Question 1

The Fisher effect predicts that the nominal interest rate:

Accepted Answer

A)  rises as the expected inflation rate rises. 
B)  falls as the expected inflation rate rises. 
C)  remains the same as the expected inflation rate changes. 
D)  changes only if the unexpected inflation rate changes,but not with the expected inflation rate. 
A)  rises as the expected inflation rate rises. 
B)  falls as the expected inflation rate rises. 
C)  remains the same as the expected inflation rate changes. 
D)  changes only if the unexpected inflation rate changes,but not with the expected inflation rate. A

Question 2

Explain the difference between the price level and the rate of inflation.

Accepted Answer

The price level is the average price of the goods and services sold in the economy.Inflation is the rate of change in the average price of those goods and services.That is,inflation is the rate of change in the average price level.

Question 3

List three nations that have experienced hyperinflation.What is the cause of hyperinflation,and how does hyperinflation and velocity interact?

Accepted Answer

The nations listed in the textbook are America,Bolivia,Peru,Yugoslavia,Nicaragua,Greece,Germany,Hungary,and Zimbabwe.Increasing the money supply leads to more inflation.Governments often increase the money supply to monetize debts brought on by deficit spending in order to raise more revenue without increasing explicit tax rates.Increased velocity of money is a result of inflation.As prices continue to rise dramatically,people demand to be paid more frequently and increase the number of times they make purchases,which increases velocity.Both the increase in money growth and velocity contribute to extremely high rates of inflation,or hyperinflation,according to the quantity theory of money.

Question 4

High and volatile inflation:

Accepted Answer

A)  causes the price of goods and services to deviate from the market price. 
B)  increases the purchasing power of money and income. 
C)  creates high supply of goods and services. 
D)  destroys the ability of market prices to send signals about the value of resources and opportunities. 
A)  causes the price of goods and services to deviate from the market price. 
B)  increases the purchasing power of money and income. 
C)  creates high supply of goods and services. 
D)  destroys the ability of market prices to send signals about the value of resources and opportunities.

Question 5

Which of these statements is NOT correct?

Accepted Answer

A)  If your nominal wages rise at a rate higher than the inflation rate,you have received a "real" pay raise. 
B)  If your nominal wages rise at exactly the rate of inflation,your purchasing power over time remains constant. 
C)  If your nominal wages rise at 4% while inflation rises at 5%,you have essentially received a "pay cut." 
D)  If deflation occurs,you will receive a "real" pay raise regardless of what happens to your nominal wage. 
A)  If your nominal wages rise at a rate higher than the inflation rate,you have received a "real" pay raise. 
B)  If your nominal wages rise at exactly the rate of inflation,your purchasing power over time remains constant. 
C)  If your nominal wages rise at 4% while inflation rises at 5%,you have essentially received a "pay cut." 
D)  If deflation occurs,you will receive a "real" pay raise regardless of what happens to your nominal wage.

Question 6

A measure of the average price received by suppliers is the:

Accepted Answer

A)  consumer price index. 
B)  GDP deflator. 
C)  producer price index. 
D)  exchange rate. 
A)  consumer price index. 
B)  GDP deflator. 
C)  producer price index. 
D)  exchange rate.

Question 7

The basket of goods bought by the average consumer:

Accepted Answer

A)  stays about the same throughout time. 
B)  is changing all the time. 
C)  uniformly falls in price. 
D)  uniformly rises in price. 
A)  stays about the same throughout time. 
B)  is changing all the time. 
C)  uniformly falls in price. 
D)  uniformly rises in price.

Question 8

Suppose a worker earns twice as much income this year as 5 years ago.Is that worker necessarily better off in terms of the goods and services that can be purchased with that income today? How could you tell?

Accepted Answer

To find out if this worker has become be

Question 9

As a result of the changing variety and quality of goods that the typical consumer purchases each year,many economists argue that the CPI might:

Accepted Answer

A)  have to be abandoned in favor of a better measure of inflation. 
B)  not be as good a measure of inflation as the GDP deflator is. 
C)  understate inflation. 
D)  overstate inflation. 
A)  have to be abandoned in favor of a better measure of inflation. 
B)  not be as good a measure of inflation as the GDP deflator is. 
C)  understate inflation. 
D)  overstate inflation.

Question 10

Money illusion occurs when people:

Accepted Answer

A)  become irrational about money use. 
B)  become rationally ignorant about money. 
C)  mistake changes in prices for changes in quality. 
D)  mistake changes in nominal prices for changes in real prices. 
A)  become irrational about money use. 
B)  become rationally ignorant about money. 
C)  mistake changes in prices for changes in quality. 
D)  mistake changes in nominal prices for changes in real prices.

Question 11

Inflation generally causes the taxes paid by individuals and business firms to:

Accepted Answer

A)  remain relatively constant. 
B)  increase. 
C)  decrease. 
D)  become less of a burden. 
A)  remain relatively constant. 
B)  increase. 
C)  decrease. 
D)  become less of a burden.

Question 12

Changes in money velocity and GDP are the main determinants of the inflation rate.

Accepted Answer

A) True 
 B)False

Question 13

Inflation tends to cause nominal wages to:

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain constant. 
D)  become more difficult to predict. 
A)  increase. 
B)  decrease. 
C)  remain constant. 
D)  become more difficult to predict.

