Question 1

Which of the following is correct? Inflation

Accepted Answer

A)  impedes financial markets in their role of allocating resources. 
B)  reduces the purchasing power of the average consumer. 
C)  generally increases after-tax real interest rates. 
D)  is most costly when anticipated. 
A)  impedes financial markets in their role of allocating resources. 
B)  reduces the purchasing power of the average consumer. 
C)  generally increases after-tax real interest rates. 
D)  is most costly when anticipated.

Question 2

In 1975 tuition at Wattsomata University was $2,500 and the consumer price index was 80. In 2011 tuition was $12,000 and the price index was 320. Which of the following is correct?

Accepted Answer

A)  Nominal and real tuition were both higher in 1975. 
B)  Nominal and real tuition were both higher in 2011. 
C)  Nominal tuition was higher in 1975, real tuition was higher in 2011. 
D)  Nominal tuition was higher in 2011, real tuition was higher in 1975. 
A)  Nominal and real tuition were both higher in 1975. 
B)  Nominal and real tuition were both higher in 2011. 
C)  Nominal tuition was higher in 1975, real tuition was higher in 2011. 
D)  Nominal tuition was higher in 2011, real tuition was higher in 1975.

Question 3

Inflation distorts relative prices. What does this mean and why does it impose a cost on society?

Accepted Answer

Relative prices are the value of one goo

Question 4

If the price level this year was 140 and was 135 last year, what was the inflation rate to the nearest decimal?

Accepted Answer

The answer of If the price level this year was...

Question 5

Suppose the money supply grew at an average annual rate of 8%, velocity was constant, the nominal interest rate averaged 9%, and output grew at an average annual rate of 3%. According to the Quantity Theory,

Accepted Answer

A)  inflation averaged 8% per year and the real rate of return was 9%. 
B)  inflation averaged 11% per year and the real rate of return was 17%. 
C)  inflation averaged 5% per year and the real rate of return was 4%. 
D)  inflation averaged 1% per year and the real rate of return was 6%. 
A)  inflation averaged 8% per year and the real rate of return was 9%. 
B)  inflation averaged 11% per year and the real rate of return was 17%. 
C)  inflation averaged 5% per year and the real rate of return was 4%. 
D)  inflation averaged 1% per year and the real rate of return was 6%.

Question 6

Given a nominal interest rate of 6 percent, in which of the following cases would you earn the lowest after-tax real rate of interest?

Accepted Answer

A)  Inflation is 4 percent; the tax rate is 5 percent. 
B)  Inflation is 3 percent; the tax rate is 20 percent. 
C)  Inflation is 2 percent; the tax rate is 30 percent. 
D)  The after-tax real interest rate is the same for all of the above. 
A)  Inflation is 4 percent; the tax rate is 5 percent. 
B)  Inflation is 3 percent; the tax rate is 20 percent. 
C)  Inflation is 2 percent; the tax rate is 30 percent. 
D)  The after-tax real interest rate is the same for all of the above.

Question 7

The nominal interest rate is eight percent and the consumer price index rises from 140 to 147. What is the real interest rate?

Accepted Answer

The answer of The nominal interest rate is eight percent...

Question 8

Which of the following combinations of nominal interest rates and inflation implies a real interest rate of 7 percent?

Accepted Answer

A)  a nominal interest rate of 5 percent and an inflation rate of 4 percent. 
B)  a nominal interest rate of 4 percent and an inflation rate of 3 percent. 
C)  a nominal interest rate of 8 percent and an inflation rate of 1 percent. 
D)  a nominal interest rate of 14 percent and an inflation rate of 2 percent. 
A)  a nominal interest rate of 5 percent and an inflation rate of 4 percent. 
B)  a nominal interest rate of 4 percent and an inflation rate of 3 percent. 
C)  a nominal interest rate of 8 percent and an inflation rate of 1 percent. 
D)  a nominal interest rate of 14 percent and an inflation rate of 2 percent.

Question 9

The quantity equation is M x V = P x Y.

Accepted Answer

A) True 
 B)False

Question 10

You bought some shares of stock and, over the next year, the price per share decreased by 7 percent and the price level decreased by 9 percent. Before taxes, you experienced

Accepted Answer

A)  both a nominal gain and a real gain. 
B)  a nominal gain and a real loss. 
C)  a nominal loss and a real gain. 
D)  both a nominal loss and a real loss. 
A)  both a nominal gain and a real gain. 
B)  a nominal gain and a real loss. 
C)  a nominal loss and a real gain. 
D)  both a nominal loss and a real loss.

