MGEB06H3 Lecture Notes - Lecture 1: Quantitative Easing

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orangecamel502

5 Oct 2015

School

UTSC

Department

Economics for Management Studies

Course

MGEB06H3

Professor

Iris

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Document Summary

According the quantity theory of money, if the monetary growth rate is 5% and the percentage change in velocity is 0%, then the inflation rate would be equal to 5%. true/false/uncertain, explain. Some argue that these changes would increase the long-run price level. true/false/uncertain, explain. During war times, cigarettes are often used as a medium of exchange in the prisoner-of-war (pow) camps because they satisfy a number of criteria for good money. Explain: on some occasions the prisoners knew in advance when the cigarette shipments were to arrive.

Related Questions

Question 1. (0.1 pt) According to the wealth effect, a higher price level will (decrease, increase)

the number of goods and services demanded. (Circle the correct answer for each.)

Question 2. (0.2 pt) If the central bank wants to expand aggregate demand, it can (decrease, increase)

the money supply, which would (decrease, increase) the interest rate.

(Circle the correct answer for each.)

Question 3. (0.2 pt) Monetary policy that contracts the money supply, will (decrease, increase) the

interest rate causing the aggregate demand curve to shift (in, out).

(Circle the correct answer for each.)

Question 4. (0.7 pt) The Federal Reserve contracts the money supply by 5 percent.

(Make sure to label your axes.)

a. ) Use the supply of money and the demand for money diagram to illustrate the impact of this policy on the interest rate.

b. ) Use the model of aggregate demand and aggregate supply to illustrate the impact of this change in the interest rate on output and the price level in the short run.

Question 5 . (0.8 pt) Explain how each of the following developments would affect the supply of money,

the demand for money, and the interest rate. Illustrate your answers with diagrams.

(Make sure to label your axes.)

a. ) The Fed's bond traders sell bonds in open-market operations.

b. ) An increase in credit-card availability reduces the cash people hold.

c. ) The Federal Reserve reduces banks' reserve requirements.

d. ) Households decide to hold more money to use for holiday shopping.

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1.The classical theory of inflation

A. Is also known as the quantity theory of money.

B.was developed by some of the earliest economic thinkers.

C.is used by most modern economists to explain the long-run determinants of the inflation rate.

D.All of the above are correct.

2.To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the

A.quantity theory of money.

B.price-index theory of money.

C.theory of hyperinflation.

D.disequilibrium theory of money and inflation.

3.When the price level rises, the number of dollars needed to buy a representative basket of goods

A.increases, and so the value of money rises.

B.increases, and so the value of money falls.

C.decreases, and so the value of money rises.

D.decreases, and so the value of money falls

4.The supply of money is determined by

A.the price level.

B.the Treasury and Congressional Budget Office.

C.the Federal Reserve System.

D.the demand for money.

6.Economic variables whose values are measured in monetary units are called

A.dichotomous variables.

B.nominal variables.

C.classical variables.

D.real variables.

7.Economic variables whose values are measured in goods are called

A.dichotomous variables.

B.nominal variables.

C.classical variables.

D.real variables.

7.The classical dichotomy refers to the idea that the supply of money

A. is irrelevant for understanding the determinants of nominal and real variables.

B.determines nominal variables, but not real variables.

C.determines real variables, but not nominal variables.

D.is a determinant of both real and nominal variables.

8.According to the classical dichotomy, when the money supply doubles, which of the following also doubles?

A.the price level

B.nominal wages

C.nominal GDP

D.All of the above are correct.

9.Monetary neutrality implies that an increase in the quantity of money will

A.increase employment.

B.increase the price level.

C.increase the incentive to save.

D.not increase any of the above.

10.The velocity of money is

A.the rate at which the Fed puts money into the economy.

B.the same thing as the long-term growth rate of the money supply.

C.the money supply divided by nominal GDP.

D.the average number of times per year a dollar is spent.

11.If M = 4,000, P = 1.5, and Y= 6,000, what is velocity?

A.2.25

B.3.00

C.6.50

D.None of the above is correct.

12.According to the assumptions of the quantity theory of money, if the money supply increases by 5 per cent, then

A.nominal and real GDP would rise by 5 per cent.

B.nominal GDP would rise by 5 per cent; real GDP would be unchanged.

C.nominal GDP would be unchanged; real GDP would rise by 5 per cent.

D.neither nominal GDP nor real GDP would change.

13.The inflation tax refers to

A.the revenue a government creates by printing money.

B.higher inflation which requires more frequent price changes.

C.the idea that other things the same, an increase in the tax rate raises the inflation rate.

D.taxes being indexed for inflation.

14.The inflation tax falls most heavily on

A.those who hold a lot of currency and accounts for a large share of U.S. government revenue.

B.those who hold a lot of currency but accounts for a small share of U.S. government revenue.

C.those who hold little currency and accounts for a large share of U.S. government revenue.

D.those who hold little currency but accounts for a small share of U.S. government revenue.

15.The claim that increases in the growth rate of the money supply increase nominal interest rates but not real interest rates is known as the

A.Friedman Effect.

B.Hume Effect.

C.Fisher Effect.

D.None of the above is correct.

16.The nominal interest rate is 3 per cent and the inflation rate is 2 per cent. What is the real interest rate?

A.6 per cent

B.5 per cent

C.1.5 per cent

D.1 per cent

17.Which of the following helps to explain why the inflation fallacy is a fallacy?

A.Increases in the price level can be created by increases in money demand.

B.Nominal incomes tend to rise at the same time that the price level is rising.

C.As the price level rises, the value of a dollar falls.

D.Inflation only changes nominal variables.

