Question 1

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 whose wages increase by as much as inflation than for those who are paid a fixed nominal wage. 
D)  for savers in high income tax brackets than for savers in low income tax brackets.

Question 2

If the money supply increased by 10% and at the same time velocity decreased by 10%, then according to the quantity equation there would be no change in the price level.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A)  the price level 
B)  nominal wages 
C)  nominal GDP 
D)  All of the above are correct.

Question 4

When the money market is drawn with the value of money on the vertical axis, the price level increases 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.

Question 5

In order to maintain stable prices, a central bank must

Accepted Answer

A)  maintain low interest rates. 
B)  keep unemployment low. 
C)  tightly control the money supply. 
D)  sell indexed bonds.

Question 6

Suppose the rate of inflation rate is two percent and the nominal interest rate is five percent. According to the Fisher Effect, an increase in the inflation rate to six percent should cause the nominal interest rate to increase from five percent to in the long run.

Accepted Answer

The answer of Suppose the rate of inflation rate is...

Question 7

An excess supply of money is eliminated by a decrease in the value of money.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements concerning the history of U.S. inflation is not correct?

Accepted Answer

A)  Prices rose at an average annual rate of about 3.6 percent over the last 80 years. 
B)  There was about a 17-fold increase in the price level over the last 80 years. 
C)  Inflation in the 1970s was below the average over the last 80 years. 
D)  The United States has experienced periods of deflation.

Question 9

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 10

If M = 12,000, P = 3, and Y = 32,000, then velocity =

Accepted Answer

A)  1.125. Velocity will rise if money changes hands more frequently. 
B)  1.125. Velocity will rise if money changes hands less frequently. 
C)  8. Velocity will rise if money changes hands more frequently. 
D)  8. Velocity will rise if money changes hands less frequently.

Question 11

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 12

Nominal GDP measures

Accepted Answer

A)  the total quantity of final goods and services produced. 
B)  the dollar value of the economy's output of final goods and services. 
C)  the total income received from producing final goods and services measured in constant dollars. 
D)  the overall level of prices.

Question 13

When the money market is drawn with the value of money on the vertical axis, as the price level increases the quantity of money

Accepted Answer

A)  demanded increases. 
B)  demanded decreases. 
C)  supplied increases. 
D)  supplied decreases.

Question 14

The classical dichotomy refers to the idea that the supply of money

Accepted Answer

A)  is irrelevant for understanding the determinants of nominal and real variables. 
B)  determines nominal variables, but not real variables. 
C)  determines real variables, but not nominal variables. 
D)  is a determinant of both real and nominal variables.

Question 15

If M = 6,000, P = 3, and Y = 3,000, what is velocity?

Accepted Answer

A)  6 
B)  1.5 
C)  0.67 
D)  0.167

Question 16

When Haley states that inflation by itself always reduces the real return on her saving, she

Accepted Answer

A)  has expressed the idea of the inflation tax. 
B)  has expressed the idea behind menu costs. 
C)  has committed the inflation fallacy. 
D)  has expressed the idea behind shoeleather costs.

Question 17

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 18

You put money in the bank. The increase in the dollar value of your savings

Accepted Answer

A)  and the change in the number of goods you can buy with your savings are both nominal variables. 
B)  and the change in the number of goods you can buy with your savings are both real variables. 
C)  is a nominal variable, but the change in the number of goods you can buy with your savings is a real variable. 
D)  is a real variable, but the change in the number of goods you buy with your savings is a nominal variable.

Question 19

Norma complains that she is not receiving the full benefit of her six percent raise, because inflation is two percent. You tell her that nominal incomes tend to rise with inflation, therefore

Accepted Answer

A)  she really is worse off. 
B)  her real income increased eight percent. 
C)  menu costs have reduced her purchasing power. 
D)  she is committing the inflation fallacy.

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.

Exam 30: Money Growth and Inflation