Question 1

The nominal interest rate is:

Accepted Answer

A)   the everyday notion of the interest rate adjusted for inflation.
B)   the reported interest rate, adjusted for the effects of inflation.
C)   the amount of interest the bank charges you for saving or pays you for borrowing.
D)   the amount of interest the bank pays you for saving or charges you for borrowing.E) A) and C)
F) All of the above

Question 2

If an economy produces 3,000 units of output with a money supply of $500 and a velocity of 9, we know the price level must be:

Accepted Answer

A)   $1.50.
B)   $2.
C)   $4.50.
D)   $9.E) None of the above
F) C) and D)

Question 3

If the real rate of return is 0 percent, and the inflation rate is 3 percent, then the nominal interest rate must be:

Accepted Answer

A)   0 percent.
B)   3 percent.
C)   −3 percent.
D)   6 percent.E) A) and B)
F) A) and C)

Question 4

Kim is paid $50,000 per year, and pays an annual income tax of 10 percent. Due to an inflation rate of 10 percent, her pay increases to $55,000, which puts her in a higher tax bracket where she must pay 20 percent. Kim has experienced:

Accepted Answer

A)   bracket costs.
B)   the deflationary cost of tax distortion.
C)   an increase in her purchasing power.
D)   the inflationary cost of tax distortion.E) A) and B)
F) C) and D)

Question 5

The reduction in aggregate demand caused by deflation:

Accepted Answer

A)   further reduces prices, causing a deflationary spiral.
B)   will decrease production and increase prices, causing inflation to adjust the price level.
C)   further reduces prices, causing aggregate supply to shift left back to long-run equilibrium.
D)   will decrease production and increase prices, causing a deflationary trap.E) All of the above
F) B) and C)

Question 6

According to the quantity theory of money, an increase in the money supply leads to:

Accepted Answer

A)   an increase in prices, as there are more dollar bills spent on the same number of goods and services.
B)   an increase in prices, as there are the same dollar bills spent on a greater number of goods and services.
C)   a decrease in prices, as there are more dollar bills spent on the same number of goods and services.
D)   a decrease in price, as there are the same dollar bills spent on a greater number of goods and services.E) B) and C)
F) C) and D)

Question 7

When real rates of interest are negative, borrowers:

Accepted Answer

A)   benefit, because the value of their debt declines.
B)   suffer, because the value of their debt declines.
C)   benefit, because the value of their debt increases.
D)   suffer, because the value of their debt increases.E) A) and C)
F) A) and D)

Question 8

When an economy experiences deflation, consumption will:

Accepted Answer

A)   decrease, because people will want to wait for prices to drop before spending.
B)   increase, because people will want to wait for prices to drop before spending.
C)   decrease, because people will lose value in their savings.
D)   increase, because people will lose value in their savings.E) B) and D)
F) A) and B)

Question 9

In order to calculate the real interest rate, simply:

Accepted Answer

A)   add the rate of inflation to the nominal interest rate.
B)   subtract the rate of inflation from the nominal interest rate.
C)   subtract the nominal interest rate from the rate of inflation.
D)   divide the nominal interest earned by the rate of inflation.E) None of the above
F) All of the above

Question 10

In the long run, an increase in the aggregate price level:

Accepted Answer

A)   doesn't change real output.
B)   decreases real output.
C)   increases real output.
D)   increases spending.E) B) and C)
F) A) and B)

Question 11

Price indexes allow us to convert __________ measures of output into _________ measures of output, because an increase in that would mean economic growth.

Accepted Answer

A)   nominal; real
B)   real; nominal
C)   perceived; real
D)   nominal; perceivedE) A) and D)
F) C) and D)

Question 12

The classical theory of inflation:

Accepted Answer

A)   describes a long-run equilibrium.
B)   explains the direct relationship between money supply and the price level.
C)   shows neutrality of money in the long run.
D)   All of these statements are true.E) B) and C)
F) A) and B)

Question 13

When an economy is experiencing a negative output gap, there is:

Accepted Answer

A)   inflationary pressure due to low demand.
B)   inflationary pressure due to high demand.
C)   significant inflationary pressure due to low demand.
D)   significant inflationary pressure due to high demand.E) B) and D)
F) A) and C)

Question 14

According to the graph shown, what does Y on the x-axis stand for?

Accepted Answer

A)   Full employment level of output
B)   Current level of GDP
C)   Observed level of output
D)   Future target goal for outputE) A) and B)
F) A) and C)

Question 15

If an economy produces 3,000 units of output with a price level of $2 and the money supply (M)  is $2,000, velocity is:

Accepted Answer

A)   2.
B)   3.
C)   67.
D)   150.E) C) and D)
F) B) and C)

Question 16

If the average price level increases 10 percent per year, and the velocity of money is 2, then the:

Accepted Answer

A)   inflation rate is 10 percent.
B)   inflation rate is 5 percent.
C)   inflation rate is 2 percent.
D)   inflation rate is 20 percent.E) A) and B)
F) A) and C)

Question 17

If the real rate of return is 2 percent, and the inflation rate is 0 percent, then the nominal interest rate must be:

Accepted Answer

A)   2 percent.
B)   0 percent.
C)   4 percent.
D)   −2 percent.E) A) and B)
F) All of the above

Question 18

One of the costs associated with predictable inflation is:

Accepted Answer

A)   tax distortions.
B)   budget charges.
C)   overheads.
D)   the re-distribution of purchasing power.E) None of the above
F) C) and D)

Question 19

Why is deflation such a problem?

Accepted Answer

A)   It increases the value of debt, making it harder to pay it back.
B)   It decreases the value of debt, making it harder to pay it back.
C)   It increases the value of debt, making it easier to pay it back.
D)   It decreases the value of debt, making it easier to pay it back.E) All of the above
F) B) and C)

Question 20

When the price of a key input increases suddenly, it causes:

Accepted Answer

A)   cost push inflation.
B)   the business cycle to become sporadic.
C)   demand pull inflation.
D)   the velocity of money to rise.E) A) and B)
F) All of the above

Exam 16: Inflation

If an economy produces 3,000 units of output with a money supply of $500 and a velocity of 9, we know the price level must be:

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Kim is paid $50,000 per year, and pays an annual income tax of 10 percent. Due to an inflation rate of 10 percent, her pay increases to $55,000, which puts her in a higher tax bracket where she must pay 20 percent. Kim has experienced:

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When the price of a key input increases suddenly, it causes:

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According to the quantity theory of money, an increase in the money supply leads to:

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When real rates of interest are negative, borrowers:

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If the real rate of return is 2 percent, and the inflation rate is 0 percent, then the nominal interest rate must be:

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Why is deflation such a problem?

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If an economy produces 3,000 units of output with a price level of $2 and the money supply (M) is $2,000, velocity is:

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The classical theory of inflation:

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In order to calculate the real interest rate, simply:

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The nominal interest rate is:

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If the average price level increases 10 percent per year, and the velocity of money is 2, then the:

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The reduction in aggregate demand caused by deflation:

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When an economy is experiencing a negative output gap, there is:

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Price indexes allow us to convert __________ measures of output into _________ measures of output, because an increase in that would mean economic growth.

Correct AnswerverifiedShow Answer

If the real rate of return is 0 percent, and the inflation rate is 3 percent, then the nominal interest rate must be:

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One of the costs associated with predictable inflation is:

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According to the graph shown, what does Y on the x-axis stand for?

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When an economy experiences deflation, consumption will:

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In the long run, an increase in the aggregate price level:

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Price indexes allow us to convert __ measures of output into _ measures of output, because an increase in that would mean economic growth.

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