Question 1

For a given real interest rate, an increase in the inflation rate reduces the after-tax real interest rate.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A)  Inflation is 3 percent; the tax rate is 25 percent. 
B)  Inflation is 1 percent; the tax rate is 50 percent. 
C)  Inflation is 1 percent; the tax rate is 55 percent. 
D)  Inflation is 4 percent; the tax rate is 10 percent. 
A)  Inflation is 3 percent; the tax rate is 25 percent. 
B)  Inflation is 1 percent; the tax rate is 50 percent. 
C)  Inflation is 1 percent; the tax rate is 55 percent. 
D)  Inflation is 4 percent; the tax rate is 10 percent.

Question 3

According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then

Accepted Answer

A)  both the price level and nominal GDP would rise by 5 percent. 
B)  the price level would rise by 5 percent and nominal GDP would be unchanged. 
C)  the price level would be unchanged and nominal GDP would rise by 5 percent. 
D)  both the price level and nominal GDP would be unchanged. 
A)  both the price level and nominal GDP would rise by 5 percent. 
B)  the price level would rise by 5 percent and nominal GDP would be unchanged. 
C)  the price level would be unchanged and nominal GDP would rise by 5 percent. 
D)  both the price level and nominal GDP would be unchanged.

Question 4

When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve buys bonds, then the money supply curve

Accepted Answer

A)  shifts rightward, causing the value of money measured in terms of goods and services to rise. 
B)  shifts rightward, causing the value of money measured in terms of goods and services to fall. 
C)  shifts leftward, causing the value of money measured in terms of goods and services to rise. 
D)  shifts leftward, causing the value of money measured in terms of goods and services to fall. 
A)  shifts rightward, causing the value of money measured in terms of goods and services to rise. 
B)  shifts rightward, causing the value of money measured in terms of goods and services to fall. 
C)  shifts leftward, causing the value of money measured in terms of goods and services to rise. 
D)  shifts leftward, causing the value of money measured in terms of goods and services to fall.

Question 5

What is the inflation tax, and how might it explain the creation of inflation by a central bank?

Accepted Answer

The inflation tax refers to the fact tha

Question 6

The classical dichotomy says that two groups of variables are affected by different forces. What are these two groups of variables?

Accepted Answer

nominal va

Question 7

Most economists believe that monetary neutrality provides

Accepted Answer

A)  a good description of both the long run and the short run. 
B)  a good description of neither the long run nor the short run. 
C)  a good description of the short run, but not the long run. 
D)  a good description of the long run, but not the short run. 
A)  a good description of both the long run and the short run. 
B)  a good description of neither the long run nor the short run. 
C)  a good description of the short run, but not the long run. 
D)  a good description of the long run, but not the short run.

Question 8

When the money market is drawn with the value of money on the vertical axis, the price level decreases if

Accepted Answer

A)  either money demand or money supply shifts right. 
B)  either money demand or money supply shifts left. 
C)  money demand shifts right or money supply shifts left. 
D)  money demand shifts left or money supply shifts right. 
A)  either money demand or money supply shifts right. 
B)  either money demand or money supply shifts left. 
C)  money demand shifts right or money supply shifts left. 
D)  money demand shifts left or money supply shifts right.

Question 9

Wealth is redistributed from creditors to debtors when inflation was expected to be

Accepted Answer

A)  high and it turns out to be high. 
B)  low and it turns out to be low. 
C)  low and it turns out to be high. 
D)  high and it turns out to be low. 
A)  high and it turns out to be high. 
B)  low and it turns out to be low. 
C)  low and it turns out to be high. 
D)  high and it turns out to be low.

Question 10

Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 32 percent. Sam's after­tax real rate of interest

Accepted Answer

A)  will be 1.2 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent. 
B)  will be 1.2 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent. 
C)  will be 1.7 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent. 
D)  will be 1.7 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent. 
A)  will be 1.2 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent. 
B)  will be 1.2 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent. 
C)  will be 1.7 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent. 
D)  will be 1.7 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent.

Question 11

If the Fed were to unexpectedly increase the money supply, creditors would gain at the expense of debtors.

Accepted Answer

A) True 
 B)False

Question 12

Your spouse complains that her 6% raise this year will not keep up with the increase in prices. In other words, she is unable to buy the same basket of goods with her 6% raise. Therefore, she believes that her

Accepted Answer

A)  nominal income and real income increased. 
B)  nominal income increased, but their real income decreased. 
C)  nominal income and real income decreased. 
D)  nominal income decreased, but their real income increased. 
A)  nominal income and real income increased. 
B)  nominal income increased, but their real income decreased. 
C)  nominal income and real income decreased. 
D)  nominal income decreased, but their real income increased.

