Question 1

Which of the following helps to explain why the inflation fallacy is a fallacy?

Accepted Answer

A)  Increases in the price level can be created by increases in money demand. 
B)  Nominal incomes tend to rise at the same time that the price level is rising. 
C)  As the price level rises, the value of a dollar falls. 
D)  Inflation only changes nominal variables. 
A)  Increases in the price level can be created by increases in money demand. 
B)  Nominal incomes tend to rise at the same time that the price level is rising. 
C)  As the price level rises, the value of a dollar falls. 
D)  Inflation only changes nominal variables.

Question 2

An increase in the price level causes the value of money to _____. Therefore, people will want to hold ____ money, because the cost of their purchases has increased.

Accepted Answer

The answer of An increase in the price level causes...

Question 3

When the value of money is on the vertical axis, the money supply curve slopes upward because an increase in the value of money induces banks to create more money.

Accepted Answer

A) True 
 B)False

Question 4

On a Sunday morning, Tom sold 300 cups of coffee for a total of $750.

Accepted Answer

A)  The $750 is a nominal variable. The 300 cups of coffee is a real variable. 
B)  The $750 is a real variable. The 300 cups of coffee is a nominal variable. 
C)  Both the $750 and the 300 cups of coffee are nominal variables. 
D)  Both the $750 and the 300 cups of coffee are real variables. 
A)  The $750 is a nominal variable. The 300 cups of coffee is a real variable. 
B)  The $750 is a real variable. The 300 cups of coffee is a nominal variable. 
C)  Both the $750 and the 300 cups of coffee are nominal variables. 
D)  Both the $750 and the 300 cups of coffee are real variables.

Question 5

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 6

Which of the following statements about inflation is correct?

Accepted Answer

A)  Evidence from studies indicates that, in U.S. newspapers, inflation is mentioned less frequently than other economic terms, such as unemployment and productivity. 
B)  People believe the inflation fallacy because they tend to believe too strongly in the principle of monetary neutrality. 
C)  Nominal incomes are determined by nominal factors; they are not affected by real factors. 
D)  Inflation does not in itself reduce people's real purchasing power. 
A)  Evidence from studies indicates that, in U.S. newspapers, inflation is mentioned less frequently than other economic terms, such as unemployment and productivity. 
B)  People believe the inflation fallacy because they tend to believe too strongly in the principle of monetary neutrality. 
C)  Nominal incomes are determined by nominal factors; they are not affected by real factors. 
D)  Inflation does not in itself reduce people's real purchasing power.

Question 7

According to the classical dichotomy, when the money supply doubles, which of the following also doubles?

Accepted Answer

A)  the price level and nominal wages 
B)  the price level, but not the nominal wage 
C)  the nominal wage, but not the price level 
D)  neither the nominal wage nor the price level 
A)  the price level and nominal wages 
B)  the price level, but not the nominal wage 
C)  the nominal wage, but not the price level 
D)  neither the nominal wage nor the price level

Question 8

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 9

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 10

The idea of menu costs suggests that

Accepted Answer

A)  firms alter prices less frequently as inflation increases. 
B)  firms alter prices more frequently as inflation increases. 
C)  firms always alter prices when costs increase. 
D)  firms alter prices as interest rates rise. 
A)  firms alter prices less frequently as inflation increases. 
B)  firms alter prices more frequently as inflation increases. 
C)  firms always alter prices when costs increase. 
D)  firms alter prices as interest rates rise.

Question 11

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)  the value of money. 
B)  real interest rates. 
C)  nominal interest rates. 
D)  the money supply. 
A)  the value of money. 
B)  real interest rates. 
C)  nominal interest rates. 
D)  the money supply.

Question 12

The shoeleather cost of inflation refers to

Accepted Answer

A)  the redistributional effects of unexpected inflation. 
B)  the time spent searching for low prices when inflation rises. 
C)  the waste of resources used to maintain lower money holdings. 
D)  the increased cost to the government of printing more money. 
A)  the redistributional effects of unexpected inflation. 
B)  the time spent searching for low prices when inflation rises. 
C)  the waste of resources used to maintain lower money holdings. 
D)  the increased cost to the government of printing more money.

