|K2. Evaluate and apply Macroeconomic theory to solving problems of inflation and unemployment.
S1. Explain the impact of various types of government policy on Money Supply, Interest rate, Reserve ratio and trade balance and forecast how exogenous events may affect economic growth..
S2. Calculate Aggregate demand and aggregate supply and understand shifts of these variables.
S3. Able to calculate the Consumer price Index and determine the rate of inflation
S4. Explain Monetary Policy, Savings, Investment and the Financial System Velocity and Quantity Theory of Money and how these affect inflation and unemployment.
|CLOs||( K1, S1,S4 )||( K2, S1 )|
Answer the questions in the following (100 Marks)
Part 1. Choose the correct answer of the following: (60 Marks)
- Because money growth and inflation move together:
- Avoiding high inflation means avoiding low money growth.
- Inflation causes money growth.
- Money growth rates equal inflation rates.
- To avoid sustained inflation, a central bank must be concerned with money growth.
- What does the Quantity Theory of Money assume about the relationship of M and Y?
- The quantity theory assumes that changes in M cannot change Y.
- The quantity theory assumes that changes in M will have a small impact on Y.
- The quantity theory assumes that changes in M will have a large impact on Y.
- The quantity theory assumes that changes in M will have a indeterminate impact on Y.
- The quantity equation:
- Gives the relationship between the quantity of money and the velocity of money.
- Is not very useful as monetary theory.
- Indicates that real GDP and velocity of money are positively related when all other things equal.
- Indicates that the quantity of money must decrease when price increases.
- Historical data about the velocity implies that:
- The velocity of money is stable in the long run.
- The velocity of money is stable in the short run.
- There is little volatility in the velocity of money in the short run.
- None of the answers given are correct.
- People hold money:
- Only to hold wealth.
- Only to make transactions.
- To make transactions and to hold wealth.
- To know the value of goods and to hold wealth.
- Which of the following would reflect the transactions demand for money?
- Keeping money in your wallet to pay the subway fare.
- Keeping money under your mattress in case of emergency.
- Keeping money in a savings account at the bank.
- Keeping money in your child’s piggy bank.
- According to the quantity theory, money in the long run affects:
- the velocity of money.
- real GDP.
- none of the above.
- When there is inflation
- Prices decrease in the economy.
- The value of the dollar rises on foreign exchange markets.
- The value of money decreases in the economy.
- Basic necessities become cheaper
- Money Demand is the:
- Amounts of money people are willing to buy at different price levels.
- Amounts of dollars foreigners are willing to buy with their foreign currency.
- Amounts of money people are willing to hold at different price levels.
- Amounts of dollars U.S. citizens are willing to buy with their holdings of foreign currency
- When the Fed adds more money to the economy, the Money Supply curve shifts to the ________, causing the equilibrium price level to ________.
- Right, decrease
- Right, increase
- Left, decrease
- Left, increase
- According to the principle of monetary neutrality:
- Changes in the money supply do not affect real variables.
- Real variables do not affect nominal variables.
- Nominal variables are not adjusted for inflation and real units are adjusted for inflation.
- Nominal variables are expressed in monetary units and real variables are expressed in physical units.
- The velocity of money is:
- The speed at which the money multiplier works.
- The speed at which prices rise in the economy.
- The time it takes for checks to be cleared by the Fed.
- The rate at which money changes hands.
- If the Fed increased the supply of money, and velocity remains unchanged, according to the quantity equation:
- P x Y must decrease.
- Y must decrease.
- P x Y must increase.
- Y must increase.
- The resources wasted when inflation encourages people to reduce their money holdings is called:
- Menu costs.
- Shoeleather costs.
- Misallocation of resources.
- Relative price variability.
- When inflation turns out to be higher than expected, borrowers will be ________ off, and lenders will be ________ off.
- Better, better
- Better, worse
- Worse, worse
- Worse, better
- Suppose the value of goods and services produced in an economy is $10 billion, but the total money supply is $1 billion, what is the velocity of money?
- The quantity theory of money states that:
- All else equal an increase in money growth will lead to a proportionate increase in prices in the long-run.
- All else equal an increase in money growth will lead to a proportionate increase in prices in the short-run.
- An increase in money growth can lead to inflation if and only if velocity is constant.
- An increase in money growth must lead to a decrease in velocity.
- In a country with hyperinflation, the value of money
- Is increasing over time.
- Is decreasing quickly over time.
- Is remaining constant.
- May either be increasing or decreasing.
- Suppose the nominal interest rate is 7 per cent while the money supply is growing at a rate of 5 per cent per year. If the government increases the growth rate of the money supply from 5 per cent to 9 per cent, the Fisher effect suggests that, in the long run, the nominal interest rate should become
- 9 per cent.
- 11 per cent.
- 4 per cent.
- 16 per cent.
- If individuals choose to hold their money, afraid to spend it, what impact would this have on the velocity of money?
- The velocity of money would decrease.
- The velocity of money would remain unchanged.
- The velocity of money would increase.
- There would be no impact on the velocity of money
Part 2: One of the economic principles says: “Prices rise when a government prints too much money”. (40 Marks)
- Explain and justify in details how this principle works.
In your opinion, what are the procedures and tools that the central bank has to use in order to decrease the negative effects of increasing money supply?