Question

1-In the short run, when the central bank increases the quantity of money, the

A)demand for money decreases.

B)price level decreases.

C)demand for money increases.

D)nominal interest rate falls.

E)quantity demanded of money decreases

2-If the quantity of money supplied ________ the quantity demanded, in the long run the value of money ________.

a)exceeds; falls as people spend their surplus money

b)exceeds; rises as people buy bonds

c)is less than; falls as people spend their surplus money

d)is less than; does not change unless the Fed increases the money supply

e)equals; equals zero

3-The proposition that in the long run when real GDP equals potential GDP, an increase in the quantity of money leads to an equal percentage increase in the price level is the called the quantity theory of

A)equal change.

B)constant velocity.

C)money.

D)the long run.

E)inflation.

4-All of the following shift the demand for money curve EXCEPT

A)a decrease in real GDP.

B)a rise in the nominal interest rate.

C)an increase in real GDP.

D)an increase in the price level.

E)an improvement in financial technology

Answer 1

1. Option 'D' is correct. When quantity of money increases, the amount of loanable fund in the system increases which pulls the nominal interest rate to a lower level so that people demand more loans and money market returns to equilibrium. The change in the quantity of money has no direct relationship with demand for money.

2. Option 'A' is correct. When supply of money exceeds demand for money, price level rises which decreases the value of money. If supply of money is less than the demand for money, price level decreases which increases the value of money.

3. Option 'C' is correct. The quantity theory of money states that in the long run when real GDP equals potential GDP, an increase in the quantity of money leads to an equal percentage increase in the price level. Thus, in the long run, the inflation rate equals the rate of money growth minus the growth rate of output.

4. Option 'B' is correct. Money demand curve shows relationship between rate of interest and quantity of money. Thus if rate of interest change, there is movement along the money demand curve and this does not shift.