Question 13

Other things the same, a decrease in velocity means that

Accepted Answer

A)  the rate at which money changes hands falls, so the price level rises. 
B)  the rate at which money changes hands falls, so the price level falls. 
C)  the rate at which money changes hands rises, so the price level rises. 
D)  the rate at which money changes hands rises, so the price level falls. 
A)  the rate at which money changes hands falls, so the price level rises. 
B)  the rate at which money changes hands falls, so the price level falls. 
C)  the rate at which money changes hands rises, so the price level rises. 
D)  the rate at which money changes hands rises, so the price level falls.

Question 14

If the Fed conducts open market sales, the equilibrium value of money decreases and the equilibrium price level increases.

Accepted Answer

A) True 
 B)False

Question 15

One year ago Sam purchased bonds for $100,000. He just sold them for $120,000. During the year the price level rose by 5%. If the tax rate on capital gains is 20%, how much did Sam gain in real terms?

Accepted Answer

The answer of One year ago Sam purchased bonds for...

Question 16

When inflation rises, people tend to go to the bank

Accepted Answer

A)  more often, giving rise to menu costs. 
B)  more often, giving rise to shoeleather costs. 
C)  less often, giving rise to redistribution costs. 
D)  less often, thereby lessening the severity of the inflation tax. 
A)  more often, giving rise to menu costs. 
B)  more often, giving rise to shoeleather costs. 
C)  less often, giving rise to redistribution costs. 
D)  less often, thereby lessening the severity of the inflation tax.

Question 17

The money demand curve shifts to the left when the Fed buys government bonds.

Accepted Answer

A) True 
 B)False

Question 18

Other things the same, an increase in velocity means that

Accepted Answer

A)  the rate at which money changes hands falls, so the price level rises. 
B)  the rate at which money changes hands falls, so the price level falls. 
C)  the rate at which money changes hands rises, so the price level rises. 
D)  the rate at which money changes hands rises, so the price level falls. 
A)  the rate at which money changes hands falls, so the price level rises. 
B)  the rate at which money changes hands falls, so the price level falls. 
C)  the rate at which money changes hands rises, so the price level rises. 
D)  the rate at which money changes hands rises, so the price level falls.

Question 19

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

Accepted Answer

A)  the real wage. 
B)  the real interest rate. 
C)  the nominal interest rate. 
D)  All of the above are correct. 
A)  the real wage. 
B)  the real interest rate. 
C)  the nominal interest rate. 
D)  All of the above are correct.

Question 20

The theory that most economists rely on to explain inflation is called the .

Accepted Answer

The answer of The theory that most economists rely on...

Exam 17: Money Growth and Inflation

Which of the following helps to explain why the inflation fallacy is a fallacy?

An increase in the price level causes the value of money to _____. Therefore, people will want to hold ____ money, because the cost of their purchases has increased.

When the value of money is on the vertical axis, the money supply curve slopes upward because an increase in the value of money induces banks to create more money.

On a Sunday morning, Tom sold 300 cups of coffee for a total of $750.

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

Which of the following statements about inflation is correct?

According to the classical dichotomy, when the money supply doubles, which of the following also doubles?

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

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?

The idea of menu costs suggests that

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

The shoeleather cost of inflation refers to

Other things the same, a decrease in velocity means that

If the Fed conducts open market sales, the equilibrium value of money decreases and the equilibrium price level increases.

One year ago Sam purchased bonds for $100,000. He just sold them for $120,000. During the year the price level rose by 5%. If the tax rate on capital gains is 20%, how much did Sam gain in real terms?

When inflation rises, people tend to go to the bank

The money demand curve shifts to the left when the Fed buys government bonds.

Other things the same, an increase in velocity means that

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

The theory that most economists rely on to explain inflation is called the .

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

An increase in the price level causes the value of money to _. Therefore, people will want to hold money, because the cost of their purchases has increased.