Question 1

If the price level in 2016 is 140 and it falls to 133 in 2017,what has the economy experienced between 2016 and 2017?

Accepted Answer

A)  5% inflation 
B)  7% inflation 
C)  7% deflation 
D)  5% deflation 
A)  5% inflation 
B)  7% inflation 
C)  7% deflation 
D)  5% deflation

Question 2

The quantity theory of money is consistent with economist Milton Friedman's argument that "inflation is always and everywhere a monetary phenomenon."

Accepted Answer

A) True 
 B)False

Question 3

Sustained inflation tends to increase nominal wages.

Accepted Answer

A) True 
 B)False

Question 4

The inflation rate is the rate of change of the:

Accepted Answer

A)  value of the dollar. 
B)  New York Stock Exchange. 
C)  average level of prices. 
D)  money supply. 
A)  value of the dollar. 
B)  New York Stock Exchange. 
C)  average level of prices. 
D)  money supply.

Question 5

The concept of money illusion refers to:

Accepted Answer

A)  people who do not understand the purchasing power of money and therefore spend it faster than they can earn it. 
B)  consumers with inflation-indexed wages seeing a rise in prices and believing that their purchasing power has been compromised. 
C)  consumers paying prices that are higher than normal and not feeling bad about it because it's happening to everyone just the same. 
D)  an unobserved change in relative prices. 
A)  people who do not understand the purchasing power of money and therefore spend it faster than they can earn it. 
B)  consumers with inflation-indexed wages seeing a rise in prices and believing that their purchasing power has been compromised. 
C)  consumers paying prices that are higher than normal and not feeling bad about it because it's happening to everyone just the same. 
D)  an unobserved change in relative prices.

Question 6

Negative real interest rates among developing countries result when they print too little money.

Accepted Answer

A) True 
 B)False

Question 7

Negative real rates of interest tend to:

Accepted Answer

A)  increase economic growth. 
B)  reduce economic growth. 
C)  have no impact on economic growth. 
D)  exist only in poor countries. 
A)  increase economic growth. 
B)  reduce economic growth. 
C)  have no impact on economic growth. 
D)  exist only in poor countries.

Question 8

The inflation parable discussed in the text suggests a:

Accepted Answer

A)  short-run relationship between unexpected inflation and output. 
B)  short-run relationship between expected inflation and output. 
C)  long-run relationship between unexpected inflation and output. 
D)  long-run relationship between expected inflation and output. 
A)  short-run relationship between unexpected inflation and output. 
B)  short-run relationship between expected inflation and output. 
C)  long-run relationship between unexpected inflation and output. 
D)  long-run relationship between expected inflation and output.

Question 9

The text states,"inflation is a type of tax." This tax refers to _____ when inflation occurs.

Accepted Answer

A)  the lower purchasing power of money 
B)  a higher tax rate that the government must impose 
C)  a higher nominal interest rate of a typical loan 
D)  a special tax on taxpayers in order for the government to balance its budget 
A)  the lower purchasing power of money 
B)  a higher tax rate that the government must impose 
C)  a higher nominal interest rate of a typical loan 
D)  a special tax on taxpayers in order for the government to balance its budget

Question 10

When people suffer from money illusion,an increase in the money supply:

Accepted Answer

A)  raises real GDP in the short run. 
B)  lowers real GDP in the short run. 
C)  has no effect on real GDP in the short run but raises real GDP in the long run. 
D)  lowers real GDP in the long run. 
A)  raises real GDP in the short run. 
B)  lowers real GDP in the short run. 
C)  has no effect on real GDP in the short run but raises real GDP in the long run. 
D)  lowers real GDP in the long run.

Question 11

Disinflation occurs when the overall price level:

Accepted Answer

A)  falls. 
B)  rises at a decreasing rate. 
C)  rises at an exponential rate. 
D)  falls at an increasing rate. 
A)  falls. 
B)  rises at a decreasing rate. 
C)  rises at an exponential rate. 
D)  falls at an increasing rate.

