ECON 103 MIDTERM EXAM LATEST QUESTIONS
AND ANSWERS SURE A+
✔✔Federal Funds Rate - ✔✔The interest rate at which banks lend reserves to each
other overnight, influencing overall interest rates in the economy.
✔✔Discount Rate - ✔✔The interest rate charged by central banks on loans to
commercial banks, used as a tool of monetary policy.
✔✔Quantity Theory of Money - ✔✔A theory that relates the quantity of money in an
economy to the level of prices of goods and services, typically expressed as MV = PQ,
where M is money supply, V is velocity of money, P is price level, and Q is output.
✔✔Factor that Shifts the Supply of Money in the Money Market - ✔✔An example is
changes in the central bank's monetary policy, such as altering interest rates or
engaging in open market operations.
✔✔Factor that Shifts the Demand for Money in the Money Market - ✔✔An example is
changes in income levels; as income increases, the demand for money typically
increases as well.
, ✔✔Examples that Shift the Demand for Money in the Money Market - ✔✔1. Changes in
income levels, 2. Changes in price levels, 3. Changes in technology affecting payment
methods, 4. Changes in expectations about future interest rates.
✔✔Fed's Options for Pursuing Monetary Policy in the Classical Money Market - ✔✔1.
Open market operations, 2. Adjusting the discount rate.
✔✔Nominal Variables - ✔✔Variables that are measured in monetary units, such as
nominal GDP or nominal interest rates, without adjusting for inflation.
✔✔Real Variables - ✔✔Variables that are adjusted for inflation, such as real GDP or
real interest rates, reflecting the true purchasing power.
✔✔Classical Dichotomy - ✔✔The theoretical separation of real and nominal variables,
suggesting that nominal variables do not affect real variables in the long run.
✔✔Relative Price - ✔✔The price of one good or service compared to another, indicating
how much of one good must be given up to obtain another.
✔✔Money Neutrality - ✔✔The concept that changes in the money supply only affect
nominal variables and do not influence real variables in the long run.
✔✔Velocity of Money - ✔✔The rate at which money circulates in the economy,
calculated as the ratio of nominal GDP to the money supply.
✔✔Quantity Equation - ✔✔An equation that expresses the relationship between money
supply, velocity, price level, and output, typically written as MV = PQ.
✔✔Steps of the Quantity Theory of Money - ✔✔1. Determine money supply, 2. Assess
velocity of money, 3. Calculate nominal GDP, 4. Analyze price level, 5. Evaluate output.
✔✔Hyperinflation - ✔✔An extremely high and typically accelerating rate of inflation,
often exceeding 50% per month.
✔✔Inflation Tax - ✔✔The reduction in the purchasing power of money held by the
public due to inflation, effectively acting as a tax on cash holdings.
✔✔Fisher Effect - ✔✔The theory that real interest rates are equal to nominal interest
rates minus the expected inflation rate.
✔✔Costs of Inflation - ✔✔1. Shoeleather costs, 2. Menu costs, 3. Uncertainty costs, 4.
Tax distortion costs, 5. Redistribution of wealth, 6. Loss of purchasing power.
AND ANSWERS SURE A+
✔✔Federal Funds Rate - ✔✔The interest rate at which banks lend reserves to each
other overnight, influencing overall interest rates in the economy.
✔✔Discount Rate - ✔✔The interest rate charged by central banks on loans to
commercial banks, used as a tool of monetary policy.
✔✔Quantity Theory of Money - ✔✔A theory that relates the quantity of money in an
economy to the level of prices of goods and services, typically expressed as MV = PQ,
where M is money supply, V is velocity of money, P is price level, and Q is output.
✔✔Factor that Shifts the Supply of Money in the Money Market - ✔✔An example is
changes in the central bank's monetary policy, such as altering interest rates or
engaging in open market operations.
✔✔Factor that Shifts the Demand for Money in the Money Market - ✔✔An example is
changes in income levels; as income increases, the demand for money typically
increases as well.
, ✔✔Examples that Shift the Demand for Money in the Money Market - ✔✔1. Changes in
income levels, 2. Changes in price levels, 3. Changes in technology affecting payment
methods, 4. Changes in expectations about future interest rates.
✔✔Fed's Options for Pursuing Monetary Policy in the Classical Money Market - ✔✔1.
Open market operations, 2. Adjusting the discount rate.
✔✔Nominal Variables - ✔✔Variables that are measured in monetary units, such as
nominal GDP or nominal interest rates, without adjusting for inflation.
✔✔Real Variables - ✔✔Variables that are adjusted for inflation, such as real GDP or
real interest rates, reflecting the true purchasing power.
✔✔Classical Dichotomy - ✔✔The theoretical separation of real and nominal variables,
suggesting that nominal variables do not affect real variables in the long run.
✔✔Relative Price - ✔✔The price of one good or service compared to another, indicating
how much of one good must be given up to obtain another.
✔✔Money Neutrality - ✔✔The concept that changes in the money supply only affect
nominal variables and do not influence real variables in the long run.
✔✔Velocity of Money - ✔✔The rate at which money circulates in the economy,
calculated as the ratio of nominal GDP to the money supply.
✔✔Quantity Equation - ✔✔An equation that expresses the relationship between money
supply, velocity, price level, and output, typically written as MV = PQ.
✔✔Steps of the Quantity Theory of Money - ✔✔1. Determine money supply, 2. Assess
velocity of money, 3. Calculate nominal GDP, 4. Analyze price level, 5. Evaluate output.
✔✔Hyperinflation - ✔✔An extremely high and typically accelerating rate of inflation,
often exceeding 50% per month.
✔✔Inflation Tax - ✔✔The reduction in the purchasing power of money held by the
public due to inflation, effectively acting as a tax on cash holdings.
✔✔Fisher Effect - ✔✔The theory that real interest rates are equal to nominal interest
rates minus the expected inflation rate.
✔✔Costs of Inflation - ✔✔1. Shoeleather costs, 2. Menu costs, 3. Uncertainty costs, 4.
Tax distortion costs, 5. Redistribution of wealth, 6. Loss of purchasing power.
