Question

1- In the short run, an increase in the money supply causes the price level and inflation to ________________.

a. decrease

b. increase

c. not change

d. decrease or not change

2- The best measure used to study changes in the economy’s output over time is

a. GNP.

b. nominal GDP.

c. real GDP.

d. the GDP deflator.

3- Assuming constant real interest rates, an increase in the inflation rate will ____________ nominal interest rates over the long term.

a. decrease

b. increase

c. not change

Answer 1

Ans 1: An increase in the money supply will increase the aggregate demand and aggregate demand curve will shift to right. Hence, price level rises and inflation rises. Therefore, option (B)

Ans 2: The option (C) Real GDP is the correct answer because real GDP is the GDP adjusted for inflation, it is measured at constant prices.

Nominal GDP is measured at current prices and are affected by inflation.

GDP deflator is the ratio of nominal GDP to real GDP multiplied by 100, used for measuring inflation.

While, GNP is the gross national product in a particular year.

Ans 3: The correct answer is (B) Increases, the nominal interest rate rises to keep the real interest rate constant. The formula for real interest rate is:

Real Interest Rate = Nominal Interest rate - Inflation Rate