Question 12

A real price is:

Accepted Answer

A)  an increase in the average level of the price of a good. 
B)  a decrease in the average level of the price of a good. 
C)  a price that has been corrected for inflation. 
D)  the average number of times a dollar is spent on final goods and services in a year. 
A)  an increase in the average level of the price of a good. 
B)  a decrease in the average level of the price of a good. 
C)  a price that has been corrected for inflation. 
D)  the average number of times a dollar is spent on final goods and services in a year.

Question 13

Which one of the following is NOT a cost of inflation?

Accepted Answer

A)  wasted resources associated with price confusion 
B)  higher tax burdens if tax brackets are not adjusted for inflation 
C)  wealth redistribution from private citizens to the government 
D)  an automatic decrease in real wages throughout the period of inflation. 
A)  wasted resources associated with price confusion 
B)  higher tax burdens if tax brackets are not adjusted for inflation 
C)  wealth redistribution from private citizens to the government 
D)  an automatic decrease in real wages throughout the period of inflation.

Question 14

Nobel Laureate Milton Friedman said,"Inflation is always and everywhere an unemployment phenomenon."

Accepted Answer

A) True 
 B)False

Question 15

The quantity theory of money is a theory of:

Accepted Answer

A)  money growth in the United States. 
B)  inflation. 
C)  economic growth. 
D)  the growth of tax burdens. 
A)  money growth in the United States. 
B)  inflation. 
C)  economic growth. 
D)  the growth of tax burdens.

Question 16

High volatility in the inflation rate can result in:

Accepted Answer

A)  improper allocation of resources. 
B)  sudden changes in output. 
C)  low volatility in the CPI. 
D)  deflation. 
A)  improper allocation of resources. 
B)  sudden changes in output. 
C)  low volatility in the CPI. 
D)  deflation.

Question 17

Unexpected disinflation will cause the real interest rate to be greater than the equilibrium rate,which will benefit lenders and harm borrowers.

Accepted Answer

A) True 
 B)False

Question 18

Inflation refers to an increase in the:

Accepted Answer

A)  relative prices of some goods as compared to other goods. 
B)  average level of prices. 
C)  standard of living. 
D)  average level of nominal output. 
A)  relative prices of some goods as compared to other goods. 
B)  average level of prices. 
C)  standard of living. 
D)  average level of nominal output.

Question 19

Deflation is a decrease in the:

Accepted Answer

A)  exchange rate. 
B)  average level of prices. 
C)  inflation rate. 
D)  velocity of money. 
A)  exchange rate. 
B)  average level of prices. 
C)  inflation rate. 
D)  velocity of money.

Question 20

Between 1960 and 1990,Argentina's money supply grew at approximately 80%.According to the quantity theory of money,inflation rates in Argentina should have been approximately _____ during this period.

Accepted Answer

A)  20% 
B)  40% 
C)  80% 
D)  160% 
A)  20% 
B)  40% 
C)  80% 
D)  160%

Exam 12: Inflation and the Quantity Theory of Money

If the price level in 2016 is 140 and it falls to 133 in 2017,what has the economy experienced between 2016 and 2017?

The quantity theory of money is consistent with economist Milton Friedman's argument that "inflation is always and everywhere a monetary phenomenon."

Sustained inflation tends to increase nominal wages.

The inflation rate is the rate of change of the:

The concept of money illusion refers to:

Negative real interest rates among developing countries result when they print too little money.

Negative real rates of interest tend to:

The inflation parable discussed in the text suggests a:

The text states,"inflation is a type of tax." This tax refers to _____ when inflation occurs.

When people suffer from money illusion,an increase in the money supply:

Disinflation occurs when the overall price level:

A real price is:

Which one of the following is NOT a cost of inflation?

Nobel Laureate Milton Friedman said,"Inflation is always and everywhere an unemployment phenomenon."

The quantity theory of money is a theory of:

High volatility in the inflation rate can result in:

Unexpected disinflation will cause the real interest rate to be greater than the equilibrium rate,which will benefit lenders and harm borrowers.

Inflation refers to an increase in the:

Deflation is a decrease in the:

Between 1960 and 1990,Argentina's money supply grew at approximately 80%.According to the quantity theory of money,inflation rates in Argentina should have been approximately _____ during this period.

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