Deck 30: Money Growth and Inflation

Question 1

The money demand curve is downward sloping because as the value of money falls people desire to hold a larger quantity of money.

Answer 1

True

Question 2

If money demand shifts right, the price level falls.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

The quantity theory of money can explain hyperinflations but not moderate inflation.

Question 5

The inflation rate is measured as the percentage change in a price index.

Question 6

U.S. prices rose at an average annual rate of about 3.6 percent over the last 80 years.

Question 7

When the value of money is on the vertical axis, an increase in the price level shifts money demand to the right.

Question 8

The price level is determined by the supply of, and demand for, money.

Question 9

If P represents the price of goods and services measured in money, then 1/P is the value of money measured in terms of goods and services.

Question 10

An increase in money demand would create a surplus of money at the original value of money.

Question 11

When the value of money is on the vertical axis, the money supply curve is vertical and shifts right if the Federal Reserve buys bonds.

Question 12

The United States has never had deflation.

Question 13

An excess supply of money is eliminated by a falling price level

Question 14

In the 1990s, U.S. prices rose at about the same rate as in the 1970s.

Question 15

If the quantity of money demanded is greater than the quantity supplied, then the value of money rises.

Question 16

The money demand curve shifts to the left when the Fed buys government bonds.

Question 17

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

Question 18

In United States history there were long periods when most prices fell.

Question 19

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

Question 20

When the value of money is on the vertical axis, the money supply curve slopes upward because an increase in the value of money induces banks to create more money.

Question 21

Dollar prices and relative prices are both nominal variables.

Question 22

The irrelevance of monetary changes for real variables is called monetary neutrality. Most economists accept monetary neutrality as a good description of the economy in the long run, but not the short run.

Question 23

The quantity theory of money implies that if output and velocity are constant, then a 50 percent increase in the money supply would lead to less than a 50 percent increase in the price level.

Question 24

One study found that unemployment is the economic term mentioned most often in U.S. newspapers.

Question 25

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.

Question 26

Inflation induces people to spend more resources maintaining lower money holdings. The costs of doing this are called shoeleather costs.

Question 27

If the Fed increases the money supply, the equilibrium value of money decreases and the equilibrium price level increases.

Question 28

The source of all four classic hyperinflations was high rates of money growth.

Question 29

If the real interest rate is 5% and the inflation rate is 3%, then the nominal interest rate is 8%.

Question 30

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

Question 31

If the Fed conducts open market sales, the equilibrium value of money decreases and the equilibrium price level increases.

Question 32

Nominal GDP measures output of final goods and services in physical terms.

Question 33

The classical dichotomy is useful for analyzing the economy because in the long run nominal variables are heavily influenced by developments in the monetary system, and real variables are not.

Question 34

Monetary neutrality means that while real variables may change in response to changes in the money supply, nominal variables do not.

Question 35

Hyperinflations are associated with governments printing money to finance expenditures.

Question 36

Real GDP measures output of final goods and services in physical units.

Question 37

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

Question 38

The quantity equation is M x V = P x Y.

Question 39

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.

Question 40

Hyperinflation is generally defined as inflation that exceeds 50 percent per month.

Question 41

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

Question 42

A person received 4% nominal interest. The inflation rate was -2% and the tax rate was 25%. This person received an after-tax real interest rate of 5%.

Question 43

Jimmy Carter, Ronald Reagan, and Gerald Ford are all U.S. presidents whose political careers were helped by inflation.

Question 44

The hyperinflation in Zimbabwe ended in April 2009 when the central bank purchased government bonds in open-market operations.

Question 45

​Unexpected and large deflation is desirable, according to the Friedman rule.

Question 46

Inflation is costly only if it is unanticipated.

Question 47

Suppose the nominal interest rate is 5 percent, the tax rate on interest income is 30 percent, and the after-tax real interest rate is 2.1percent. Then the inflation rate is 2 percent.

Question 48

Shoeleather costs and menu costs are both costs of anticipated inflation.

Question 49

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

Question 50

If the Fed were to unexpectedly increase the money supply, creditors would gain at the expense of debtors.

Question 51

The story The Wizard of Oz can be interpreted as an allegory about U.S. monetary policy in the late 19th century.

Question 52

Inflation distorts savings when real interest income, rather than nominal interest income, is taxed.

Question 53

Even though monetary policy is neutral in the short run, it may have profound real effects in the long run.

Question 54

When the Fed increases the money supply and creates inflation, it erodes the real value of the unit of account and makes it more difficult for investors to sort successful from unsuccessful firms.

Question 55

Suppose the nominal interest rate is 10 percent, the tax rate on interest income is 28 percent, and the inflation rate is 6 percent. Then the after-tax real interest rate is -3.2 percent.

Question 56

In the late 1800's deflation caused farmers to suffer as the fall in crop prices reduced their income and thus their ability to pay off their debts.

Question 57

Suppose the nominal interest rate is 5 percent, the tax rate on interest income is 30 percent, and the after-tax real interest rate is 0.8 percent. Then the inflation rate is 2.7 percent.

Question 58

In the presence of inflation in the U.S., accountants incorrectly measure firms' earnings but the tax code correctly measures real incomes.

Question 59

If inflation is higher than expected, then borrowers make nominal interest payments that are less than they expected.

Question 60

If inflation is higher than expected, then lenders receive interest payments whose real values are less than they expected.

Question 61

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

Question 62

The theory that most economists rely on to explain inflation is called the __________.

Question 63

An increase in the price level causes the value of money to _____. Therefore, people will want to hold ____ money, because the cost of their purchases has increased.

Question 64

A decrease in the value of money __________ the quantity of money demanded. On a graph with the value of money on the vertical axis this effect on the value of money on quantity demanded is shown as ____________.

Question 65

The consumer price index increases from 200 to 208. What is the inflation rate?

Question 66

You hear an economist state the following: "The increase in the money supply will causes price to rise in the long run and will have no effect on output or any other real factors." This economist is expressing the principle of _____.

Question 67

According to the quantity theory of money, an increase in the money supply causes the price level to _____ and the value of money to _____.

Question 68

When the Federal Reserve injects money into the banking system, it initially causes an excess _____ of money. Equilibrium in the money market is reestablished through a(n) _____ in the price level.

Question 69

If the price level this year was 140 and was 135 last year, what was the inflation rate to the nearest decimal?

Question 70

Money neutrality states that a change in the money supply affects _____ variables only. Most economists believe that money neutrality is a good description of how money affects the economy in the _____.

Question 71

It takes more money to purchase the same amount of goods when prices _____. Therefore, the value of your money has ____.

Question 72

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?

Question 73

In the long run an increase in the money supply causes the price level to __________. The price level moves in this direction because an increase in the money supply creates __________ in the money market that causes people to ________ spending.

Question 74

An economy produces two goods, x and y. A year ago the price of x was $4 and the price of y was $6. Today the price of x is $8 and the price of y is $10. What happened to the nominal and the real value of good x? What happened to the nominal and real value of good y?

Question 75

When the consumer price index increases, the value of your money has _____. According to the quantity theory of money this is caused by an increase in the _____.

Question 76

If the price level were to rise from 160 to 200, in what direction and by how much would the value of a dollar change?

Question 77

An increase in the price level means that a dollar buys __________ goods and services so the value of a dollar __________.

Question 78

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

Question 79

The increase in the overall level of prices is known as _____.

Question 80

A decrease in the overall price level (or falling prices) is called _____. An extraordinarily high rate of inflation is called _____.