Question 1

Why did farmers in the late 1800s dislike deflation?

Accepted Answer

Most had large nominal debts.

Question 2

According to the principle of monetary neutrality, a decrease in the money supply will not change

Accepted Answer

A)  nominal GDP. 
B)  the price level. 
C)  unemployment. 
D)  All of the above are correct. 
A)  nominal GDP. 
B)  the price level. 
C)  unemployment. 
D)  All of the above are correct.

Question 3

Over the last 80 years, the average annual U.S. inflation rate was about

Accepted Answer

A)  3.6 percent, implying that prices have increased 16-fold. 
B)  4 percent, implying that prices have increased 17-fold. 
C)  4 percent, implying that prices have increased 16-fold. 
D)  3.6 percent, implying that prices increased about 17-fold. 
A)  3.6 percent, implying that prices have increased 16-fold. 
B)  4 percent, implying that prices have increased 17-fold. 
C)  4 percent, implying that prices have increased 16-fold. 
D)  3.6 percent, implying that prices increased about 17-fold.

Question 4

The inflation tax alters people's behavior and creates a deadweight loss. Explain.

Accepted Answer

Higher inflation gives people

Question 5

It takes more money to purchase the same amount of goods when prices _____. Therefore, the value of your money has ____.

Accepted Answer

The answer of It takes more money to purchase the...

Question 6

Which of the following is correct?

Accepted Answer

A)  Inflation impedes financial markets in their role of allocating savings to alternative investments. 
B)  Inflation encourages savings through the tax treatment on capital gains. 
C)  Inflation encourages larger holdings of currency by the public. 
D)  Inflation reduces people's real purchasing power. 
A)  Inflation impedes financial markets in their role of allocating savings to alternative investments. 
B)  Inflation encourages savings through the tax treatment on capital gains. 
C)  Inflation encourages larger holdings of currency by the public. 
D)  Inflation reduces people's real purchasing power.

Question 7

During the last tax year you lent money at a nominal rate of 6 percent. Actual inflation was 1 percent, but people had been expecting 1.5 percent. This difference between actual and expected inflation

Accepted Answer

A)  transferred wealth from the borrower to you and caused your after-tax real interest rate to be 0.5 percentage points higher than what you had expected. 
B)  transferred wealth from the borrower to you and caused your after-tax real interest rate to be more than 0.5 percentage points higher than what you had expected. 
C)  transferred wealth from you to the borrower and caused your after-tax real interest rate to be 0.5 percentage points lower than what you had expected. 
D)  transferred wealth from you to the borrower and caused your after-tax real interest rate to be more than 0.5 percentage points lower than what you had expected. 
A)  transferred wealth from the borrower to you and caused your after-tax real interest rate to be 0.5 percentage points higher than what you had expected. 
B)  transferred wealth from the borrower to you and caused your after-tax real interest rate to be more than 0.5 percentage points higher than what you had expected. 
C)  transferred wealth from you to the borrower and caused your after-tax real interest rate to be 0.5 percentage points lower than what you had expected. 
D)  transferred wealth from you to the borrower and caused your after-tax real interest rate to be more than 0.5 percentage points lower than what you had expected.

Question 8

You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?

Accepted Answer

A)  3.6 percent. 
B)  2.4 percent. 
C)  2.0 percent. 
D)  4.4 percent. 
A)  3.6 percent. 
B)  2.4 percent. 
C)  2.0 percent. 
D)  4.4 percent.

Question 9

Suppose the price level rises, but the number of dollars you are paid per hour stays the same. This means that your

Accepted Answer

A)  nominal wage is higher. 
B)  nominal wage is lower. 
C)  real wage is higher. 
D)  real wage is lower. 
A)  nominal wage is higher. 
B)  nominal wage is lower. 
C)  real wage is higher. 
D)  real wage is lower.

Question 10

When the money market is drawn with the value of money on the vertical axis, if money supply and money demand both shift to the right

Accepted Answer

A)  the price level must have risen 
B)  the price level must have fallen. 
C)  the price level rises if money supply shifts farther than money demand. 
D)  the price level falls if money supply shifts farther than money demand. 
A)  the price level must have risen 
B)  the price level must have fallen. 
C)  the price level rises if money supply shifts farther than money demand. 
D)  the price level falls if money supply shifts farther than money demand.

Question 11

The principle of monetary neutrality implies that an increase in the money supply will

Accepted Answer

A)  increase real GDP and the price level. 
B)  increase real GDP, but not the price level. 
C)  increase the price level, but not real GDP. 
D)  increase neither the price level nor real GDP. 
A)  increase real GDP and the price level. 
B)  increase real GDP, but not the price level. 
C)  increase the price level, but not real GDP. 
D)  increase neither the price level nor real GDP.

Question 12

From the early 1980's through the 1990's, the nominal interest rate

Accepted Answer

A)  fell because the Fed got inflation under control. 
B)  fell because the Fed let inflation get out of control. 
C)  rose because the Fed got inflation under control. 
D)  rose because the Fed let inflation get out of control. 
A)  fell because the Fed got inflation under control. 
B)  fell because the Fed let inflation get out of control. 
C)  rose because the Fed got inflation under control. 
D)  rose because the Fed let inflation get out of control.

