Question 1

The price level falls if either

Accepted Answer

A) money demand or money supply shifts rightward. 
B) money demand shifts rightward or money supply shifts leftward. 
C) money demand shifts leftward or money supply shifts rightward. 
D) money demand or money supply shifts leftward. 
A) money demand or money supply shifts rightward. 
B) money demand shifts rightward or money supply shifts leftward. 
C) money demand shifts leftward or money supply shifts rightward. 
D) money demand or money supply shifts leftward.

Question 2

Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 20 percent. Sam's after-tax real rate of interest

Accepted Answer

A) will be 2 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent. 
B) will be 2 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent. 
C) will be 1.7 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent. 
D) will be 1.7 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent. 
A) will be 2 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent. 
B) will be 2 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent. 
C) will be 1.7 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent. 
D) will be 1.7 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent.

Question 3

Most economists believe the principle of monetary neutrality is

Accepted Answer

A) relevant to both the short and long run. 
B) irrelevant to both the short and long run. 
C) mostly relevant to the short run. 
D) mostly relevant to the long run. 
A) relevant to both the short and long run. 
B) irrelevant to both the short and long run. 
C) mostly relevant to the short run. 
D) mostly relevant to the long run.

Question 4

The price level rises if either

Accepted Answer

A) money demand shifts rightward or money supply shifts leftward; this rise in the price level is associated with a rise in the value of money. 
B) money demand shifts rightward or money supply shifts leftward; this rise in the price level is associated with a fall in the value of money. 
C) money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a rise in the value of money. 
D) money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a fall in the value of money. 
A) money demand shifts rightward or money supply shifts leftward; this rise in the price level is associated with a rise in the value of money. 
B) money demand shifts rightward or money supply shifts leftward; this rise in the price level is associated with a fall in the value of money. 
C) money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a rise in the value of money. 
D) money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a fall in the value of money.

Question 5

The idea that nominal variables are heavily influenced by the quantity of money and that money is largely irrelevant for understanding the determinants of real variables is called the

Accepted Answer

A) velocity concept. 
B) Fisher effect. 
C) classical dichotomy. 
D) Mankiw effect. 
A) velocity concept. 
B) Fisher effect. 
C) classical dichotomy. 
D) Mankiw effect.

Question 6

Explain the adjustment process in the money market that creates a change in the price level when the money supply increases.

Accepted Answer

When the money supply increases, there i

Question 7

The nominal interest rate is 4.5 percent and the inflation rate is 0.9 percent. What is the real interest rate?

Accepted Answer

A) 5.4 percent 
B) 5 percent 
C) 4.1 percent 
D) 3.6 percent 
A) 5.4 percent 
B) 5 percent 
C) 4.1 percent 
D) 3.6 percent

Question 8

Given a nominal interest rate of 6 percent, in which of the following cases would you earn the lowest after-tax real rate of interest?

Accepted Answer

A) Inflation is 4 percent; the tax rate is 5 percent. 
B) Inflation is 3 percent; the tax rate is 20 percent. 
C) Inflation is 2 percent; the tax rate is 30 percent. 
D) The after-tax real interest rate is the same for all of the above. 
A) Inflation is 4 percent; the tax rate is 5 percent. 
B) Inflation is 3 percent; the tax rate is 20 percent. 
C) Inflation is 2 percent; the tax rate is 30 percent. 
D) The after-tax real interest rate is the same for all of the above.

Question 9

When the money market is drawn with the value of money on the vertical axis, if the value of money is below the equilibrium level,

Accepted Answer

A) the price level will rise. 
B) the value of money will rise. 
C) money demand will shift leftward. 
D) money demand will shift rightward. 
A) the price level will rise. 
B) the value of money will rise. 
C) money demand will shift leftward. 
D) money demand will shift rightward.

Question 10

Suppose that velocity rises while the money supply stays the same. It follows that

Accepted Answer

A) P x Y must rise. 
B) P x Y must fall. 
C) P x Y must be unchanged. 
D) the effects on P x Y are uncertain. 
A) P x Y must rise. 
B) P x Y must fall. 
C) P x Y must be unchanged. 
D) the effects on P x Y are uncertain.

Question 11

The irrelevance of monetary changes for real variables is called monetary neutrality. Most economists accept monetary neutrality as a good description of the economy in the long run, but not the short run.

Accepted Answer

A) True 
 B)False

Question 12

Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, then

Accepted Answer

A) both the nominal and the real interest rate rise. 
B) neither the nominal nor the real interest rate rise. 
C) the nominal interest rate rises, but the real interest rate does not. 
D) the real interest rate rises, but the nominal interest rate does not. 
A) both the nominal and the real interest rate rise. 
B) neither the nominal nor the real interest rate rise. 
C) the nominal interest rate rises, but the real interest rate does not. 
D) the real interest rate rises, but the nominal interest rate does not.

