Question 1

What assumptions are necessary to argue that the quantity equation implies that increases in the money supply lead to proportional changes in the price level?

Accepted Answer

We must suppose that V is rela

Question 2

In which case below is the real interest rate the highest?

Accepted Answer

A)  the nominal interest rate = 1% and inflation = 3% 
B)  the nominal interest rate = 6% and inflation = 4% 
C)  the nominal interest rate = 2% and inflation = -1% 
D)  the nominal interest rate = 2% and inflation = 1% 
A)  the nominal interest rate = 1% and inflation = 3% 
B)  the nominal interest rate = 6% and inflation = 4% 
C)  the nominal interest rate = 2% and inflation = -1% 
D)  the nominal interest rate = 2% and inflation = 1%

Question 3

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 4

During the 1970's, U.S. inflation averaged 7% each year and real GDP increased. Holding velocity constant and using the Quantity Equation, we conclude that

Accepted Answer

A)  money growth must have been greater than the growth of real income. 
B)  money growth must have been less than the growth of real income. 
C)  prices fell during the 1970's. 
D)  output fell during the 1970's. 
A)  money growth must have been greater than the growth of real income. 
B)  money growth must have been less than the growth of real income. 
C)  prices fell during the 1970's. 
D)  output fell during the 1970's.

Question 5

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 6

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

Accepted Answer

A)  nominal wages 
B)  unemployment 
C)  real GDP 
D)  All of the above are correct. 
A)  nominal wages 
B)  unemployment 
C)  real GDP 
D)  All of the above are correct.

Question 7

If money demand shifts right, the price level falls.

Accepted Answer

A) True 
 B)False

Question 8

In the long run, money demand and money supply determine

Accepted Answer

A)  the price level and the real interest rate. 
B)  the price level but not the real interest rate. 
C)  the real interest rate but not the price level. 
D)  neither the price level nor the real interest rate. 
A)  the price level and the real interest rate. 
B)  the price level but not the real interest rate. 
C)  the real interest rate but not the price level. 
D)  neither the price level nor the real interest rate.

Question 9

Suppose every good costs $8 per unit and Molly holds $120. What is the real value of the money she holds?

Accepted Answer

A)  $120. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars. 
B)  $120. If the price of goods rises, to maintain the real value of her money holdings she needs to hold fewer dollars. 
C)  15 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars. 
D)  15 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold fewer dollars. 
A)  $120. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars. 
B)  $120. If the price of goods rises, to maintain the real value of her money holdings she needs to hold fewer dollars. 
C)  15 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars. 
D)  15 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold fewer dollars.

Question 10

The inflation tax refers to

Accepted Answer

A)  the revenue a government creates by printing money. 
B)  higher inflation which requires more frequent price changes. 
C)  the idea that, other things the same, an increase in the tax rate raises the inflation rate. 
D)  taxes being indexed for inflation. 
A)  the revenue a government creates by printing money. 
B)  higher inflation which requires more frequent price changes. 
C)  the idea that, other things the same, an increase in the tax rate raises the inflation rate. 
D)  taxes being indexed for inflation.

Question 11

For a given real interest rate, a decrease in the inflation rate would

Accepted Answer

A)  decrease the after-tax real interest rate and so decrease saving. 
B)  decrease the after-tax real interest rate and so increase saving. 
C)  increase the after-tax real interest rate and so decrease saving. 
D)  increase the after-tax real interest rate and so increase saving. 
A)  decrease the after-tax real interest rate and so decrease saving. 
B)  decrease the after-tax real interest rate and so increase saving. 
C)  increase the after-tax real interest rate and so decrease saving. 
D)  increase the after-tax real interest rate and so increase saving.

Question 12

When the money market is drawn with the value of money on the vertical axis, an increase in the money supply causes the equilibrium value of money

Accepted Answer

A)  and equilibrium quantity of money to increase. 
B)  and equilibrium quantity of money to decrease. 
C)  to increase, while the equilibrium quantity of money decreases. 
D)  to decrease, while the equilibrium quantity of money increases. 
A)  and equilibrium quantity of money to increase. 
B)  and equilibrium quantity of money to decrease. 
C)  to increase, while the equilibrium quantity of money decreases. 
D)  to decrease, while the equilibrium quantity of money increases.

