Deck 31: Money Growth and Inflation

Question 1

Figure 31-2.On the graph,MS represents the money supply and MD represents money demand.The usual quantities are measured along the axes.
Economic variables whose values are measured in monetary units are called

A)dichotomous variables.
B)nominal variables.
C)classical variables.
D)real variables.

Answer 1

B

Question 2

Figure 31-1
Refer to Figure 31-1.If the money supply is MS₂ and the value of money is 2,then there is an excess

A)demand for money that is represented by the distance between points A and C.
B)demand for money that is represented by the distance between points A and B.
C)supply of money that is represented by the distance between points A and C.
D)supply of money that is represented by the distance between points A and B.

Answer 2

D

Question 3

Figure 31-1
Refer to Figure 31-1.If the money supply is MS₂ and the value of money is 2,then

A)the quantity of money demanded is greater than the quantity supplied; the price level will rise.
B)the quantity of money demanded is greater than the quantity supplied; the price level will fall.
C)the quantity of money supplied is greater than the quantity demanded; the price level will rise.
D)the quantity of money supplied is greater than the quantity demanded; the price level will fall.

Answer 3

C

Question 4

Economists agree that

A)neither high inflation nor moderate inflation is very costly.
B)both high and moderate inflation are quite costly.
C)high inflation is costly,but they disagree about the costs of moderate inflation.
D)moderate inflation is as costly as high inflation.

Question 5

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

A)the price level and nominal GDP
B)the price level and real GDP
C)only real GDP
D)only the price level

Question 6

If P denotes the price of goods and services measured in terms of money,then

A)1/P represents the value of money measured in terms of goods and services.
B)P can be regarded as the "overall price level."
C)an increase in the value of money is associated with a decrease in P.
D)All of the above are correct.

Question 7

Which of the following is correct?

A)If the Fed purchases bonds in the open market,then the money supply curve shifts right.A change in the price level does not shift the money supply curve.
B)If the Fed sells bonds in the open market,then the money supply curve shifts right.A change in the price level does not shift the money supply curve.
C)If the Fed purchases bonds,then the money supply curve shifts right.An increase in the price level shifts the money supply curve right.
D)If the Fed sells bonds,then the money supply curve shifts right.A decrease in the price level shifts the money supply curve right.

Question 8

If the price level increased from 120 to 126,then what was the inflation rate?

A)3 percent
B)5 percent
C)6 percent
D)None of the above is correct.

Question 9

According to the classical dichotomy,which of the following is influenced by monetary factors?

A)real GDP
B)Unemployment
C)nominal interest rates
D)All of the above are correct.

Question 10

Inflation can be measured by the

A)change in the consumer price index.
B)percentage change in the consumer price index.
C)percentage change in the price of a specific commodity.
D)change in the price of a specific commodity.

Question 11

Figure 31-1
Refer to Figure 31-1.If the current money supply is MS₁,then

A)there is no excess supply or excess demand if the value of money is 2.
B)the equilibrium is at point C.
C)there is an excess supply of money if the value of money is 1.
D)None of the above is correct.

Question 12

On its web site,your bank posts the interest rates it is paying on savings accounts.Those posted rates

A)and a price index are both real variables.
B)and a price index are both nominal variables.
C)are real variables,and a price index is a nominal variable.
D)are nominal variables,and a price index is a real variable

Question 13

The value of money falls as the price level

A)rises,because the number of dollars needed to buy a representative basket of goods rises.
B)rises,because the number of dollars needed to buy a representative basket of goods falls.
C)falls,because the number of dollars needed to buy a representative basket of goods rises.
D)falls,because the number of dollars needed to buy a representative basket of goods falls.

Question 14

Changes in nominal variables are determined mostly by the quantity of money and the monetary system according to

A)both the classical dichotomy and the quantity theory of money.
B)the classical dichotomy,but not the quantity theory of money.
C)the quantity theory of money,but not the classical dichotomy.
D)neither the classical dichotomy nor the quantity theory of money.

Question 15

The classical theory of inflation

A)is also known as the quantity theory of money.
B)was developed by some of the earliest economic thinkers.
C)is used by most modern economists to explain the long-run determinants of the inflation rate.
D)All of the above are correct.