Question 14

If the growth rate of the money supply decreases from 10% to 5%,which of the following is a prediction of the quantity theory of money?

Accepted Answer

A)  disinflation 
B)  deflation 
C)  hyperinflation 
D)  money illusion 
A)  disinflation 
B)  deflation 
C)  hyperinflation 
D)  money illusion

Question 15

The price level at the end of 2011 minus the price level at the end of 2010 is the _____ for the year 2011.

Accepted Answer

A)  inflation rate 
B)  change in the price level 
C)  change in gross national product 
D)  consumer price index 
A)  inflation rate 
B)  change in the price level 
C)  change in gross national product 
D)  consumer price index

Question 16

When disinflation arises unexpectedly,the real interest rate will _____ the equilibrium rate,which will benefit _____.

Accepted Answer

A)  exceed;lenders and harm borrowers 
B)  exceed;benefit borrowers and harm lenders 
C)  fall short of;lenders and harm borrowers 
D)  fall short of;borrowers and harm lenders 
A)  exceed;lenders and harm borrowers 
B)  exceed;benefit borrowers and harm lenders 
C)  fall short of;lenders and harm borrowers 
D)  fall short of;borrowers and harm lenders

Question 17

How might changes in the money supply be non-neutral in the short run?

Accepted Answer

A)  As the amount of money circulating in the economy changes before prices respond,the purchases of consumers change accordingly,which leads producers to change production levels. 
B)  When money supply changes in the short run,it will affect nominal,but not real,variables in the short run. 
C)  As money growth increases at a faster rate,it will cause real GDP to grow at an even faster rate. 
D)  If producers expect inflation to increase,they will increase supply in order to sell before the arrival of inflation. 
A)  As the amount of money circulating in the economy changes before prices respond,the purchases of consumers change accordingly,which leads producers to change production levels. 
B)  When money supply changes in the short run,it will affect nominal,but not real,variables in the short run. 
C)  As money growth increases at a faster rate,it will cause real GDP to grow at an even faster rate. 
D)  If producers expect inflation to increase,they will increase supply in order to sell before the arrival of inflation.

Question 18

Because of money illusion,inflation usually confuses:

Accepted Answer

A)  consumers. 
B)  workers. 
C)  firms. 
D)  consumers,workers,and firms. 
A)  consumers. 
B)  workers. 
C)  firms. 
D)  consumers,workers,and firms.

Question 19

What effect did reducing U.S.inflation from 13.5% in 1980 to 3% in 1983 have?

Accepted Answer

A)  Wealth was shifted from lenders to borrowers. 
B)  The unemployment rate fell to 4%. 
C)  The country experienced a recession. 
D)  Per capita income increased by 18 % in 3 years. 
A)  Wealth was shifted from lenders to borrowers. 
B)  The unemployment rate fell to 4%. 
C)  The country experienced a recession. 
D)  Per capita income increased by 18 % in 3 years.

Question 20

The price of phone calls has risen over time as a result of inflation.

Accepted Answer

A) True 
 B)False

Exam 12: Inflation and the Quantity Theory of Money

The Fisher effect predicts that the nominal interest rate:

Explain the difference between the price level and the rate of inflation.

List three nations that have experienced hyperinflation.What is the cause of hyperinflation,and how does hyperinflation and velocity interact?

High and volatile inflation:

Which of these statements is NOT correct?

A measure of the average price received by suppliers is the:

The basket of goods bought by the average consumer:

Suppose a worker earns twice as much income this year as 5 years ago.Is that worker necessarily better off in terms of the goods and services that can be purchased with that income today? How could you tell?

As a result of the changing variety and quality of goods that the typical consumer purchases each year,many economists argue that the CPI might:

Money illusion occurs when people:

Inflation generally causes the taxes paid by individuals and business firms to:

Changes in money velocity and GDP are the main determinants of the inflation rate.

Inflation tends to cause nominal wages to:

If the growth rate of the money supply decreases from 10% to 5%,which of the following is a prediction of the quantity theory of money?

The price level at the end of 2011 minus the price level at the end of 2010 is the _____ for the year 2011.

When disinflation arises unexpectedly,the real interest rate will _____ the equilibrium rate,which will benefit _____.

How might changes in the money supply be non-neutral in the short run?

Because of money illusion,inflation usually confuses:

What effect did reducing U.S.inflation from 13.5% in 1980 to 3% in 1983 have?

The price of phone calls has risen over time as a result of inflation.

The Big Ideas

The Power of Trade

Supply and Demand

Equilibrium- How Supply and Demand

Price Ceilings and Floors

GDP and the Measurement of Progress

The Wealth of Nations and Economic Growth

Growth,capital Accumulation

Saving,investment,and the Financial System

Stock Markets and Personal Finance

Unemployment and Labor Force Participation

Business Fluctuations

Transmission and Amplification Mechanisms

The Federal Reserve System

Monetary Policy

The Federal Budget- Taxes and Spending

Fiscal Policy

International Trade

International Finance

Political Economy and Public Choice

Filters

When disinflation arises unexpectedly,the real interest rate will _ the equilibrium rate,which will benefit _.