Question 1

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.E) A) and D)
F) None of the above

Question 2

Monetary neutrality means that a change in the money supply

Accepted Answer

A)   does not change real variables. Most economists think this is a good description of the economy in the short run and in the long run.
B)   does not change real variables. Most economists think this is a good description of the economy in the long run but not the short run.
C)   does not change nominal variables. Most economists think this is a good description of the economy in the short-run and the long run.
D)   does not change nominal variables. Most economists think this is a good description of the economy in the long run but not the short run.E) All of the above
F) None of the above

Question 3

The term hyperinflation refers to

Accepted Answer

A)   the spread of inflation from one country to others.
B)   a decrease in the inflation rate.
C)   a period of very high inflation.
D)   inflation accompanied by a recession.E) B) and D)
F) A) and B)

Question 4

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.E) A) and B)
F) A) and D)

Question 5

Dollar prices and relative prices are both nominal variables.

Accepted Answer

A) True 
 B)False

Question 6

If velocity = 5, the price level = 2, and the real value of output is 2,500, then the quantity of money is

Accepted Answer

A)   $250.
B)   $25,000.
C)   $1,000.
D)   $6,250.E) All of the above
F) None of the above

Question 7

The inflation tax falls mostly heavily on

Accepted Answer

A)   those who hold a lot of currency and accounts for a large share of U.S. government revenue.
B)   those who hold a lot of currency but accounts for a small share of U.S. government revenue.
C)   those who hold little currency and accounts for a large share of U.S. government revenue.
D)   those who hold little currency but accounts for a small share of U.S. government revenue.E) None of the above
F) All of the above

Question 8

Figure 30-1 
-Refer to Figure 30-1. If the current money supply is MS1, then

Accepted Answer

A)   equilibrium exists when the value of money is 2.
B)   equilibrium exists when the equilibrium is at point D.
C)   equilibrium exists when the value of money is 1.
D)   there is excess demand if the value of money is 2.E) A) and B)
F) B) and D)

Question 9

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.E) All of the above
F) A) and D)

Question 10

The nominal interest rate is 6 percent and the inflation rate is 3 percent. What is the real interest rate?

Accepted Answer

A)   9 percent
B)   2 percent
C)   18 percent
D)   3 percentE) B) and D)
F) C) and D)

Question 11

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.E) A) and B)
F) A) and C)

Question 12

Darla puts her money into a bank account that earns interest. One year later she sees that the account has 6 percent more dollars and that her money will buy 7.5 percent more goods.

Accepted Answer

A)   The nominal interest rate was 13.5 percent and the inflation rate was 7.5 percent.
B)   The nominal interest rate was 13.5 percent and the inflation rate was 1.5 percent.
C)   The nominal interest rate was 6 percent and the inflation rate was -1.5 percent.
D)   The nominal interest rate was 6 percent and the inflation rate was 7.5 percent.E) A) and B)
F) All of the above

Question 13

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 14

The quantity equation is expressed as _____. The rate at which money changes hands is known as _____.

Accepted Answer

M x V = P ...

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)   0.167E) A) and B)
F) None of the above

Question 16

You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?

Accepted Answer

A)   3.6 percent.
B)   2.4 percent.
C)   2.0 percent.
D)   4.4 percent.E) A) and B)
F) A) and C)

Question 17

According to the quantity theory of money, a 3 percent increase in the money supply

Accepted Answer

A)   causes the price level to rise by 3 percent.
B)   causes the price level to rise by less than 3 percent.
C)   leaves the price level unchanged.
D)   causes the price level to fall by 3 percent.E) A) and D)
F) C) and D)

Question 18

If M = 9,000, P = 6, and Y = 1,500, what is velocity?

Accepted Answer

A)   0.167.
B)   1.
C)   4.
D)   36.E) All of the above
F) A) and B)

Question 19

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.E) A) and B)
F) A) and C)

Question 20

When inflation falls, people

Accepted Answer

A)   make less frequent trips to the bank and firms make less frequent price changes.
B)   make less frequent trips to the bank while firms make more frequent price changes.
C)   make more frequent trips to the bank while firms make less frequent price changes.
D)   make more frequent trips to the bank and firms make more frequent price changes.E) A) and B)
F) A) and C)

Exam 12: Money Growth and Inflation

Monetary neutrality means that a change in the money supply

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedWe must suppose that V is rela...View AnswerShow Answer

The quantity equation is expressed as _____. The rate at which money changes hands is known as _____.

Correct AnswerverifiedM x V = P ...View AnswerShow Answer

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

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According to the quantity theory of money, a 3 percent increase in the money supply

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When inflation falls, people

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You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?

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If M = 9,000, P = 6, and Y = 1,500, what is velocity?

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Figure 30-1 -Refer to Figure 30-1. If the current money supply is MS1, then

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

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

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If velocity = 5, the price level = 2, and the real value of output is 2,500, then the quantity of money is

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Darla puts her money into a bank account that earns interest. One year later she sees that the account has 6 percent more dollars and that her money will buy 7.5 percent more goods.

Correct AnswerverifiedShow Answer

The inflation tax falls mostly heavily on

Correct AnswerverifiedShow Answer

When inflation rises, people tend to go to the bank

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Dollar prices and relative prices are both nominal variables.

Correct AnswerverifiedShow Answer

The term hyperinflation refers to

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The nominal interest rate is 6 percent and the inflation rate is 3 percent. What is the real interest rate?

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We must suppose that V is rela...
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The quantity equation is expressed as _. The rate at which money changes hands is known as _.

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M x V = P ...
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