Deck 4: Money and Inflation

Question 1

To make a trade in a barter economy requires:

A)currency.
B)a check.
C)scrip.
D)a double coincidence of wants.

Answer 1

a double coincidence of wants.

Question 2

In the United States, monetary policy is controlled by:

A)the President.
B)the Congress.
C)the Federal Reserve.
D)the Treasury Department.

Answer 2

the Federal Reserve.

Question 3

A country that is on a gold standard primarily uses:

A)commodity money.
B)fiat money.
C)credit money.
D)the barter system.

Answer 3

commodity money.

Question 4

All of the following are considered major functions of money except as a:

A)medium of exchange.
B)way to display wealth.
C)unit of account.
D)store of value.

Question 5

People use money as a unit of account when they:

A)hold money to transfer purchasing power into the future.
B)use money as a measure of economic transactions.
C)use money to buy goods and services.
D)hold money to gain power and esteem.

Question 6

Money that has no value other than as money is called money.

A)fiat intrinsic
B)commodity
C)government

Question 7

The central bank in the United States is the:

A)Bank of America.
B)U.S. Treasury.
C)U.S. National Bank.
D)Federal Reserve.

Question 8

An important factor in the evolution of commodity money to fiat money is:

A)a desire to reduce transaction costs.
B)a desire to increase transaction costs.
C)the fact that gold is no longer highly valued.
D)a desire to use gold for jewelry.

Question 9

In prisoner of war camps during World War II, the "currency" used was:

A)chocolates.
B)cigarettes.
C)gold.
D)IOUs.

Question 10

Macroeconomists call assets used to make transactions:

A)real income.
B)nominal income.
C)money.
D)consumption.

Question 11

In a country on a gold standard, the quantity of money is determined by the:

A)government.
B)central bank.
C)amount of gold.
D)buying and selling of government securities.

Question 12

When a pizza maker lists the price of a pizza as $10, this is an example of using money as a:

A)store of value. unit of
B)account. medium of
C)exchange. flow of
D)value.

Question 13

To increase the money supply, the Federal Reserve:

A)buys government bonds.
B)sells government bonds.
C)buys corporate stocks.
D)sells corporate stocks.

Question 14

To reduce the money supply, the Federal Reserve:

A)buys government bonds.
B)sells government bonds.
C)creates demand deposits.
D)destroys demand deposits.

Question 15

The quantity of money in the United States is essentially controlled by the:

A)president of the United States.
B)Department of the Treasury.
C)Federal Reserve.
D)system of commercial banks.

Question 16

People use money as a medium of exchange when they:

A)hold money to transfer purchasing power into the future.
B)use money as a measure of economic transactions.
C)use money to buy goods and services.
D)hold money to gain power and esteem.

Question 17

The use of fei as money on the island of Yap illustrates the idea of money as a social convention because:

A)only fei physically in the possession of the owner is accepted in transactions.
B)legal claim to a fei never seen by current generations was accepted in transactions.
C)the central bank of Yap accepts fei in exchange for paper certificates.
D)the government of Yap verifies the authenticity of fei used for transactions.

Question 18

Economists use the term money to mean:

A)income.
B)profits.
C)assets used for transactions.
D)earnings from labor.

Question 19

Money's liquidity refers to the ease with which:

A)coins can be melted down.
B)illegally obtained money can be laundered.
C)loans can be floated.
D)money can be converted into goods and services.

Question 20

The rate of inflation is the:

A)median level of prices.
B)average level of prices.
C)percentage change in the level of prices.
D)measure of the overall level of prices.

Question 21

Credit card balances are included in:

A)M1 only.
B)M2 only.
C)both M1 and M2.
D)neither M1 nor M2.

Question 22

The demand for real money balances is generally assumed to:

A)be exogenous.
B)be constant.
C)increase as real income increases.
D)decrease as real income increases.

Question 23

All of the following assets are included in M1 except:

A)currency.
B)demand deposits.
C)traveler's checks.
D)money market deposit accounts.

Question 24

Consider the money demand function that takes the form (M/P)d=kY, where M is the quantity of money, P is the price level, k is a constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average velocity of money in this economy?

A)3 percent
B)7 percent
C)10 percent
D)13 percent

Question 25

If the demand for real money balances is proportional to real income, velocity will:

A)increase as income increases.
B)increase as income decreases.
C)vary directly with the interest rate.
D)remain constant.

Question 26

The quantity equation, viewed as an identity, is a definition of the:

A)quantity of money.
B)quantity of transactions.
C)price level.
D)transactions velocity of money.

Question 27

Checking account balances that are linked to debit cards are included in:

A)M1.
B)M2 only.
C)both M1 and M2.
D)neither M1 nor M2.

Question 28

Credit cards:

A)are part of the M1 money supply.
B)are part of the M2 money supply.
C)are part of both the M1 and M2 money supply.
D)may affect the demand for money

Question 29

The income velocity of money:

A)is defined in the identity MV = PY.
B)is defined in the identity MV = PT.
C)is the same thing as the transactions velocity of money.
D)will be smaller than the transactions velocity of money if the quantity of transactions is greater than income.

