Question 1

As the price level falls, the value of money falls.

Accepted Answer

A) True 
 B)False

Question 2

Suppose ice cream cones costs $3. Molly holds $60. What is the real value of the money she holds?

Accepted Answer

A) $60. If the price of ice cream cones rises, to maintain the real value of her money holdings she need to hold more dollars. 
B) $60. If the price of ice cream cones rises, to maintain the real value of her money holdings she need to hold fewer dollars. 
C) 20 ice cream cones. If the price of ice cream cones rises, to maintain the real value of her money holdings she needs to hold more dollars. 
D) 20 ice cream cones. If the price of ice cream cones rises, to maintain the real value of her money holdings she needs to hold fewer dollars.

Question 3

When prices are falling, economists say that there is

Accepted Answer

A) disinflation. 
B) deflation. 
C) a contraction. 
D) an inverted inflation.

Question 4

People go to the bank more frequently to reduce currency holdings when inflation is high. The sacrifice of time and convenience that is involved in doing that is referred to as

Accepted Answer

A) inflation-induced tax distortion. 
B) relative-price-variability cost. 
C) shoeleather cost. 
D) menu cost.

Question 5

In 2010 the U.S. government was running a large deficit. Some were concerned that pressures might be put on the Federal Reserve to purchase government bonds to help the government finance this deficit. If the Fed were to buy government bonds to help the government finance its expenditures, then

Accepted Answer

A) the price level would fall, so the value of money would fall. 
B) the price level would fall, so the value of money would rise. 
C) the price level would rise, so the value of money would fall. 
D) the price level would rise, so the value of money would rise.

Question 6

The Fisher effect says that

Accepted Answer

A) the nominal interest rate adjusts one for one with the inflation rate. 
B) the growth rate of the money supply is negatively related to the velocity of money. 
C) real variables are heavily influenced by the monetary system. 
D) All of the above are correct.

Question 7

The classical dichotomy argues that changes in the money supply

Accepted Answer

A) affect both nominal and real variables. 
B) affect neither nominal nor real variables. 
C) affect nominal variables, but not real variables. 
D) do not affect nominal variables, but do affect real variables.

Question 8

Which of the following is consistent with the idea that high money supply growth leads to high inflation?

Accepted Answer

A) the quantity theory and evidence from four hyperinflations during the 1920's 
B) the quantity theory but not evidence from four hyperinflations during the 1920's 
C) evidence from four hyperinflations during the 1920's but not the quantity theory 
D) neither the quantity theory nor evidence from four hyperinflation during the 1920's

Question 9

When shopping you notice that a pair of jeans costs $20 and that a tee-shirt costs $10. You compute the price of jeans relative to tee-shirts.

Accepted Answer

A) The dollar price of jeans and the relative price of jeans are both nominal variables. 
B) The dollar price of jeans and the relative price of jeans are both real variables. 
C) The dollar price of jeans is a nominal variable; the relative price of jeans is a real variable. 
D) The dollar price of jeans is a real variable; the relative price of jeans is a nominal variable.

Question 10

Explain how inflation affects savings.

Accepted Answer

The answer of Explain how inflation affects savings....

Question 11

In recent years Venezuela and Ukraine have had much higher nominal interest rates than the United States while Japan has had lower nominal interest rates. What would you predict is true about money growth in these other countries? Why?

Accepted Answer

The answer of In recent years Venezuela and Ukraine have...

Question 12

Menu costs refers to

Accepted Answer

A) resources used by people to maintain lower money holdings when inflation is high. 
B) resources used to price shop during times of high inflation. 
C) the distortion in incentives created by inflation when taxes do not adjust for inflation. 
D) the cost of more frequent price changes induced by higher inflation.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

In the long run, an increase in the growth rate of the money supply leads to an increase in the real interest rate, but no change in the nominal interest rate.

Accepted Answer

A) True 
 B)False

Question 15

You find that to attract a sufficient number of workers you have to pay them more dollars. Given the price of your output you determine you are paying your workers more in goods than before. Which of the following has risen?

Accepted Answer

A) The real and nominal value of the wages you pay. 
B) The real but not the nominal value of wages you pay. 
C) The nominal but not the real value of the wages you pay. 
D) Neither the real nor the nominal value of the wages you pay.

Question 16

Hyperinflations are associated with governments printing money to finance expenditures.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) decrease, which encourages savings. 
B) decrease, which discourages savings. 
C) increase, which encourages savings. 
D) increase, which discourages savings.

Question 18

If M = 4,000, P = 1.5, and Y= 6,000, what is velocity?

Accepted Answer

A) 2.25 
B) 3.00 
C) 6.50 
D) None of the above is correct.

Question 19

On a given morning, Franco sold 40 pairs of shoes for a total of $80 at his shoe store.

Accepted Answer

A) The $80 is a real variable. The quantity of shoes is a nominal variable. 
B) The $80 is a nominal variable. The quantity of shoes is a real variable. 
C) Both the $80 and the quantity of shoes are nominal variables. 
D) Both the $80 and the quantity of shoes are real variables.

Question 20

Suppose the price level rises, but the number of dollars you are paid per hour stays the same. This means that your

Accepted Answer

A) nominal wage is higher. 
B) nominal wage is lower. 
C) real wage is higher. 
D) real wage is lower.

Exam 17: Money Growth and Inflation

As the price level falls, the value of money falls.

Suppose ice cream cones costs $3. Molly holds $60. What is the real value of the money she holds?

When prices are falling, economists say that there is

People go to the bank more frequently to reduce currency holdings when inflation is high. The sacrifice of time and convenience that is involved in doing that is referred to as

In 2010 the U.S. government was running a large deficit. Some were concerned that pressures might be put on the Federal Reserve to purchase government bonds to help the government finance this deficit. If the Fed were to buy government bonds to help the government finance its expenditures, then

The Fisher effect says that

The classical dichotomy argues that changes in the money supply

Which of the following is consistent with the idea that high money supply growth leads to high inflation?

When shopping you notice that a pair of jeans costs $20 and that a tee-shirt costs $10. You compute the price of jeans relative to tee-shirts.

Explain how inflation affects savings.

In recent years Venezuela and Ukraine have had much higher nominal interest rates than the United States while Japan has had lower nominal interest rates. What would you predict is true about money growth in these other countries? Why?

Menu costs refers to

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

In the long run, an increase in the growth rate of the money supply leads to an increase in the real interest rate, but no change in the nominal interest rate.

You find that to attract a sufficient number of workers you have to pay them more dollars. Given the price of your output you determine you are paying your workers more in goods than before. Which of the following has risen?

Hyperinflations are associated with governments printing money to finance expenditures.

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

If M = 4,000, P = 1.5, and Y= 6,000, what is velocity?

On a given morning, Franco sold 40 pairs of shoes for a total of $80 at his shoe store.

Suppose the price level rises, but the number of dollars you are paid per hour stays the same. This means that your