18.The shoe-leather cost of inflation refers to

A.the re distributional effects of unexpected inflation.

B.the time spent searching for low prices when inflation rises.

C.the waste of resources used to maintain lower money holdings.

D.the increased cost to the government of printing more money.

19.Which of the following is an example of menu costs?

A.deciding on new prices

B.printing new price-lists

C.advertising new prices

D.All of the above are examples of menu costs.

20.Which of the following are U.S. taxpayers allowed to adjust for inflation for income taxes?

A.both interest in income and capital gains.

B.interest income but not capital gains.

C.capital gains but net interest income.

D.neither interest income nor capital gains.

21.You put money into an account and earn a real interest rate of 4 per cent. Inflation is 2 per cent, and your marginal tax rate is 20 per cent. What is your after-tax real rate of interest?

A.1.2 per cent

B.2.8 per cent

C.4.8 per cent

D.None of the above is correct.

22.Which of the following is correct? Inflation

A.impedes financial markets in their role of allocating resources.

B.reduces the purchasing power of the average consumer.

C.generally increases after-tax real interest rates.

D.is most costly when anticipated.

23.Wealth is redistributed from creditors to debtors when inflation is

A.high, whether it is expected or not.

B.low, whether it is expected or not.

C.unexpectedly high.

D.unexpectedly low.

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Question 3

According to Joseph Schumpeter, the theory of creative destruction describes a process by which

	A	some new products unleash a gale of destruction that drive other new products out of the market.
B		new products unleash a gale of destruction that drives old products out of the market.
C		new products are created by the destruction of capital.
D		the creation of new products never involves the destruction of old products.

Question 4

Which of the following countries had the highest GDP per capita in 2012?

		A Qatar
B		United States
C		Japan
D		Norway

Question 5

________ save a ________ of their income. This ________ capital in their economy and raises economic growth.

	A	Developing countries; large proportion; decreases
B		Developing countries; small proportion; increases
C		High-income countries; large proportion; increases
D		High-income countries; small proportion; increases

Question 6

The demand for loanable funds is determined by the willingness of ________ to borrow money to engage in new investment projects.

A		government
B		households
C		banks
D		firms

Question 7

The U.S. economy has been more stable since 1950.

True

False

Question 8

When the economy reaches a trough in a business cycle, which of the following will occur?

A		Income, production, and employment will continue to fall.
B		Income, production, and employment will begin to rise.
C		Income and production will rise, but employment will continue to fall.
D		Employment rises, but income and production will continue to fall.

Question 9

In a closed economy, what is the relationship between saving and investment?

A		Saving is greater than investment.
B		Investment is greater than saving.
C		Investment is equal to saving.
D		Investment may be greater or smaller than saving.

Question 10

The per-worker production function shows the relationship between ________ per hour worked and ________ per hour worked, holding ________ constant.

A		labor; real GDP; technology
B		capital; real GDP; technology
C		labor; capital; real GDP
D		capital; labor; real GDP

Question 11

New growth theory states that increases in ________ capital will result in ________ at the ________ level.

	A	knowledge; increasing returns to scale; firm
	B	physical; decreasing returns to scale; firm
	C	knowledge; decreasing returns to scale; economy
D		knowledge; increasing returns to scale; economy

Question 12

Which of the following is not a reason why the Industrial Revolution occurred when and where it did?

A		The British government was committed to upholding private property rights.
B		The British government was able to eliminate arbitrary increases in taxes.
C		The British government was able to more easily seize wealth.
D		Institutional changes by the British government helped protect wealth.

Question 13

Growth in real GDP per capita for the world economy was greatest during

A		the seventeenth century.
B		the eighteenth century.
C		the nineteenth century.
D		the twentieth century.

Question 14

Which of the following is a normative statement about economic growth?

A		Economic growth is associated with higher labor productivity growth.
B		Economic growth increases GDP per capita.
C		Economic growth hurts developing countries.
D		Foreign direct investment stimulates economic growth.

Question 15

The effect of a recession on a company like Whirlpool Corporation is such that

A		sales decline more sharply for Whirlpool as compared to firms that do not produce durable goods.
B		profits fall less sharply as compared to firms that do not produce durable goods.
C		the decline in sales is more short-lived as compared to firms that do not produce durable goods.
D		there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods.

Question 16

For the recessions in the United States since the 1950s,

A		cyclical unemployment has been non-existent.
B		unemployment rises on average by about 1.2 percentage points 12 months after a recession begins.
C		unemployment falls on average by 2 percentage points 12 months after a recession begins.
D		unemployment rises on average about 5 percentage points 12 months after a recession begins.

Question 17

You are an economic advisor to the president. You are asked to recommend a policy to promote long-term economic growth in the economy. Which of the following policies would you choose?

A		a reduction in sales taxes
B		an investment tax credit
C		a reduction in taxes on luxury yachts
D		All of these

Question 18

In comparison to a government that runs a balanced budget, when the government runs a budget deficit,

	A	the equilibrium interest rate will fall.
	B	business investment will fall.
	C	household savings will fall.
	D	None of these

Question 19

If labor productivity growth slows down in a country, this means that the growth rate in ________ has declined.

A		labor force participation
B		the quantity of goods or services that can be produced by one hour of work
C		the working-age population
D		nominal GDP

Question 20

Policies to promote growth by increasing saving and investment work through

A		decreasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.
B		increasing the supply of loanable funds, increasing the interest rate, raising the level of investment in physical capital.
C		increasing the supply of loanable funds, lowering the interest rate, lowering the level of investment in physical capital.
D		increasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital.

MGEB06H3 Lecture Notes - Lecture 1: Quantitative Easing

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