If when the money supply changes, real output and velocity do not change, then a

Question

If when the money supply changes, real output and velocity do not change, then a 2 percent increase in the money supply a. decreases the price level by 2 percent. b. decreases the price level by less than 2 percent. c. increases the price level by 2 percent. d. increases the price level by less than 2 percent. 8. Assuming the Fisher Effect holds, and given U.S. tax laws, an increase in inflation a. does not change the real interest rate but reduces the after-tax real rate of interest. b. increases the real interest rate and the after-tax real rate of interest. c. does not change the real interest rate but raises the after tax real rate of interest. d. decreases the real interest rate and raises the after-tax real rate of interest. 9. Harvey, a U.S. taxpayer, purchased 10 shares of MVC stock for $100 per share, one year later he sold shares for $130 a share. Over the year, the price level increased from 140.0 to 147.0. What is Harvey before-tax real capital gain? a. $1,300 - $1,000(1.05) and this is the gain he is to report on his income tax b. $1,300 - $1,000(1.07) but he is to report a $300 gain on his income tax c. $1,300 - $1,000(1.07) and this is the gain he is to report on his income tax d. $1,300 - $1,000(1.05) but he is to report a $300 gain on his income tax 10. If the economy unexpectedly went from inflation to deflation, a. creditors would gain at the expense of debtors. b. both debtors and creditors would have increased real wealth. c. debtors would gain at the expense of creditors. d. both creditors and debtors would have reduced real wealth. 11. An increase in U.S. sales of movies to other countries raises U.S. a. exports and so reduces the U.S. trade balance. b. imports and so raises the U.S. trade balance. c. imports and so raises the U.S. trade balance. d. exports and so raises the U.S. trade balance. 12. If a country had a trade surplus of $100 billion and then its exports rose by $40 billion and its $30 billion, its net exports would now he a. $90 billion b. $110 billion. c. $70 billion. d. $60 billion. 13. If a country's purchases of foreign assets exceeds foreign purchases of domestic assets, that count a. negative net exports and positive net capital outflows. b. positive net exports and positive net capital outflows. c. positive net exports and negative net capital outflows. d. negative net exports and negative net capital outflows.

Explanation / Answer

(7) (c)

As per quantity theory of money,

M x V = P x Y

Change in M + Change in V = Change in P + Change in Y

If change in M = 2% and changes in V and Y are 0, Change in P = 2% = Inflation

(8) (d)

Real interest rate = Nominal interest rate - Inflation rate

As inflation increases, real interest rate decreases. After tax real rate increases.

(9) (d)

Increase in price = (147 / 140) - 1 = 1.05 - 1 = 0.05, or 5%

Real capital gain = ($130 x 10) - ($100 x 10) x (1 + Inflation rate)

= $1,300 - $1,000 x (1.05)

However, nominal gain = $(1300 - 1000) = $300, and this has to be reported for tax purposes since tax system does not consider inflation effects.

(10) (a)

Lower inflation benefits creditors and harms debtors.

(11) (d)

Trade balance = Exports - Imports

A sale of US good abroad is an export, and higher export increases trade balance.

(12) Full question cannot be read.

(13) (c)

Purchase of foreign asset being higher, there is a negative net capital outflow. Since capital account is balanced by current account, this means current account (= exports - imports) is positive.

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