If there is a permanent increase of 5% in the domestic money supply, then which of the following will be true in the long run?
a. Prices will decrease by 5%.
b. Prices will increase by 4%.
c. The home country currency will depreciate by 5%.
d. The home country currency will appreciate by 4%.
Ans: c. The home country currency will depreciate by 5%.
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If you deposit a $50 check in the bank, the immediate impact on your bank's balance sheet will be a
A) $50 increase in reserves and a $50 increase in checkable deposits. B) $50 decrease in reserves and a $50 increase in checkable deposits. C) $50 increase in reserves and a $50 decrease in checkable deposits. D) $50 decrease in liabilities and a $50 increase in checkable deposits.
Empirical evidence shows that the nominal interest rate typically rises at the same time the inflation rate increases. What does this suggest?
A) The real rate of interest is zero. B) Increases in the current inflation rate lead borrowers and lenders to expect that inflation in the future will be higher than previously thought. C) Interest rate changes are the main component of the CPI. D) Interest rate changes are the main component of the GDP deflator.