Question 1

When expected inflation is less than actual inflation,inflation causes wealth redistribution from lenders to borrowers.

Accepted Answer

A) True 
 B)False

Question 2

The case of hyperinflation in Zimbabwe in the late 2000s was an example of the effects of:

Accepted Answer

A)  the government monetizing its debt. 
B)  large rainfall shocks. 
C)  amplification mechanisms. 
D)  a lack of foreign aid. 
A)  the government monetizing its debt. 
B)  large rainfall shocks. 
C)  amplification mechanisms. 
D)  a lack of foreign aid.

Question 3

The bundle of goods used to calculate the consumer price index is always changing.

Accepted Answer

A) True 
 B)False

Question 4

Suppose the nominal interest rate is 4% and the inflation rate is 5%.The real interest rate is:

Accepted Answer

A)  9%. 
B)  0%. 
C)  1%. 
D)  -1%. 
A)  9%. 
B)  0%. 
C)  1%. 
D)  -1%.

Question 5

Mistaking changes in nominal prices for changes in real prices is called a:

Accepted Answer

A)  nominal illusion. 
B)  real illusion. 
C)  price illusion. 
D)  money illusion. 
A)  nominal illusion. 
B)  real illusion. 
C)  price illusion. 
D)  money illusion.

Question 6

Suppose real GDP and velocity of money remain constant.If money supply doubles,then the inflation rate will be:

Accepted Answer

A)  10%. 
B)  50%. 
C)  100%. 
D)  200%. 
A)  10%. 
B)  50%. 
C)  100%. 
D)  200%.

Question 7

When changes in nominal prices are confused with changes in real prices,people experience:

Accepted Answer

A)  consumer bias. 
B)  inflationary delusion. 
C)  cyclical price confusion. 
D)  money illusion. 
A)  consumer bias. 
B)  inflationary delusion. 
C)  cyclical price confusion. 
D)  money illusion.

Question 8

According to Nobel laureate Milton Friedman,"inflation is _____."

Accepted Answer

A)  a good thing 
B)  found everywhere 
C)  always present 
D)  always and everywhere a monetary phenomenon 
A)  a good thing 
B)  found everywhere 
C)  always present 
D)  always and everywhere a monetary phenomenon

Question 9

Deflation always implies the inflation rate is negative.

Accepted Answer

A) True 
 B)False

Question 10

When the expected rate of inflation is higher than the actual rate of inflation,wealth is:

Accepted Answer

A)  redistributed at random. 
B)  not redistributed at all. 
C)  redistributed from borrowers to lenders. 
D)  redistributed from lenders to borrowers. 
A)  redistributed at random. 
B)  not redistributed at all. 
C)  redistributed from borrowers to lenders. 
D)  redistributed from lenders to borrowers.

Question 11

If the average price level rises from 105 to 110,then the inflation rate is 5%.

Accepted Answer

A) True 
 B)False

Question 12

The Consumer Price Index (CPI)measures the average price for a basket of goods and services bought by a typical American consumer.

Accepted Answer

A) True 
 B)False

Question 13

Wealth will be redistributed from borrowers to lenders when expected inflation is less than actual inflation.

Accepted Answer

A) True 
 B)False

Question 14

Inflation has no economic costs as long as it is fully expected.

Accepted Answer

A) True 
 B)False

Question 15

Even moderate inflation typically:

Accepted Answer

A)  increases real prices. 
B)  increases the amount of taxes that people pay over time. 
C)  decreases average household consumption. 
D)  decreases the number of long-term contracts signed. 
A)  increases real prices. 
B)  increases the amount of taxes that people pay over time. 
C)  decreases average household consumption. 
D)  decreases the number of long-term contracts signed.

Question 16

According to the quantity theory of money,the primary cause of inflation is:

Accepted Answer

A)  the growth rate of the money supply. 
B)  the growth rate of real GDP. 
C)  productivity growth. 
D)  the number of real economic shocks. 
A)  the growth rate of the money supply. 
B)  the growth rate of real GDP. 
C)  productivity growth. 
D)  the number of real economic shocks.

