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1、Macroeconomics (Hubbard et al.)Chapter 6 Money and Inflation6.1 What Is Money, and Why Do We Need It?1) A major shortcoming of a barter economy isA) the requirement of specialization and exchange.B) that money loses value over time from inflation.C) the requirement of a double coincidence of wants.D
2、) that most goods and services cannot be traded.Answer: CDiff: 1 Page Ref: 189Topic: The Functions of MoneyObjective: LOI: Define money and explain its functions.Special Feature: noneAACSB: Reflective Thinking Skills*: Recurring2) Which of the following is one of the most important benefits of money
3、 in an economy?A) Money allows for the accumulation of wealth.B) Money makes exchange easier, leading to more specialization and higher productivity.C) Money encourages self-sufficiency and therefore increases economic stability.D) Money allows for the exchange of goods and services.Answer: BDiff: 1
4、 Page Ref: 190Topic: The Functions of MoneyObjective: LOI: Define money and explain its functions.Special Feature: noneAACSB: Reflective Thinking Skills*: Recurring3) If bananas were used as money, which of the following functions of money would be the hardest for bananas to satisfy?A) unit of accou
5、ntB) store of valueC) divisibilityD) medium of exchangeAnswer: BDiff: 2 Page Ref: 190-191Topic: The Functions of MoneyObjective: LOI: Define money and explain its functions.Special Feature: noneAACSB: Reflective Thinking Skills*: Recurring11) Suppose banks hold no excess reserves, households and fir
6、ms do not change the amount of currency they hold, and the required reserve ratio is 25%. If the Federal Reserve purchases $1 million in treasury securities, what will be the changes in bank reserves and total checking account deposits in the whole banking system?Answer: Bank reserves will increase
7、by $1 million when the seller of the Treasury security deposits the $1 million in her checking account. Total checking account deposits in the whole banking system will increase by the original $1 million deposit times the deposit multiplier of 4, or $4 million.Diff: 2 Page Ref: 196-197Topic: The Pr
8、ocess of Money CreationObjective: LO2: Explain how the Federal Reserve changes the money supply.Special Feature: noneAACSB: Reflective Thinking Skills*: Recurring12) Suppose the required reserve ratio is 100%. Explain if the Federal Reserve could still change the money supply with open market operat
9、ions?Answer: The Federal Reserve could still change the money supply because the initial purchase or sale of Treasury securities would still change checking account deposits. The simple deposit multiplier would equal one, so if the Fed purchased $1 million in securities, deposits would increase by $
10、1 million, and if the Fed sold $1 million in securities, deposits would decrease by $1 million.Diff: 2 Page Ref: 196-197Topic: The Process of Money CreationObjective: LO2: Explain how the Federal Reserve changes the money supply.Special Feature: noneAACSB: Reflective Thinking Skills*: Recurring6.3 T
11、he Quantity Theory of Money and Inflation1) The quantity equation states that theA) money supply times the velocity of money equals the price level times real GDP.B) money supply times the price level equals real GDP divided by the velocity of money.C) money supply times the price level equals real
12、GDP times the velocity of money.D) money supply divided by the velocity of money equals the price level divided by real GDP.Answer: ADiff: 1 Page Ref: 197-198Topic: The Quantity Theory of MoneyObjective: LO3: Describe the quantity theory of money and use it to explain the connection between changes
13、in the money supply and the inflation rate.Special Feature: noneAACSB: Reflective Thinking Skills*: Recurring2) The quantity theory of money predicts that, in the long run, inflation results from theA) money supply growing at a slower rate than real GDP.B) money supply growing at a faster rate than
14、real GDP.C) velocity of money growing at a slower rate than real GDP.D) velocity of money growing at a faster rate than real GDP.Answer: BDiff: 2 Page Ref: 198-199Topic: The Quantity Theory Explanation of InflationObjective: LO3: Describe the quantity theory of money and use it to explain the connec
15、tion between changes in the money supply and the inflation rate.Special Feature: noneAACSB: Reflective Thinking Skills*: Recurring3) According to the quantity theory of money, the inflation rate equalsA) money supply minus real GDP.B) the growth rate of the money supply minus the growth rate of real
16、 GDP.C) real GDP minus the money supply.D) the growth rate of real GDP minus the growth rate of the money supply.Answer: BDiff: 1 Page Ref: 198-199Topic: The Quantity Theory Explanation of InflationObjective: LO3: Describe the quantity theory of money and use it to explain the connection between cha