Question 13

Based on the quantity equation, if M = 100, V = 3, and Y = 150, then P =

Accepted Answer

A)  1. 
B)  1.5. 
C)  2. 
D)  4.5. 
A)  1. 
B)  1.5. 
C)  2. 
D)  4.5.

Question 14

Dollar prices and relative prices are both nominal variables.

Accepted Answer

A) True 
 B)False

Question 15

Suppose that monetary neutrality holds. Of the following variables, which ones do not change when the money supply increases?
a. real interest rates
b. inflation
c. the price level
d. real output
e. real wages
f. nominal wages

Accepted Answer

a. real interest rat

Question 16

Most economists believe the principle of monetary neutrality is

Accepted Answer

A)  relevant to both the short and long run. 
B)  irrelevant to both the short and long run. 
C)  mostly relevant to the short run. 
D)  mostly relevant to the long run. 
A)  relevant to both the short and long run. 
B)  irrelevant to both the short and long run. 
C)  mostly relevant to the short run. 
D)  mostly relevant to the long run.

Question 17

Hyperinflations are associated with governments printing money to finance expenditures.

Accepted Answer

A) True 
 B)False

Question 18

If the economy unexpectedly went from inflation to deflation,

Accepted Answer

A)  both debtors and creditors would have reduced real wealth. 
B)  both debtors and creditors would have increased real wealth. 
C)  debtors would gain at the expense of creditors. 
D)  creditors would gain at the expense of debtors. 
A)  both debtors and creditors would have reduced real wealth. 
B)  both debtors and creditors would have increased real wealth. 
C)  debtors would gain at the expense of creditors. 
D)  creditors would gain at the expense of debtors.

Question 19

When the money market is drawn with the value of money on the vertical axis, if the money supply rises

Accepted Answer

A)  the price level and the value of money rise. 
B)  the price level rises and the value of money falls. 
C)  the price level falls and the value of money rises. 
D)  the price level and the value of money fall. 
A)  the price level and the value of money rise. 
B)  the price level rises and the value of money falls. 
C)  the price level falls and the value of money rises. 
D)  the price level and the value of money fall.

Question 20

If people had been expecting prices to rise but in fact prices fell, then who among the following would benefit?

Accepted Answer

A)  lenders and people holding a lot of currency 
B)  lenders but not people holding a lot of currency 
C)  people holding a lot of currency but not lenders 
D)  neither lenders nor people holding a lot of currency 
A)  lenders and people holding a lot of currency 
B)  lenders but not people holding a lot of currency 
C)  people holding a lot of currency but not lenders 
D)  neither lenders nor people holding a lot of currency

Exam 22: Money Growth and Inflation

For a given real interest rate, an increase in the inflation rate reduces the after-tax real interest rate.

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

According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then

When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve buys bonds, then the money supply curve

What is the inflation tax, and how might it explain the creation of inflation by a central bank?

The classical dichotomy says that two groups of variables are affected by different forces. What are these two groups of variables?

Most economists believe that monetary neutrality provides

When the money market is drawn with the value of money on the vertical axis, the price level decreases if

Wealth is redistributed from creditors to debtors when inflation was expected to be

Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 32 percent. Sam's after­tax real rate of interest

If the Fed were to unexpectedly increase the money supply, creditors would gain at the expense of debtors.

Your spouse complains that her 6% raise this year will not keep up with the increase in prices. In other words, she is unable to buy the same basket of goods with her 6% raise. Therefore, she believes that her

Based on the quantity equation, if M = 100, V = 3, and Y = 150, then P =

Dollar prices and relative prices are both nominal variables.

Suppose that monetary neutrality holds. Of the following variables, which ones do not change when the money supply increases? a. real interest rates b. inflation c. the price level d. real output e. real wages f. nominal wages

Most economists believe the principle of monetary neutrality is

Hyperinflations are associated with governments printing money to finance expenditures.

If the economy unexpectedly went from inflation to deflation,

When the money market is drawn with the value of money on the vertical axis, if the money supply rises

If people had been expecting prices to rise but in fact prices fell, then who among the following would benefit?

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

Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 32 percent. Sam's aftertax real rate of interest