Question 13

When inflation rises, people

Accepted Answer

A) make less frequent trips to the bank and firms make less frequent price changes. 
B) make less frequent trips to the bank while firms make more frequent price changes. 
C) make more frequent trips to the bank while firms make less frequent price changes. 
D) make more frequent trips to the bank and firms make more frequent price changes. 
A) make less frequent trips to the bank and firms make less frequent price changes. 
B) make less frequent trips to the bank while firms make more frequent price changes. 
C) make more frequent trips to the bank while firms make less frequent price changes. 
D) make more frequent trips to the bank and firms make more frequent price changes.

Question 14

The country of Lessidinia has a tax system identical to that of the United States. Suppose someone in Lessidinia bought a parcel of land for 20,000 foci (the local currency) in 1960 when the price index equaled 100. In 2002, the person sold the land for 100,000 foci, and the price index equaled 600. The tax rate on nominal gains was 20 percent. Compute the taxes on the nominal gain and the change in the real value of the land in terms of 2002 prices to find the after-tax real rate of capital gain.

Accepted Answer

A) -60 percent 
B) -30 percent 
C) 30 percent 
D) 60 percent 
A) -60 percent 
B) -30 percent 
C) 30 percent 
D) 60 percent

Question 15

When the money market is drawn with the value of money on the vertical axis, if there is a surplus of money then

Accepted Answer

A) the value of money rises which will make people desire to hold more money. 
B) the value of money rises which will make people desire to hold less money. 
C) the value of money falls which will make people desire to hold more money. 
D) the value of money falls which will make people desire to hold less money. 
A) the value of money rises which will make people desire to hold more money. 
B) the value of money rises which will make people desire to hold less money. 
C) the value of money falls which will make people desire to hold more money. 
D) the value of money falls which will make people desire to hold less money.

Question 16

If the nominal interest rate is 5 percent and there is a deflation rate of 2 percent, what is the real interest rate?

Accepted Answer

A) 7 percent 
B) 5 percent 
C) 3 percent 
D) 3/5 percent 
A) 7 percent 
B) 5 percent 
C) 3 percent 
D) 3/5 percent

Question 17

Money demand depends on

Accepted Answer

A) the price level and the interest rate. 
B) the price level but not the interest rate. 
C) the interest rate but not the price level. 
D) neither the price level nor the interest rate. 
A) the price level and the interest rate. 
B) the price level but not the interest rate. 
C) the interest rate but not the price level. 
D) neither the price level nor the interest rate.

Question 18

When the money market is drawn with the value of money on the vertical axis, if the Fed sells bonds then

Accepted Answer

A) the money supply and the price level increase. 
B) the money supply and the price level decrease. 
C) the money supply increases and the price level decreases. 
D) the money supply increases and the price level increases. 
A) the money supply and the price level increase. 
B) the money supply and the price level decrease. 
C) the money supply increases and the price level decreases. 
D) the money supply increases and the price level increases.

Question 19

Which of the following statements concerning the history of U.S. inflation is not correct?

Accepted Answer

A) Prices rose at an average annual rate of about 4 percent over the last 70 years. 
B) There was about a 16-fold increase in the price level over the last 70 years. 
C) Inflation in the 1970s was below the average over the last 70 years. 
D) The United States has experienced periods of deflation. 
A) Prices rose at an average annual rate of about 4 percent over the last 70 years. 
B) There was about a 16-fold increase in the price level over the last 70 years. 
C) Inflation in the 1970s was below the average over the last 70 years. 
D) The United States has experienced periods of deflation.

Question 20

Inflation is costly only if it is unanticipated.

Accepted Answer

A) True 
 B)False

Exam 17: Money Growth and Inflation

The price level falls if either

Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 20 percent. Sam's after-tax real rate of interest

Most economists believe the principle of monetary neutrality is

The price level rises if either

The idea that nominal variables are heavily influenced by the quantity of money and that money is largely irrelevant for understanding the determinants of real variables is called the

Explain the adjustment process in the money market that creates a change in the price level when the money supply increases.

The nominal interest rate is 4.5 percent and the inflation rate is 0.9 percent. What is the real interest rate?

Given a nominal interest rate of 6 percent, in which of the following cases would you earn the lowest after-tax real rate of interest?

When the money market is drawn with the value of money on the vertical axis, if the value of money is below the equilibrium level,

Suppose that velocity rises while the money supply stays the same. It follows that

The irrelevance of monetary changes for real variables is called monetary neutrality. Most economists accept monetary neutrality as a good description of the economy in the long run, but not the short run.

Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, then

When inflation rises, people

When the money market is drawn with the value of money on the vertical axis, if there is a surplus of money then

If the nominal interest rate is 5 percent and there is a deflation rate of 2 percent, what is the real interest rate?

Money demand depends on

When the money market is drawn with the value of money on the vertical axis, if the Fed sells bonds then

Which of the following statements concerning the history of U.S. inflation is not correct?

Inflation is costly only if it is unanticipated.

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Application: The Costs of Taxation

Application: International Trade

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Open-Economy Macroeconomic Models

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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