Question 11

You put money into an account and earn a real interest rate of 4 percent. Inflation is 2 percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of interest?

Accepted Answer

A)  1.5 percent. 
B)  2.5 percent. 
C)  5.0 percent. 
D)  4.5 percent. 
A)  1.5 percent. 
B)  2.5 percent. 
C)  5.0 percent. 
D)  4.5 percent.

Question 12

The price level is determined by the supply of, and demand for, money.

Accepted Answer

A) True 
 B)False

Question 13

In the 1970s, the U.S. inflation rate reached about

Accepted Answer

A)  7 percent per year. 
B)  10 percent per year. 
C)  14 percent per year. 
D)  20 percent per year. 
A)  7 percent per year. 
B)  10 percent per year. 
C)  14 percent per year. 
D)  20 percent per year.

Question 14

According to the classical dichotomy, which of the following is not influenced by monetary factors?

Accepted Answer

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

Question 15

To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the

Accepted Answer

A)  quantity theory of money. 
B)  price-index theory of money. 
C)  theory of hyperinflation. 
D)  disequilibrium theory of money and inflation. 
A)  quantity theory of money. 
B)  price-index theory of money. 
C)  theory of hyperinflation. 
D)  disequilibrium theory of money and inflation.

Question 16

You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the price level. Before taxes, you experienced

Accepted Answer

A)  both a nominal gain and a real gain, and you paid taxes on the nominal gain. 
B)  both a nominal gain and a real gain, and you paid taxes only on the real gain. 
C)  a nominal gain, but no real gain, and you paid taxes on the nominal gain. 
D)  a nominal gain, but no real gain, and you paid no taxes on the transaction. 
A)  both a nominal gain and a real gain, and you paid taxes on the nominal gain. 
B)  both a nominal gain and a real gain, and you paid taxes only on the real gain. 
C)  a nominal gain, but no real gain, and you paid taxes on the nominal gain. 
D)  a nominal gain, but no real gain, and you paid no taxes on the transaction.

Question 17

Nominal GDP measures output of final goods and services in physical terms.

Accepted Answer

A) True 
 B)False

Question 18

If M = 12,000, P = 3, and Y = 32,000, then velocity =

Accepted Answer

A)  1.125. Velocity will rise if money changes hands more frequently. 
B)  1.125. Velocity will rise if money changes hands less frequently. 
C)  8. Velocity will rise if money changes hands more frequently. 
D)  8. Velocity will rise if money changes hands less frequently. 
A)  1.125. Velocity will rise if money changes hands more frequently. 
B)  1.125. Velocity will rise if money changes hands less frequently. 
C)  8. Velocity will rise if money changes hands more frequently. 
D)  8. Velocity will rise if money changes hands less frequently.

Question 19

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 0.8 percent. Then the inflation rate is 2.7 percent.

Accepted Answer

A) True 
 B)False

Question 20

According to the classical dichotomy, which of the following is affected by monetary factors?

Accepted Answer

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

Exam 22: Money Growth and Inflation

Which of the following is correct? Inflation

In 1975 tuition at Wattsomata University was $2,500 and the consumer price index was 80. In 2011 tuition was $12,000 and the price index was 320. Which of the following is correct?

Inflation distorts relative prices. What does this mean and why does it impose a cost on society?

If the price level this year was 140 and was 135 last year, what was the inflation rate to the nearest decimal?

Suppose the money supply grew at an average annual rate of 8%, velocity was constant, the nominal interest rate averaged 9%, and output grew at an average annual rate of 3%. According to the Quantity Theory,

Given a nominal interest rate of 6 percent, in which of the following cases would you earn the lowest after-tax real rate of interest?

The nominal interest rate is eight percent and the consumer price index rises from 140 to 147. What is the real interest rate?

Which of the following combinations of nominal interest rates and inflation implies a real interest rate of 7 percent?

The quantity equation is M x V = P x Y.

You bought some shares of stock and, over the next year, the price per share decreased by 7 percent and the price level decreased by 9 percent. Before taxes, you experienced

You put money into an account and earn a real interest rate of 4 percent. Inflation is 2 percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of interest?

The price level is determined by the supply of, and demand for, money.

In the 1970s, the U.S. inflation rate reached about

According to the classical dichotomy, which of the following is not influenced by monetary factors?

To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the

You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the price level. Before taxes, you experienced

Nominal GDP measures output of final goods and services in physical terms.

If M = 12,000, P = 3, and Y = 32,000, then velocity =

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 0.8 percent. Then the inflation rate is 2.7 percent.

According to the classical dichotomy, which of the following is affected by monetary factors?

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

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