Question 30

The definition of the transactions velocity of money is:

A)money multiplied by prices divided by transactions.
B)transactions divided by prices multiplied by money.
C)money divided by prices multiplied by transactions.
D)prices multiplied by transactions divided by money.

Question 31

The quantity equation for money, by itself:

A)may be thought of as a definition for velocity.
B)implies that the velocity of money is constant.
C)implies that the price level is proportional to the money supply.
D)implies that real gross domestic product (GDP) is proportional to the money supply.

Question 32

The quantity theory of money assumes that:

A)income is constant.
B)velocity is constant.
C)prices are constant.
D)the money supply is constant.

Question 33

If the transactions velocity of money remains constant while the quantity of money doubles, the:

A)price of the average transaction must double.
B)number of transactions must remain constant.
C)price of the average transaction multiplied by the number of transactions must remain constant.
D)price of the average transaction multiplied by the number of transactions must double.

Question 34

Real money balances equal the:

A)sum of coin, currency, and balances in checking accounts.
B)amount of money expressed in terms of the quantity of goods and services it can purchase.
C)number of dollars used as a medium of exchange.
D)quantity of money created by the Federal Reserve.

Question 35

When the demand for money parameter, k, is large, the velocity of money is and money is changing hands .

A)large; frequently
B)large; infrequently
C)small; frequently
D)small; infrequently

Question 36

If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200,000, then real balances in the economy equal:

A)10.
B)20,000.
C)200,000.
D)2,000,000.

Question 37

Open-market operations are:

A)Commerce Department efforts to open foreign markets to international trade.
B)Federal Reserve purchases and sales of government bonds.
C)Securities and Exchange Commission rules requiring open disclosure of market trades.
D)Treasury Department purchases and sales of the U.S. gold stock.

Question 38

Demand deposits are funds held in:

A)currency.
B)certificates of deposit.
C)checking accounts.
D)money markets.

Question 39

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is times per year.

A)0.2
B)2
C)5
D)10

Question 40

Currency equals:

A)M1.
B)the sum of funds in checking accounts.
C)the sum of checking accounts and paper money.
D)the sum of coins and paper money.

Question 41

A positive relationship between nominal interest rates and inflation in the United States is obvious in:

A)both recent data and nineteenth-century data.
B)recent data but not nineteenth-century data.
C)nineteenth-century data but not recent data.
D)neither nineteenth-century data nor recent data.

Question 42

The percentage of government revenue raised by printing money has usually accounted for:

A)more than 10 percent of government revenue in the United States.
B)less than 3 percent of government revenue in the United States.
C)less than 3 percent of government revenue in Italy.
D)less than 3 percent of government revenue in Greece.

Question 43

If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in:

A)inflation of 1 percent and the nominal interest rate of less than 1 percent.
B)inflation of 1 percent and the nominal interest rate of 1 percent.
C)inflation of 1 percent and the nominal interest rate of more than 1 percent.
D)both inflation and the nominal interest rate of less than 1 percent.

Question 44

According to the Fisher effect, the nominal interest rate moves one-for-one with changes in the:

A)inflation rate.
B)expected inflation rate.
C)ex ante real interest rate.
D)ex post real interest rate.

Question 45

According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be:

A)increasing.
B)decreasing.
C)7 percent.
D)constant.

Question 46

"Inflation tax" means that:

A)as the price level rises, taxpayers are pushed into higher tax brackets.
B)as the price level rises, the real value of money held by the public decreases.
C)as taxes increase, the rate of inflation also increases.
D)in a hyperinflation, the chief source of tax revenue is often the printing of money.

Question 47

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be percent.

A)3
B)4
C)9
D)11

Question 48

According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by:

A)the Organization of Petroleum Exporting Countries (OPEC).
B)the U.S. Treasury.
C)the Fed.
D)private citizens.

Question 49

Equilibrium in the market for goods and services determines the interest rate and the expected rate of inflation determines the interest rate.

A)ex ante real; ex ante nominal
B)ex post real; ex post nominal
C)ex ante nominal; ex post real
D)ex post nominal; ex post real

Question 50

Using average rates of money growth and inflation in the United States over many decades, Friedman and Schwartz found that decades of high money growth tended to have rates of inflation and decades of low money growth tended to have rates of inflation.

A)high; high
B)high; low
C)low; low
D)low; high

Question 51

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is:

A)1 percent.
B)6 percent.
C)-4 percent.
D)-5 percent.

Question 52

When a person purchases a 90-day Treasury bill, he or she cannot know the:

A)ex post real interest rate.
B)ex ante real interest rate.
C)nominal interest rate.
D)expected rate of inflation.

Question 53

Percentage change in P is approximately equal to the percentage change in :

A)M.
B)M minus percentage change in Y.
C)M minus percentage change in Y plus percentage change in velocity.
D)M minus percentage change in Y minus percentage change in velocity.

Question 54

If velocity is constant and, in addition, the factors of production and the production function determine real GDP, then:

A)the price level is proportional to the money supply.
B)real GDP is proportional to the money supply.
C)the price level is fixed.
D)nominal GDP is fixed.

