Question 1

The idea that inflation by itself reduces people's purchasing power is called

Accepted Answer

A)  the inflation tax. 
B)  menu costs. 
C)  the inflation fallacy. 
D)  shoeleather costs. 
A)  the inflation tax. 
B)  menu costs. 
C)  the inflation fallacy. 
D)  shoeleather costs.

Question 2

Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay makes

Accepted Answer

A)  your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased. 
B)  your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage decreased. 
C)  your real wage increase. If your real wage rose by a greater percentage than the price level, then your nominal wage also increased. 
D)  your real wage decrease. If your real wage rose by a greater percentage than the price level, then your nominal wage decreased. 
A)  your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased. 
B)  your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage decreased. 
C)  your real wage increase. If your real wage rose by a greater percentage than the price level, then your nominal wage also increased. 
D)  your real wage decrease. If your real wage rose by a greater percentage than the price level, then your nominal wage decreased.

Question 3

The inflation tax

Accepted Answer

A)  transfers wealth from the government to households. 
B)  is the increase in real income taxes due to lack of indexation in income tax rules. 
C)  is a tax on everyone who holds money. 
D)  All of the above are correct. 
A)  transfers wealth from the government to households. 
B)  is the increase in real income taxes due to lack of indexation in income tax rules. 
C)  is a tax on everyone who holds money. 
D)  All of the above are correct.

Question 4

According to the Fisher effect, if inflation rises then the nominal interest rate rises.

Accepted Answer

A) True 
 B)False

Question 5

What direction of change in velocity could explain the price level increasing by a smaller percentage than the money supply? What would this change in velocity imply about the frequency with which money changes hands?

Accepted Answer

A decrease in veloci

Question 6

If the quantity of money supplied is greater than the quantity demanded, then prices should fall.

Accepted Answer

A) True 
 B)False

Question 7

When we assume that the supply of money is a variable that the central bank controls, we

Accepted Answer

A)  must then assume as well that the demand for money is not influenced by the value of money. 
B)  must then assume as well that the price level is unrelated to the value of money. 
C)  are ignoring the fact that, in the real world, households are also suppliers of money. 
D)  are ignoring the complications introduced by the role of the banking system. 
A)  must then assume as well that the demand for money is not influenced by the value of money. 
B)  must then assume as well that the price level is unrelated to the value of money. 
C)  are ignoring the fact that, in the real world, households are also suppliers of money. 
D)  are ignoring the complications introduced by the role of the banking system.

Question 8

For a given level of money and real GDP, an increase in velocity would lead to an increase in the price level.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

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

Question 10

Given a nominal interest rate of 5 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 15 percent. 
B)  Inflation is 2 percent; the tax rate is 40 percent. 
C)  Inflation is 1 percent; the tax rate is 50 percent. 
D)  The after-tax real interest rate is the same for all of the above. 
A)  Inflation is 3 percent; the tax rate is 15 percent. 
B)  Inflation is 2 percent; the tax rate is 40 percent. 
C)  Inflation is 1 percent; the tax rate is 50 percent. 
D)  The after-tax real interest rate is the same for all of the above.

Question 11

Suppose that velocity and output are constant and that the quantity theory and the Fisher effect both hold. What happens to inflation, real interest rates, and nominal interest rates when the money supply growth rate increases from 5 percent to 10 percent?

Accepted Answer

Inflation and nominal interest

Question 12

As the price level rises, the value of money

Accepted Answer

A)  increases, so people must hold less money to purchase goods and services. 
B)  increases, so people must hold more money to purchase goods and services. 
C)  decreases, so people must hold more money to purchase goods and services. 
D)  decreases, so people must hold less money to purchase goods and services. 
A)  increases, so people must hold less money to purchase goods and services. 
B)  increases, so people must hold more money to purchase goods and services. 
C)  decreases, so people must hold more money to purchase goods and services. 
D)  decreases, so people must hold less money to purchase goods and services.

Question 13

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 14

If velocity is 6, real output is 10,000, and M is 20,000 what would the price level be? If M increases to 25,000 but V and Y do not change, what happens to the price level? Are the change in the money supply and the change in the price level proportional?

Accepted Answer

P = MV/Y. With the numbers giv

Question 15

You put money into an account and earn an after-tax real interest rate of 2.5 percent. If the nominal interest rate on the account is 8 percent and the inflation rate is 2 percent, then what is the tax rate?

Accepted Answer

A)  28.00 percent 
B)  36.25 percent 
C)  43.75 percent 
D)  67.50 percent 
A)  28.00 percent 
B)  36.25 percent 
C)  43.75 percent 
D)  67.50 percent

Question 16

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 17

Indexing the tax system to take into account the effects of inflation would by itself

Accepted Answer

A)  mean that only real interest earnings are taxed. 
B)  mean an end to taxing capital gains. 
C)  mean an increase in average tax rates. 
D)  All of the above are correct. 
A)  mean that only real interest earnings are taxed. 
B)  mean an end to taxing capital gains. 
C)  mean an increase in average tax rates. 
D)  All of the above are correct.

Question 18

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 19

Inflation necessarily distorts saving when either real interest income or nominal interest income is taxed.

Accepted Answer

A) True 
 B)False

Question 20

Deflation

Accepted Answer

A)  increases incomes and enhances the ability of debtors to pay off their debts. 
B)  increases incomes and reduces the ability of debtors to pay off their debts. 
C)  decreases incomes and enhances the ability of debtors to pay off their debts. 
D)  decreases incomes and reduces the ability of debtors to pay off their debts. 
A)  increases incomes and enhances the ability of debtors to pay off their debts. 
B)  increases incomes and reduces the ability of debtors to pay off their debts. 
C)  decreases incomes and enhances the ability of debtors to pay off their debts. 
D)  decreases incomes and reduces the ability of debtors to pay off their debts.

Exam 17: Money Growth and Inflation

The idea that inflation by itself reduces people's purchasing power is called

Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay makes

The inflation tax

According to the Fisher effect, if inflation rises then the nominal interest rate rises.

What direction of change in velocity could explain the price level increasing by a smaller percentage than the money supply? What would this change in velocity imply about the frequency with which money changes hands?

If the quantity of money supplied is greater than the quantity demanded, then prices should fall.

When we assume that the supply of money is a variable that the central bank controls, we

For a given level of money and real GDP, an increase in velocity would lead to an increase in the price level.

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

Given a nominal interest rate of 5 percent, in which of the following cases would you earn the highest after-tax real rate of interest?

Suppose that velocity and output are constant and that the quantity theory and the Fisher effect both hold. What happens to inflation, real interest rates, and nominal interest rates when the money supply growth rate increases from 5 percent to 10 percent?

As the price level rises, the value of money

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

If velocity is 6, real output is 10,000, and M is 20,000 what would the price level be? If M increases to 25,000 but V and Y do not change, what happens to the price level? Are the change in the money supply and the change in the price level proportional?

You put money into an account and earn an after-tax real interest rate of 2.5 percent. If the nominal interest rate on the account is 8 percent and the inflation rate is 2 percent, then what is the tax rate?

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?

Indexing the tax system to take into account the effects of inflation would by itself

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

Inflation necessarily distorts saving when either real interest income or nominal interest income is taxed.

Deflation

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

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