) supply of money decreases.
E) supply of money increases.
Answer: B
60) An increase in real GDP leads to

B) a movement upward along the demand for money curve but no shift of the curve.
D) a movement downward along the demand for money curve but no shift of the curve.
E) neither a shift in the demand for money curve nor a movement along the curve.
Answer: A
61) During an economic expansion when real GDP increases, the

C) supply of money decreases.
D) nominal interest rate is constant.
E) real interest rate is constant.
Answer: A
62) During an economic expansion, the demand for money ________ because ________.
A) increases; real GDP increases
B) increases; nominal GDP does not change
C) decreases; real GDP increases
D) decreases; nominal GDP increases
E) does not change; people make more purchases with credit cards
Answer: A
63) During a(n) ________ the demand for money decreases because ________.
A) recession; real GDP decreases
B) expansion; real GDP decreases
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C) recession; nominal GDP increases
D) recession; the price level rises
E) equilibrium; real GDP decreases
Answer: A
64) Which of the following shifts the demand for money curve?
i. change in the nominal interest rate
ii. change in real GDP
iii. change in the price level
A) i only
B) ii only
C) iii only
D) ii and iii
E) i, ii, and iii
Answer: D
65) Which statement most accurately describes the effect financial technology has had on the demand for
money in the United States?
A) Advances in financial technology have all decreased the demand for money.
B) Advances in financial technology have all increased the demand for money.
C) Some advances in financial technology have increased the demand for money while others have
decreased it.
D) Advances in financial technology have had no effect on the demand for money.
E) It is not possible to tell what would be the effect because financial technology has not changed over the
past three decades.
Answer: C
66) Advances in financial technology

A) must increase the demand for money.
B) must decrease the demand for money.
C) have no effect on the demand for money or on the supply of money.
D) might increase or decrease the demand for money.
E) affect only the supply of money.
Answer: D
67) The increased use of credit cards leads to

B) a movement upward along the demand for money curve.
D) a movement downward along the demand for money curve.
E) no movement along the demand curve for money nor a shift in the demand curve.
Answer: C
69) If credit card usage exhibits a sharp increase, there is

A) an upward movement along the demand for money curve.
B) a downward movement along the demand for money curve.
E) a leftward shift of the supply of money curve.
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Answer: D
70) All of the following shift the demand for money curve EXCEPT
A) an improvement in financial technology.
B) an increase in real GDP.
C) a rise in the nominal interest rate.
D) a decrease in real GDP.
E) an increase in the price level.
Answer: C
71) In the above figure, a movement from point A to point B represents

A) an increase in the demand for money that might be the result of an increase in real GDP.
B) a decrease in the demand for money that might be the result of a fall in the price level.
C) a decrease in the quantity of money demanded.
D) an increase in the quantity of money demanded.
E) an increase in the demand for money that might be the result of a fall in the price level.
Answer: D
72) In the above figure, a movement from point B to point C represents

A) an increase in the demand for money that might be the result of an increase in real GDP.
B) a decrease in the demand for money that might be the result of an increase in real GDP.
C) a decrease in the quantity of money demanded.
D) an increase in the quantity of money demanded.
E) an increase in the demand for money that might be the result of a fall in the price level.
Answer: A
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8) In the figure above, in the long run what happens if the Fed increases the quantity of money by 5
percent?
A) The value of money falls by 5 percent and there will be a movement down along the LRMD curve.
B) The real interest rate falls and the LRMD curve shifts rightward.
C) The nominal interest rate rises by 5 percent.
D) The price level rises by 5 percent and the LRMD shifts leftward.
E) The value of money rises by 5 percent.
Answer: A
1) The demand for money curve is shown in the figure above. A movement from point B to point C could
be the result of
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A) a fall in the nominal interest rate.
B) a decrease in the total benefit from holding money.
C) an increase in the quantity of money held by banks.
D) a rise in the real interest rate.
E) a rise in the real interest rate matched by an equal fall in the nominal interest rate.
Answer: A
2) The demand for money curve is shown in the figure above. What could shift the demand for money
curve rightward from the curve illustrated in the figure above?
A) a decrease in the supply of money
B) a decrease in real GDP
C) a fall in the real interest rate
D) a fall in the nominal interest rate.
E) an increase in the price level
Answer: E
3) The demand for money curve is shown in the figure above. What could shift the demand for money
curve rightward from the curve illustrated in the figure above?
A) a decrease in the supply of money
B) an increase in the supply of money
C) a fall in the inflation rate
D) a fall in the nominal interest rate
E) an increase in real GDP
Answer: E
4) The figure above shows the money market. At which interest rate are people selling bonds and thereby
changing the interest rate?
A) 6 percent
B) 5 percent
C) 4 percent
D) 6 percent and 4 percent
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E) 6 percent, 5 percent, and 4 percent
Answer: C
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Chapter 12

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Foundations of Macroeconomics, 7e, GE (Bade/Parkin)

Chapter 12 Money, Interest, and Inflation

18) In the long run, the nominal interest rate is

33) An increase in the nominal interest rate leads to

43) If the price level increases, the

47) If the price level rises, there is

48) If the price level falls, the

49) The the price level, the .

50) An increase in the price level leads to a

52) If real GDP decreases, the

60) An increase in real GDP leads to

61) During an economic expansion when real GDP increases, the

66) Advances in financial technology

67) The increased use of credit cards leads to

69) If credit card usage exhibits a sharp increase, there is

71) In the above figure, a movement from point A to point B represents

72) In the above figure, a movement from point B to point C represents

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