Question 1

When the Consumer Price Index falls from 110 to 100

Accepted Answer

A)  there is inflation of 9.1% and the value of money decreases. 
B)  there is deflation of 9.1% and the value of money increases. 
C)  there is deflation of 10% and the value of money increases. 
D)  there is inflation of 10% and the value of money decreases. 
A)  there is inflation of 9.1% and the value of money decreases. 
B)  there is deflation of 9.1% and the value of money increases. 
C)  there is deflation of 10% and the value of money increases. 
D)  there is inflation of 10% and the value of money decreases.

Question 2

You earn a nominal return of 6% on your savings and the tax rate is 20%. If the rate of inflation is 2%, what are the before-tax real interest rate and your after-tax rate of return?

Accepted Answer

The answer of You earn a nominal return of 6%...

Question 3

If the inflation rate was 10%, and the tax rate was 25%, and you deposited money in a bank account that paid 14%, what is after tax real interest rate? Show you work.

Accepted Answer

The after- tax nominal interes

Question 4

Which of the following is not implied by the quantity equation?

Accepted Answer

A)  If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in nominal output. 
B)  If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in the price level. 
C)  With constant money supply and output, an increase in velocity creates an increase in the price level. 
D)  With constant money supply and velocity, an increase in output creates a proportional increase in the price level. 
A)  If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in nominal output. 
B)  If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in the price level. 
C)  With constant money supply and output, an increase in velocity creates an increase in the price level. 
D)  With constant money supply and velocity, an increase in output creates a proportional increase in the price level.

Question 5

Over time both real GDP and the price level have trended upward. Which of these trends would the classical dichotomy say could be explained by an upward trend in the money supply?

Accepted Answer

A)  both the upward trend in real GDP and the upward trend in the price level 
B)  the upward trend in real GDP but not the upward trend in the price level 
C)  the upward trend in the price level but not the upward trend in real GDP 
D)  neither the upward trend in the price level nor the upward trend in real GDP 
A)  both the upward trend in real GDP and the upward trend in the price level 
B)  the upward trend in real GDP but not the upward trend in the price level 
C)  the upward trend in the price level but not the upward trend in real GDP 
D)  neither the upward trend in the price level nor the upward trend in real GDP

Question 6

Shoeleather cost refers to

Accepted Answer

A)  the cost of more frequent price changes induced by higher inflation. 
B)  the distortion in resource allocation created by distortions in relative prices due to inflation. 
C)  resources used to maintain lower money holdings when inflation is high. 
D)  the tendency to expend more effort searching for the lowest price when inflation is high. 
A)  the cost of more frequent price changes induced by higher inflation. 
B)  the distortion in resource allocation created by distortions in relative prices due to inflation. 
C)  resources used to maintain lower money holdings when inflation is high. 
D)  the tendency to expend more effort searching for the lowest price when inflation is high.

Question 7

In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks in many countries increased their money supplies. The central banks might have done this by

Accepted Answer

A)  selling bonds on the open market, which would have raised the value of money. 
B)  purchasing bonds on the open market, which would have raised the value of money 
C)  selling bonds on the open market, which would have raised the value of money 
D)  purchasing bonds on the open market, which would have lowered the value of money 
A)  selling bonds on the open market, which would have raised the value of money. 
B)  purchasing bonds on the open market, which would have raised the value of money 
C)  selling bonds on the open market, which would have raised the value of money 
D)  purchasing bonds on the open market, which would have lowered the value of money

Question 8

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 9

Relative­price variability is "automatic" when

Accepted Answer

A)  firms change prices only once in a while. 
B)  firms change prices often. 
C)  people increase the frequency of their trips to the bank. 
D)  people decrease the frequency of their trips to the bank. 
A)  firms change prices only once in a while. 
B)  firms change prices often. 
C)  people increase the frequency of their trips to the bank. 
D)  people decrease the frequency of their trips to the bank.

Question 10

Based on past experience, if a country is experiencing hyperinflation, then which of the following would be a reasonable guess?

Accepted Answer

A)  The country has high money supply growth. 
B)  Inflation is acting like a tax on everyone who holds money. 
C)  The government is printing money to finance its expenditures. 
D)  All of the above are correct. 
A)  The country has high money supply growth. 
B)  Inflation is acting like a tax on everyone who holds money. 
C)  The government is printing money to finance its expenditures. 
D)  All of the above are correct.