17、nges in the money supply and the inflation rate.Special Feature: Key Issue and Question: What is the Connection between Changes in the Money Supply and the Inflation Rate?AACSB: Reflective Thinking Skills4) If the money supply grows at 5% and real GDP grows at 6%, the quantity theory predicts the in
18、flation rate will beA)-l%B) 1%.C) 1.2%.D) 11%.Answer: ADiff: 2 Page Ref: 198-199Topic: The Quantity Theory Explanation of InflationObjective: LO3: Describe the quantity theory of money and use it to explain the connection between changes in the money supply and the inflation rate.Special Feature: no
19、neAACSB: Analytic Skills*: Recurring5) If the money supply grows at 6% and the inflation rate is 2%, the quantity theory predicts that the change in real GDP will beA) 0.33%B) 3%.C) 4%.D) 8%.Answer: CDiff: 2 Page Ref: 198-199Topic: The Quantity Theory Explanation of InflationObjective: LO3: Describe
20、 the quantity theory of money and use it to explain the connection between changes in the money supply and the inflation rate.Special Feature: noneAACSB: Analytic Skills*: Recurring6) According to the quantity theory of money, if the money supply grows at 25% and the inflation rate is 20%, the growt
21、h in real GDP isA) 0.8%.B) 1.25%.C) 5%.D) 45%.Answer: CDiff: 2 Page Ref: 198-199Topic: The Quantity Theory Explanation of InflationObjective: LO3: Describe the quantity theory of money and use it to explain the connection between changes in the money supply and the inflation rate.Special Feature: no
22、neAACSB: Analytic SkillsE) RecurringArticle SummaryInflation in Brazil continued to rise in 2011, with its headline inflation index up 5.99% annually in January, well above the target rate of 4.5%. Increases in wages, government spending, and food prices, coupled with growing consumer demand, are be
23、ing credited with the rise in the price level. Surveys conducted by BraziFs central bank also show that the public expects inflation to remain high, despite statements to the contrary from the finance minister. In response to the increasing inflation, Brazils central bank finds itself pressured to i
24、ncrease its overnight interest rate, which is currently among the highest in the world at 11.25%. The rising inflation and interest rates have proven problematic for newly-elected Brazilian President Dilma Rousseff, who ran on a platform of lowering interest rates in order to foster economic growth.
25、 Many economists have suggested that significant cuts to government spending are needed to curb inflation and bring down interest rates in Brazil.Source: John Lyons, “In Brazil, Inflation Haunts Officials/9 Wall Street Journal February 9, 2011.7) Refer to the Article Summary. In 2010, the growth rat
26、e of real GDP in Brazil was 7.5%. Assume the growth rate of velocity is 0%. At Brazils current annual inflation rate of 5.99%, the growth rate of the money supply would beA)-1.51%.8) 1.51%.9) 5.99%.10) 13.49%. Answer: D Diff: 2 Page Ref: 198-199 Topic: The Quantity Theory Explanation of Inflation Ob
27、jective: LO3: Describe the quantity theory of money and use it to explain the connection between changes in the money supply and the inflation rate.Special Feature: Making the Connection: In Brazil, Inflation Haunts Officials11 AACSB: Analytic Skills8) Refer to the Article Summary. In 2010, the grow
28、th rate of real GDP in Brazil was 7.5%. Assume the growth rate of velocity is 0%. If Brazil wishes to decrease the inflation rate from the annual rate of 5.99% to its target rate of 4.5% and maintain its current growth rate of real GDP, by how many percentage points would the growth rate of the mone
29、y supply need to change?A) -3 B) -2.99 C)-1.49 D) 2.99 Answer: C Diff: 2 Page Ref: 198-199 Topic: The Quantity Theory Explanation of Inflation Objective: LO3: Describe the quantity theory of money and use it to explain the connection between changes in the money supply and the inflation rate.Special
30、 Feature: Making the Connection: In Brazil, Inflation Haunts Officials11 AACSB: Analytic Skills9) Refer to the Article Summary. In 2010, the growth rate of real GDP in Brazil was 7.5%. Assume the growth rate of velocity is constant at a rate of 5%. If Brazil wishes to decrease the inflation rate fro
31、m the annual rate of 5.99% to its target rate of 4.5% and maintain its current growth rate of real GDP, what would the growth rate of the money supply need to be?A) 6.49%.B) 7%.C) 8%.D) 8.49%.Answer: BDiff: 3 Page Ref: 198-199Topic: The Quantity Theory Explanation of InflationObjective: LO3: Describ
32、e the quantity theory of money and use it to explain the connection between changes in the money supply and the inflation rate.Special Feature: Making the Connection: nIn Brazil, Inflation Haunts Officials Suppose the annual growth rate of real GDP for the nation of Svengali is 5% and the growth rat
