Question

Question 1

What does a vertical supply curve of money indicate?

	a.	It indicates that the larger the supply of money, the higher the interest rate, all things equal.
	b.	It indicates that the quantity of money supplied depends on the interest rate.
	c.	It indicates that the lower the interest rate, the higher the opportunity cost of holding assets in the form of money.
	d.	It indicates that the quantity of money supplied is independent of the interest rate.

Question 2

Suppose the Bank of Canada is targeting the interest rate when the demand for money increases. What is the proper monetary response in terms of the money supply?

	a.	stimulate inflation to increase the demand for money
	b.	increase the money supply
	c.	keep the money supply constant
	d.	decrease the money supply

Question 3

Suppose the money supply equals $1,000 and nominal GDP equals $3,000. What does V equal?

	a.	1/3
	b.	3
	c.	300
	d.	3,000

Question 4

Suppose the dollar price of British pounds drops. What does this mean?

	a.	that fewer dollars are needed to buy British pounds
	b.	that more dollars are needed to buy British pounds
	c.	that the euro has appreciated
	d.	that the dollar has depreciated

Question 5

Which theory says that in the long run the exchange rate between two currencies should move toward equalizing the cost in each country of an identical basket of internationally traded goods?

	a.	the Big Mac Index (BMI) theory
	b.	the consumer price index (CPI) theory
	c.	the purchasing power parity (PPP) theory
	d.	the foreign exchange equalization (FEE) theory

Question 6

What does a nation’s merchandise trade balance reflect?

	a.	trade in intangible products
	b.	trade in tangible products
	c.	value of imports
	d.	value of exports

Answer 1

1) D. It indicates that the quantity of money supplied is independent of the interest rate.

Vertical money supply means that the supply is fixed no matter what interest rate is. Interest rate cannot influence the money supply.

D. decrease the money supply

Due to increase in the money demanded, the money supply will rise in the economy leading to inflation. To stop all this, money supply should be decreased.

B. 3

According to Quantity Theory of Money:

Nominal GDP = Money Supply*Velocity

Velocity = 3,000/1,000 = 3

A. that fewer dollars are needed to buy British pounds

Due to decrease in dollar price with respect to pounds, now less dollars are required to buy one pound.

C. the purchasing power parity theory

It states that a dollar should buy the same quantity of good in all the countries. In long run, exchange rate should converge to that point where all countries price are equal.

B. trade in tangible products

Merchandise trade balance refers to the balance of exports over balance of imports of goods of the economy.