Question 11

If monetary neutrality holds, then an increase in the money supply

Accepted Answer

A)  increases real but not nominal variables. Most economists think that monetary neutrality is a good description of the short run. 
B)  increases real but not nominal variables. Most economists think that monetary neutrality is a good description of the long run. 
C)  increases nominal but not real variables. Most economists think that monetary neutrality is a good description of the short run. 
D)  increases nominal but not real variables. Most economists think that monetary neutrality is a good description of the long run. 
A)  increases real but not nominal variables. Most economists think that monetary neutrality is a good description of the short run. 
B)  increases real but not nominal variables. Most economists think that monetary neutrality is a good description of the long run. 
C)  increases nominal but not real variables. Most economists think that monetary neutrality is a good description of the short run. 
D)  increases nominal but not real variables. Most economists think that monetary neutrality is a good description of the long run.

Question 12

Suppose over some period of time the money supply tripled, velocity was unchanged, and real GDP doubled. According to the quantity equation the price level is now

Accepted Answer

A)  6 times its old value. 
B)  3 times its old value. 
C)  1.5 times its old value. 
D)  0.75 times its old value 
A)  6 times its old value. 
B)  3 times its old value. 
C)  1.5 times its old value. 
D)  0.75 times its old value

Question 13

The nominal interest rate is 5 percent and the real interest rate is 3 percent. What is the inflation rate?

Accepted Answer

A)  8 percent 
B)  15 percent 
C)  2 percent 
D)  1.7 percent 
A)  8 percent 
B)  15 percent 
C)  2 percent 
D)  1.7 percent

Question 14

An assistant manager at a restaurant gets a $100 a month raise. He figures that with his new monthly salary he cannot buy as many goods and services as he could buy last year.

Accepted Answer

A)  His real and nominal salary have risen. 
B)  His real and nominal salary have fallen. 
C)  His real salary has risen and his nominal salary has fallen. 
D)  His real salary has fallen and his nominal salary has risen. 
A)  His real and nominal salary have risen. 
B)  His real and nominal salary have fallen. 
C)  His real salary has risen and his nominal salary has fallen. 
D)  His real salary has fallen and his nominal salary has risen.

Question 15

Monetary neutrality implies that an increase in the quantity of money will

Accepted Answer

A)  increase employment. 
B)  increase the price level. 
C)  increase the incentive to save. 
D)  increase the real interest rate. 
A)  increase employment. 
B)  increase the price level. 
C)  increase the incentive to save. 
D)  increase the real interest rate.

Question 16

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 17

When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal due to adjustments in

Accepted Answer

A)  nominal interest rates. 
B)  real interest rates. 
C)  the price level. 
D)  the money supply. 
A)  nominal interest rates. 
B)  real interest rates. 
C)  the price level. 
D)  the money supply.

Question 18

Suppose the nominal interest rate is 5 percent, the tax rate on interest income is 30 percent, and the after-tax real interest rate is 2.1percent. Then the inflation rate is 2 percent.

Accepted Answer

A) True 
 B)False

Question 19

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 20

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

Exam 22: Money Growth and Inflation

When the Consumer Price Index falls from 110 to 100

You earn a nominal return of 6% on your savings and the tax rate is 20%. If the rate of inflation is 2%, what are the before-tax real interest rate and your after-tax rate of return?

If the inflation rate was 10%, and the tax rate was 25%, and you deposited money in a bank account that paid 14%, what is after tax real interest rate? Show you work.

Which of the following is not implied by the quantity equation?

Over time both real GDP and the price level have trended upward. Which of these trends would the classical dichotomy say could be explained by an upward trend in the money supply?

Shoeleather cost refers to

In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks in many countries increased their money supplies. The central banks might have done this by

Money demand depends on

Relative­price variability is "automatic" when

Based on past experience, if a country is experiencing hyperinflation, then which of the following would be a reasonable guess?

If monetary neutrality holds, then an increase in the money supply

Suppose over some period of time the money supply tripled, velocity was unchanged, and real GDP doubled. According to the quantity equation the price level is now

The nominal interest rate is 5 percent and the real interest rate is 3 percent. What is the inflation rate?

An assistant manager at a restaurant gets a $100 a month raise. He figures that with his new monthly salary he cannot buy as many goods and services as he could buy last year.

Monetary neutrality implies that an increase in the quantity of money will

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

When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal due to adjustments in

Suppose the nominal interest rate is 5 percent, the tax rate on interest income is 30 percent, and the after-tax real interest rate is 2.1percent. Then the inflation rate is 2 percent.

When inflation rises, people

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

Relativeprice variability is "automatic" when