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Question 1

Consider the specification of money demand:
M = kPY
Suppose the actual money supply is M* which is not equal to M; according to the neutrality principle, the variable that would adjust to achieve equilibrium is:

a) M*

b) k

c) P

d) Y

Question 2

Line D above provides a graphical representation of the Cambridge equation specification of the demand for money.
P is the price level, M is the demand for a nominal money stock, Y is real GDP and k is the proportion of spending people which to hold in nominal money balances.
What is the slope of line D?

a) k

b) Y

c) kY

d) (1/k)

Question 3

In the long-run the growth rate of money demand equals the sum of the growth rates of (A)__________ and (B)___________.

a) A: the money supply
B: inflation

b) A: the money supply
B: GDP growth

c) A: inflation
B: GDP growth

d) A: inflation
B: the effective exchange rate

Question 4

The economic significance of a depreciation of a country's real exchange rate is…

a) …that there has been a gain in the country's competitiveness.

b) …that absolute purchasing power parity has increased.

c) …that it leads to arbitrage resulting in an appreciation of the real exchange rate in the future.

d) …all of the above.

Question 5

The real exchange rate is constant when the nominal exchange rate appreciates at a rate equal to …

a) …the rate of inflation plus the real rate of interest.

b) …the nominal rate of interest, assuming the Fisher Principle holds.

c) …the difference between the rate of growth of the money supply and the rate of inflation.

d) …the difference between the foreign and domestic inflation rates.

Oxford University Press, Online Resource Centre, Chapter 06.

Chapter 06

Instructions

Question 1

Question 2

Question 3

Question 4

Question 5