Question 13

The payments you make on your automobile loan are given in terms of dollars. As prices rise you notice you give up fewer goods to make your payments.

Accepted Answer

A)  The dollar amount you pay is a nominal value. The number of goods you give up is a real value. 
B)  The dollar amount you pay is a real value. The number of goods you give up is a nominal value. 
C)  Both the dollar amount you pay and the goods you give up are nominal values. 
D)  Both the dollar amount you pay and the goods you give up are real values. 
A)  The dollar amount you pay is a nominal value. The number of goods you give up is a real value. 
B)  The dollar amount you pay is a real value. The number of goods you give up is a nominal value. 
C)  Both the dollar amount you pay and the goods you give up are nominal values. 
D)  Both the dollar amount you pay and the goods you give up are real values.

Question 14

If the price level increased from 200 to 250, then what was the inflation rate?

Accepted Answer

A)  50 percent 
B)  25 percent 
C)  20 percent 
D)  None of the above is correct. 
A)  50 percent 
B)  25 percent 
C)  20 percent 
D)  None of the above is correct.

Question 15

According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also

Accepted Answer

A)  either a rise in output or a rise in velocity. 
B)  either a rise in output or a fall in velocity. 
C)  either a fall in output or a rise in velocity. 
D)  either a fall in output or a fall in velocity. 
A)  either a rise in output or a rise in velocity. 
B)  either a rise in output or a fall in velocity. 
C)  either a fall in output or a rise in velocity. 
D)  either a fall in output or a fall in velocity.

Question 16

The nominal interest rate is 5 percent and the inflation rate is 2 percent. What is the real interest rate?

Accepted Answer

A)  7 percent 
B)  2.5 percent 
C)  10 percent 
D)  3 percent 
A)  7 percent 
B)  2.5 percent 
C)  10 percent 
D)  3 percent

Question 17

Figure 30-3. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes.  
-Refer to Figure 30-3. If the relevant money-supply curve is the one labeled MS1, then the equilibrium price level is

Accepted Answer

A)  0.5 and the equilibrium value of money is 2. 
B)  2 and the equilibrium value of money is 0.5. 
C)  0.5 and the equilibrium value of money cannot be determined from the graph. 
D)  2 and the equilibrium value of money cannot be determined from the graph. 
A)  0.5 and the equilibrium value of money is 2. 
B)  2 and the equilibrium value of money is 0.5. 
C)  0.5 and the equilibrium value of money cannot be determined from the graph. 
D)  2 and the equilibrium value of money cannot be determined from the graph.

Question 18

When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is an

Accepted Answer

A)  excess demand for money, so the price level will rise. 
B)  excess demand for money, so the price level will fall. 
C)  excess supply of money, so the price level will rise. 
D)  excess supply of money, so the price level will fall. 
A)  excess demand for money, so the price level will rise. 
B)  excess demand for money, so the price level will fall. 
C)  excess supply of money, so the price level will rise. 
D)  excess supply of money, so the price level will fall.

Question 19

The money supply is 4,000, nominal GDP is 8,000, and real GDP is 2,000. Which of the following is 2?

Accepted Answer

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

Question 20

If the nominal interest rate is 8 percent and expected inflation is 2.5 percent, then what is the real interest rate?

Accepted Answer

A)  10.5 percent 
B)  20 percent 
C)  5.5 percent 
D)  3.2 percent 
A)  10.5 percent 
B)  20 percent 
C)  5.5 percent 
D)  3.2 percent

Exam 22: Money Growth and Inflation

Why did farmers in the late 1800s dislike deflation?

According to the principle of monetary neutrality, a decrease in the money supply will not change

Over the last 80 years, the average annual U.S. inflation rate was about

The inflation tax alters people's behavior and creates a deadweight loss. Explain.

It takes more money to purchase the same amount of goods when prices _____. Therefore, the value of your money has ____.

Which of the following is correct?

During the last tax year you lent money at a nominal rate of 6 percent. Actual inflation was 1 percent, but people had been expecting 1.5 percent. This difference between actual and expected inflation

You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?

Suppose the price level rises, but the number of dollars you are paid per hour stays the same. This means that your

When the money market is drawn with the value of money on the vertical axis, if money supply and money demand both shift to the right

The principle of monetary neutrality implies that an increase in the money supply will

From the early 1980's through the 1990's, the nominal interest rate

The payments you make on your automobile loan are given in terms of dollars. As prices rise you notice you give up fewer goods to make your payments.

If the price level increased from 200 to 250, then what was the inflation rate?

According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also

The nominal interest rate is 5 percent and the inflation rate is 2 percent. What is the real interest rate?

Figure 30-3. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. -Refer to Figure 30-3. If the relevant money-supply curve is the one labeled MS1, then the equilibrium price level is

When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is an

The money supply is 4,000, nominal GDP is 8,000, and real GDP is 2,000. Which of the following is 2?

If the nominal interest rate is 8 percent and expected inflation is 2.5 percent, then what is the real interest rate?

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

Externalities

Public Goods and Common Resources

The Costs of Production

Firms in Competitive Markets

Monopoly

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

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

Filters

It takes more money to purchase the same amount of goods when prices _. Therefore, the value of your money has .