Economics MCQ - Economics Section 2

Decreasing the supply of money, all other things being equal, will increase its “price”, that is, the interest rate on money balances.

52 As the gross domestic product (GDP) grows over time:

A
transactions money balances increase and precautionary money balances decrease.
B
transactions money balances decrease and precautionary money balances increase.
C
both transactions and precautionary money balance increase.

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Comment

As the gross domestic product (GDP) grows over time, both transactions and precautionary money balances increase.

53 Which of the following is most likely correct about the quantity equation of exchange?

A
The velocity of money is assumed to be approximately constant.
B
The spending, P * V, is approximately proportional to quantity of money, M.
C
If money neutrality holds, an increase in the money supply, M, affects Y, real output.

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Comment

B is incorrect because the spending, P * Y, is approximately proportional to quantity of money, M. C is incorrect because if money neutrality holds, an increase in the money supply, M, does not affect Y, real output.

54 Due to high inflation, businesses constantly have to change the advertised prices of their goods and services. This is best described as:

A
menu costs.
B
shoe leather costs.
C
inflation uncertainty

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Comment

The costs described are known as menu costs.

55 Unexpected inflation least likely:

A
leads to inequitable transfers of wealth between borrowers and lenders.
B
gives rise to risk premia in borrowing rates and the prices of other assets.
C
increases the information content of market prices.

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Comment

Unexpected inflation reduces the information content of market prices.