Question 17

If a lender expects an inflation rate of 5% but the inflation rate unexpectedly increases to 7% and if the nominal interest rate was 10%,what is the real rate of interest earned?

Accepted Answer

A)  2% 
B)  3% 
C)  4% 
D)  5% 
A)  2% 
B)  3% 
C)  4% 
D)  5%

Question 18

Which of the following is an example of money illusion assuming that inflation is 5%?

Accepted Answer

A)  You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend. 
B)  You receive a 5% raise at your part-time job but do not increase or decrease your spending. 
C)  You do not receive a raise at your part-time job but cut out some expenses as you notice some prices rising. 
D)  You receive a 10% raise at your part-time job and start spending extra money on entertainment every weekend. 
A)  You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend. 
B)  You receive a 5% raise at your part-time job but do not increase or decrease your spending. 
C)  You do not receive a raise at your part-time job but cut out some expenses as you notice some prices rising. 
D)  You receive a 10% raise at your part-time job and start spending extra money on entertainment every weekend.

Question 19

The consumer price index measures the:

Accepted Answer

A)  total price of a basket of goods and services bought by a typical consumer. 
B)  average price of a basket of goods and services bought by a typical consumer. 
C)  total price of a basket of goods and services bought by all families in the country. 
D)  average price of a basket of goods and services bought by all families in the country. 
A)  total price of a basket of goods and services bought by a typical consumer. 
B)  average price of a basket of goods and services bought by a typical consumer. 
C)  total price of a basket of goods and services bought by all families in the country. 
D)  average price of a basket of goods and services bought by all families in the country.

Question 20

Suppose you are forced to take a pay cut of 5% when the economy is experiencing overall deflation of 5%.If in response to your pay cut you also reduce your consumption by 5%,then economists would say:

Accepted Answer

A)  you made a rational decision. 
B)  you are exhibiting money illusion. 
C)  your real wage decreased by 5%. 
D)  the quantity theory of money held. 
A)  you made a rational decision. 
B)  you are exhibiting money illusion. 
C)  your real wage decreased by 5%. 
D)  the quantity theory of money held.

Exam 12: Inflation and the Quantity Theory of Money

When expected inflation is less than actual inflation,inflation causes wealth redistribution from lenders to borrowers.

The case of hyperinflation in Zimbabwe in the late 2000s was an example of the effects of:

The bundle of goods used to calculate the consumer price index is always changing.

Suppose the nominal interest rate is 4% and the inflation rate is 5%.The real interest rate is:

Mistaking changes in nominal prices for changes in real prices is called a:

Suppose real GDP and velocity of money remain constant.If money supply doubles,then the inflation rate will be:

When changes in nominal prices are confused with changes in real prices,people experience:

According to Nobel laureate Milton Friedman,"inflation is _____."

Deflation always implies the inflation rate is negative.

When the expected rate of inflation is higher than the actual rate of inflation,wealth is:

If the average price level rises from 105 to 110,then the inflation rate is 5%.

The Consumer Price Index (CPI)measures the average price for a basket of goods and services bought by a typical American consumer.

Wealth will be redistributed from borrowers to lenders when expected inflation is less than actual inflation.

Inflation has no economic costs as long as it is fully expected.

Even moderate inflation typically:

According to the quantity theory of money,the primary cause of inflation is:

If a lender expects an inflation rate of 5% but the inflation rate unexpectedly increases to 7% and if the nominal interest rate was 10%,what is the real rate of interest earned?

Which of the following is an example of money illusion assuming that inflation is 5%?

The consumer price index measures the:

Suppose you are forced to take a pay cut of 5% when the economy is experiencing overall deflation of 5%.If in response to your pay cut you also reduce your consumption by 5%,then economists would say:

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