33、e of velocity is 0%. If the money supply growth rate decreases from 6% to 2%, what was the initial rate of inflation in Svengali?A)-l%B) 1%C) 1.25%D) 9%Answer: BDiff: 2 Page Ref: 200Topic: The Quantity Theory Explanation of InflationObjective: LO3: Describe the quantity theory of money and use it to
34、 explain the connection between changes in the money supply and the inflation rate.Special Feature: Solved Problem 6.3: The Effect of a Decrease in the Growth Rate of the Money SupplyAACSB: Analytic SkillsAACSB: Analytic Skills10) When the Fed purchased a large quantity of long-term bonds, as it did
35、 during 2008-2010 with its quantitative easing policies, but most banks held onto their new reserves, the money multiplier while the monetary base.A) increased; increasedB) increased; decreasedC) decreased; increasedD) decreased; decreasedAnswer: CDiff: 2 Page Ref: 199Topic: The Quantity Theory Expl
36、anation of InflationObjective: LO3: Describe the quantity theory of money and use it to explain the connection between changes in the money supply and the inflation rate.Special Feature: Making the Connection: Is the Inflation Rate Around the World Going to Increase in the Near Future?AACSB: Reflect
37、ive Thinking Skills12) Suppose the annual growth rate of real GDP for the nation of Svengali is 5% and the growth rate of velocity is 0%. If the money supply growth rate decreases from 4% to 2%, what is the new rate of inflation in Svengali?A) -3%B)-l%C) 3%D) 7%Answer: ADiff: 2 Page Ref: 200Topic: T
38、he Quantity Theory Explanation of InflationObjective: LO3: Describe the quantity theory of money and use it to explain the connection between changes in the money supply and the inflation rate.Special Feature: Solved Problem 6.3: The Effect of a Decrease in the Growth Rate of the Money SupplyAACSB:
39、Analytic Skills13) Over the long run and across countries, there is evidence of between the growth rate ofthe money supply and the inflation rate.A) no relationshipB) a weak linkC) a strong linkD) a negative relationshipAnswer: CDiff: 1 Page Ref: 201Topic: Can the Quantity Theory Accurately Predict
40、the Inflation Rate?Objective: LO3: Describe the quantity theory of money and use it to explain the connection between changes in the money supply and the inflation rate.Special Feature: noneAACSB: Reflective Thinking Skills*: Recurring14) How is the quantity theory of money different from the quanti
41、ty equation, and why must the quantity equation always be true?Answer: The quantity equation is that the money supply (M) times the velocity of money (V) equals the price level (P) times real GDP (K), or MV = PY. The quantity equation must always be true because the definition of the velocity of mon
42、ey is PY/M. If PY/M is substituted for V, the quantity equation yields PY=PY.The quantity theory of money is a theory derived from the quantity equation by Irving Fisher, who asserted that the velocity of money is fixed. The theory can be judged as true or not true.Diff: 3 Page Ref: 197-198Topic: Th
43、e Quantity Theory of MoneyObjective: LO3: Describe the quantity theory of money and use it to explain the connection between changes in the money supply and the inflation rate.Special Feature: noneAACSB: Reflective Thinking Skills*: Recurring15) Suppose the annual growth rate of real GDP for the nat
44、ion of Vicuna is 8%, the growth rate of velocity is 0%, and the growth rate of the money supply is 12%.a. What is the current rate of inflation?b. What will happen to the inflation rate if the growth of the money supply increases to 16%?c. What will happen to the inflation rate if the growth of the
45、money supply increases to 16%, and at the same time, the growth rate of velocity increases to 4%?Answer:d. The current rate of inflation is 12% - 8% = 4%.e. The new rate of inflation is 16% - 8% = 8%.f. The new rate of inflation is 16% + 4% - 8% = 12%.Diff: 3 Page Ref: 200Topic: The Quantity Theory
46、Explanation of InflationObjective: LO3: Describe the quantity theory of money and use it to explain the connection between changes in the money supply and the inflation rate.Special Feature: Solved Problem 6.3: The Effect of a Decrease in the Growth Rate of the Money SupplyAACSB: Analytic Skills16)
47、Suppose the velocity of money is not fixed, but stable at about 4% growth per year. How could the quantity theory of money be modified to include a stable growth rate of the velocity of money? In this modified version with velocity growing at about 4% per year, what would the growth rate of the othe
48、r variables need to be to cause inflation?Answer: The quantity theory of money would have to include a growth rate for the velocity of money of about 4% instead of 0%. The inflation rate would then be determined by the following equation: Inflation rate = Growth rate of the money supply + Growth rate of the velocity of money - Growth rate of real GDP.Inflation would occur if the growth rate of the money supply plus the 4% growth rate of the velocity o