Seminar 5: Question

By Dr. Le Thanh Ha
Type I: True/False question (give a brief explanation)
1. If the quantity of money supplied is greater than the quantity demanded, then
prices should fall.
2. An increase in money demand would create a surplus of money at the original
value of money.
3. For a given level of money and real GDP, an increase in velocity would lead to
an increase in the price level.
4. The money supply curve shifts to the left when the SBV buys government
bonds.
5. When the value of money is on the vertical axis, the money supply curve slopes
upward because an increase in the value of money induces banks to create more
money.
6. If the Fed increases the money supply, the equilibrium value of money
decreases and the equilibrium price level increases.
7. The irrelevance of monetary changes for real variables is called monetary
neutrality. Most economists accept monetary neutrality as a good description of
the economy in the long run, but not the short run.
8. In the long run, an increase in the growth rate of the money supply leads to an
increase in the real interest rate, but no change in the nominal interest rate.
9. Inflation necessarily distorts saving when either real interest income or nominal
interest income is taxed.
10. If the Fed were to unexpectedly increase the money supply, creditors would gain
at the expense of debtors.
11. If inflation is higher than expected, then borrowers make nominal interest
payments that are less than they expected.
12.
Type II: Discussion questions
1. Suppose the SBV sells government bonds. Use a graph of the money market to
show what this does to the value of money.
 2. Using separate graphs, demonstrate what happens to the money supply, money
demand, the value of money, and the price level if:
a. the SBV increases the money supply.
b. people decide to demand less money at each value of money.
3. Suppose that monetary neutrality holds. Of the following variables, which ones do
not change when the money supply increases?
a. real interest rates
b. inflation
c. the price level
d. real output
e. real wages
f. nominal wages
4. What assumptions are necessary to argue that the quantity equation implies that
increases in the money supply lead to proportional changes in the price level?
5. In recent years Venezuela and Russia have had much higher nominal interest rates
than the United States while Japan has had lower nominal interest rates. What
would you predict is true about money growth in these other countries? Why?
6. Explain how inflation affects savings.
Questions for Review:
1. Explain how an increase in the price level affects the real value of money.
2. According to the quantity theory of money, what is the effect of an increase in the
quantity of money?
3. Explain the difference between nominal and real variables and give two examples of
each. According to the principle of monetary neutrality, which variables are affected
by changes in the quantity of money?
4. In what sense is inflation like a tax? How does thinking about inflation as a tax help
explain hyperinflation?
5. According to the Fisher effect, how does an increase in the inflation rate affect the
real interest rate and the nominal interest rate?
6. If inflation is less than expected, who benefits— debtors or creditors? Explain.

Exercises:
1. Suppose that this year’s money supply is $500 billion, nominal GDP is $10 trillion,
and real
GDP is $5 trillion.
a. What is the price level? What is the velocity of money?
b. Suppose that velocity is constant and the economy’s output of goods and services rises
by 5 percent each year. What will happen to nominal GDP and the price level next year if
the Fed keeps the money supply constant?
c. What money supply should the Fed set next year if it wants to keep the price level stable?
d. What money supply should the Fed set next year if it wants inflation of 10 percent?

2. Suppose that changes in bank regulations expand the availability of credit cards so
that
people need to hold less cash.
a. How does this event affect the demand for money?
b. If the central bank does not respond to this event, what will happen to the price level?
c. If the central bank wants to keep the price level stable, what should it do?

3. It is sometimes suggested that the central bank should try to achieve zero inflation.
If we assume that velocity is constant, does this zero-inflation goal require that the
rate of money growth equal zero? If yes, explain why. If no, explain what the rate of
money growth should equal.
12. Explain whether the following statements are true, false, or uncertain.
a. “Inflation hurts borrowers and helps lenders, because borrowers must pay a higher rate of
interest.”
b. “If prices change in a way that leaves the overall price level unchanged, then no one is
made better or worse off.”
c. “Inflation does not reduce the purchasing power of most workers.”

Type III: Multiple Choice

1. When the money market is drawn with the value of money on the vertical axis, if the
SBV buys bonds, then the money supply curve
a. shifts rightward, causing the price level to rise.
b. shifts rightward, causing the price level to fall.
c. shifts leftward, causing the price level to rise.
d. shifts leftward, causing the price level to fall.
2. When the money market is drawn with the value of money on the vertical axis, if money
demand shifts leftward, then initially there is an
a. excess demand for money which causes the price level to rise.
b. excess demand for money which causes the price level to fall.
c. excess supply of money which causes the price level to rise.
d. excess supply of money which causes the price level to fall.
3. The price level falls if either
a. money demand or money supply shifts rightward.
b. money demand shifts rightward or money supply shifts leftward.
c. money demand shifts leftward or money supply shifts rightward.
d. money demand or money supply shifts leftward.
4. As the price level rises, the value of money
a. falls, and people desire to hold less of it.
b. falls, and people desire to hold more of it.
c. rises, and people desire to hold less of it.
d. rises, and people desire to hold more of it.
5. Money demand depends on
a. the price level and the interest rate.
b. the price level but not the interest rate.
c. the interest rate but not the price level.
d. neither the price level nor the interest rate.
6. If M = 3,000, P = 2, and Y = 12,000, what is velocity?
a. ½
b. 2
c. 4
d. 8
7. Other things the same, an increase in velocity means that
a. the rate at which money changes hands falls, so the price level rises.
b. the rate at which money changes hands falls, so the price level falls.
c. the rate at which money changes hands rises, so the price level rises.
d. the rate at which money changes hands rises, so the price level falls.
8. The supply of money increases when
a. the value of money increases.
b. the interest rate increases.
c. the central bank makes open-market purchases.
d. None of the above is correct.
9. When the money market is drawn with the value of money on the vertical axis, if the
price level is above the equilibrium level, there is an
a. excess demand for money, so the price level will rise.
b. excess demand for money, so the price level will fall.
c. excess supply of money, so the price level will rise.
d. excess supply of money, so the price level will fall.
10. The price level falls. This might be because the SBV
a. bought bonds which raised the money supply.
b. bought bonds which reduced the money supply.
c. sold bonds which raised the money supply.
d. sold bonds which reduced the money supply.