Question 13

High and unexpected inflation has a greater cost

Accepted Answer

A)  for those who borrow than for those who save. 
B)  for those who hold a little money than for those who hold a lot of money. 
C)  for those who have fixed nominal wages than for those who have nominal wages that adjust with inflation. 
D)  All of the above are correct. 
A)  for those who borrow than for those who save. 
B)  for those who hold a little money than for those who hold a lot of money. 
C)  for those who have fixed nominal wages than for those who have nominal wages that adjust with inflation. 
D)  All of the above are correct.

Question 14

If the nominal interest rate is 5 percent and there is a deflation rate of 3 percent, what is the real interest rate?

Accepted Answer

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

Question 15

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 16

Monetary neutrality means that while real variables may change in response to changes in the money supply, nominal variables do not.

Accepted Answer

A) True 
 B)False

Question 17

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 18

If the nominal interest rate is 15 percent and the inflation rate is 5 percent, then what is the real interest rate?

Accepted Answer

A)  10 percent 
B)  20 percent 
C)  3 percent 
D)  5 percent 
A)  10 percent 
B)  20 percent 
C)  3 percent 
D)  5 percent

Question 19

Yvonne takes out a fixed-interest-rate loan and then inflation turns out to be higher than she had expected it to be. The real interest rate she pays is

Accepted Answer

A)  higher than she had expected, and the real value of the loan is higher than she had expected. 
B)  higher than she had expected, and the real value of the loan is lower than she had expected. 
C)  lower than she had expected, and the real value of the loan is higher than she had expected. 
D)  lower then she had expected, and the real value of the loan is lower than she had expected. 
A)  higher than she had expected, and the real value of the loan is higher than she had expected. 
B)  higher than she had expected, and the real value of the loan is lower than she had expected. 
C)  lower than she had expected, and the real value of the loan is higher than she had expected. 
D)  lower then she had expected, and the real value of the loan is lower than she had expected.

Question 20

James took out a fixed-interest-rate loan when the CPI was 200. He expected the CPI to increase to 206 but it actually increased to 204. The real interest rate he paid is

Accepted Answer

A)  higher than he had expected, and the real value of the loan is higher than he had expected. 
B)  higher than he had expected, and the real value of the loan is lower than he had expected. 
C)  lower than he had expected, and the real value of the loan is higher than he had expected. 
D)  lower then he had expected, and the real value of the loan is lower than he had expected. 
A)  higher than he had expected, and the real value of the loan is higher than he had expected. 
B)  higher than he had expected, and the real value of the loan is lower than he had expected. 
C)  lower than he had expected, and the real value of the loan is higher than he had expected. 
D)  lower then he had expected, and the real value of the loan is lower than he had expected.

Exam 17: Money Growth and Inflation

What assumptions are necessary to argue that the quantity equation implies that increases in the money supply lead to proportional changes in the price level?

In which case below is the real interest rate the highest?

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

During the 1970's, U.S. inflation averaged 7% each year and real GDP increased. Holding velocity constant and using the Quantity Equation, we conclude that

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

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

If money demand shifts right, the price level falls.

In the long run, money demand and money supply determine

Suppose every good costs $8 per unit and Molly holds $120. What is the real value of the money she holds?

The inflation tax refers to

For a given real interest rate, a decrease in the inflation rate would

When the money market is drawn with the value of money on the vertical axis, an increase in the money supply causes the equilibrium value of money

High and unexpected inflation has a greater cost

If the nominal interest rate is 5 percent and there is a deflation rate of 3 percent, what is the real interest rate?

Most economists believe the principle of monetary neutrality is

Monetary neutrality means that while real variables may change in response to changes in the money supply, nominal variables do not.

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

If the nominal interest rate is 15 percent and the inflation rate is 5 percent, then what is the real interest rate?

Yvonne takes out a fixed-interest-rate loan and then inflation turns out to be higher than she had expected it to be. The real interest rate she pays is

James took out a fixed-interest-rate loan when the CPI was 200. He expected the CPI to increase to 206 but it actually increased to 204. The real interest rate he paid is

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

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

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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