Question 55

The real interest rate is equal to the:

A)amount of interest that a lender actually receives when making a loan.
B)nominal interest rate plus the inflation rate.
C)nominal interest rate minus the inflation rate.
D)nominal interest rate.

Question 56

The ex ante real interest rate is equal to the nominal interest rate:

A)minus the inflation rate.
B)plus the inflation rate.
C)minus the expected inflation rate.
D)plus the expected inflation rate.

Question 57

The right of seigniorage is the right to: levy

A)taxes on the public. borrow
B)money from the public.
C)draft citizens into the armed forces.
D)print money.

Question 58

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the:

A)money supply is constant.
B)velocity is constant.
C)inflation rate is constant.
D)real interest rate is constant.

Question 59

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must:

A)increase by 2 percent.
B)increase by 1 percent.
C)remain constant.
D)decrease by 1 percent.

Question 60

In the long run according to the quantity theory of money and the classical macroeconomic theory, if velocity is constant, then determines real GDP and determines nominal GDP.

A)the productive capability of the economy; the money supply
B)the money supply; the productive capability of the economy
C)velocity; the money supply
D)the money supply; velocity

Question 61

Survey evidence indicates that economists worry the general public does about prices increasing more rapidly than their incomes.

A)more than
B)less than
C)about the same as
D)more intensely than

Question 62

The opportunity cost of holding money is the:

A)nominal interest rate.
B)real interest rate.
C)rate of inflation.
D)prevailing Treasury bill rate.

Question 63

The general demand function for real balances depends on the level of income and the:

A)real interest rate.
B)nominal interest rate.
C)rate of inflation.
D)price level.

Question 64

If the Fed announces that it will raise the money supply in the future but does not change the money supply today:

A)both the nominal interest rate and the current price level will decrease.
B)the nominal interest rate will increase and the current price level will decrease.
C)the nominal interest rate will decrease and the current price level will increase.
D)both the nominal interest rate and the current price level will increase.

Question 65

The ex post real interest rate will be greater than the ex ante real interest rate when the:

A)rate of inflation is increasing.
B)rate of inflation is decreasing.
C)actual rate of inflation is greater than the expected rate of inflation.
D)actual rate of inflation is less than the expected rate of inflation.

Question 66

In recent U.S. experience, inflation has:

A)been persistent from year to year, whereas in the nineteenth century inflation had little persistence.
B)been persistent from year to year, and this was also true in the nineteenth century.
C)not been persistent from year to year, although it was persistent in the nineteenth century.
D)not been persistent from year to year, and the same was true in the nineteenth century.

Question 67

The inconvenience associated with reducing money holdings to avoid the inflation tax is called:

A)menu costs. shoeleather
B)costs. variable yardstick
C)costs. fixed costs.

Question 68

According to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices each year and give workers raises.

A)more; larger
B)more; smaller
C)less; larger
D)less; smaller

Question 69

Consider the money demand function that takes the form (M/P)d=Y/4i, where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy?

A)i
B)4i
C)1/4i
D)0.25

Question 70

If the money supply is held constant, then an increase in the nominal interest rate will the demand for money and the price level.

A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Question 71

In the case of an unanticipated inflation:

A)creditors with an unindexed contract are hurt because they get less than they expected in real terms.
B)creditors with an indexed contract gain because they get more than they contracted for in nominal terms.
C)debtors with an unindexed contract do not gain because they pay exactly what they contracted for in nominal terms.
D)debtors with an indexed contract are hurt because they pay more than they contracted for in nominal terms.

Question 72

The real return on holding money is:

A)the real interest rate.
B)minus the real interest rate.
C)the inflation rate.
D)minus the inflation rate.

Question 73

Variable inflation hurts both debtors and creditors because:

A)inflation makes the money-fixed assets of creditors worth less.
B)inflation makes the money-fixed liabilities of debtors worth less.
C)most debtors and creditors are risk averse.
D)most debtors and creditors are risk neutral.

Question 74

If the nominal interest increases then:

A)the money supply increases.
B)the money supply decreases.
C)the demand for money increases.
D)the demand for money decreases.

Question 75

Between 1880 and 1896, the price level in the United States fell 23 percent. This movement was for bankers of the Northeast and for farmers of the South and West.

A)bad; bad
B)good; good
C)good; bad
D)bad; good

Question 76

The costs of reprinting catalogs and price lists because of inflation are called:

A)menu costs. shoeleather
B)costs. variable yardstick
C)costs. fixed costs.

Question 77

Inflation the variability of relative prices and allocative efficiency.

A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; increases

Question 78

According to the classical theory of money, inflation does not make workers poorer because wages increase:

A)faster than the overall price level.
B)more slowly than the overall price level.
C)in proportion to the increase in the overall price level.
D)in real terms during periods of inflation.

Question 79

Devoting resources to avoiding the costs of expected inflation leads to:

A)eliminating the costs of expected inflation.
B)fewer relative price changes.
C)economic inefficiency.
D)a decrease in the transaction velocity of money.

Question 80

All of the following are costs of fully expected inflation except that expected inflation:

A)causes lower real wages.
B)leads to shoeleather costs.
C)increases menu costs.
D)leads to taxing of nominal capital gains that are not real.