Question 16

Your boss gives you an increase in the number of dollars you earn per hour.This increase in pay makes

A)your nominal wage increase.If your nominal wage rose by a greater percentage than the price level,then your real wage also increased.
B)your nominal wage increase.If your nominal wage rose by a greater percentage than the price level,then your real wage decreased.
C)your real wage increase.If your real wage rose by a greater percentage than the price level,then your nominal wage also increased.
D)your real wage decrease.If your real wage rose by a greater percentage than the price level,then your nominal wage decreased.

Question 17

Figure 31-1
Refer to Figure 31-1.When the money supply curve shifts from MS₁ to MS₂,

A)the equilibrium value of money decreases.
B)the equilibrium price level decreases.
C)the supply of money has decreased.
D)the demand for goods and services will decrease.

Question 18

Monetary neutrality means that a change in the money supply

A)does not change real GDP.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 GDP.Most economists think this is a good description of the economy in the long run but not the short run.
C)does change real GDP.Most economists think this is a good description of the economy in the short-run and the long run.
D)does change real GDP.Most economists think this is a good description of the economy in the long run but not the short run.

Question 19

As the price level rises,the value of money

A)increases,so people want to hold more of it.
B)increases,so people want to hold less of it.
C)decreases,so people want to hold more of it.
D)decreases,so people want to hold less of it.

Question 20

According to the principle of monetary neutrality,a decrease in the money supply will not change

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

Question 21

Governments may prefer an inflation tax to some other type of tax because the inflation tax

A)is easier to impose.
B)reduces inflation.
C)falls mainly on high-income individuals.
D)reduces the real cost of government expenditure.

Question 22

If velocity and output were nearly constant,then

A)the inflation rate would be much higher than the money supply growth rate.
B)the inflation rate would be about the same as the money supply growth rate.
C)the inflation rate would be much lower than the money supply growth rate.
D)any of the above would be possible.

Question 23

Shoeleather cost refers to

A)the cost of more frequent price changes induced by higher inflation.
B)the distortion in resource allocation created by distortions in relative prices due to inflation.
C)resources used to maintain lower money holdings when inflation is high.
D)the tendency to expend more effort searching for the lowest price when inflation is high.

Question 24

People go to the bank more frequently to reduce currency holdings when inflation is high.The sacrifice of time and convenience that is involved in doing that is referred to as

A)inflation-induced tax distortion.
B)relative-price-variability cost.
C)shoeleather cost.
D)menu cost.

Question 25

Wealth is redistributed from debtors to creditors when inflation was expected to be

A)high and it turns out to be high.
B)low and it turns out to be low.
C)low and it turns out to be high.
D)high and it turns out to be low.

Question 26

Higher inflation makes relative prices

A)more variable,making it more likely that resources will be allocated to their best use.
B)more variable,making it less likely that resources will be allocated to their best use.
C)less variable,making it more likely that resources will be allocated to their best use.
D)less variable,making it less likely that resources will be allocated to their best use.

Question 27

The idea that inflation by itself reduces people's purchasing power is called

A)the inflation tax.
B)menu costs.
C)the inflation fallacy.
D)shoeleather costs.

Question 28

Given a nominal interest rate of 6 percent,in which of the following cases would you earn the lowest after-tax real rate of interest?

A)Inflation is 4 percent; the tax rate is 5 percent.
B)Inflation is 3 percent; the tax rate is 20 percent.
C)Inflation is 2 percent; the tax rate is 30 percent.
D)The after-tax real interest rate is the same for all of the above.

Question 29

If M = 4,000,P = 1.5,and Y= 6,000,what is velocity?

A)2.25
B)3.00
C)6.50
D)None of the above is correct.

Question 30

If when the money supply changes,real output and velocity do not change,then a 2 percent increase in the money supply

A)decreases the price level by 2 percent.
B)decreases the price level by less than 2 percent.
C)increases the price level by less than 2 percent.
D)increases the price level by 2 percent.

Question 31

When inflation falls,people

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.

Question 32

The money supply is 4,000,nominal GDP is 8,000,and real GDP is 4,000,Which of the following is 2?

A)the price level and velocity
B)the price level but not velocity
C)the price level and velocity
D)neither the price level nor velocity

Question 33

People can reduce the inflation tax by

A)reducing savings.
B)increasing deductions on their income tax.
C)reducing cash holdings.
D)None of the above is correct.

Question 34

According to the quantity equation,the price level would change less than proportionately with a rise in the money supply if there were also

A)either a rise in output or a rise in the rate at which money changes hands.
B)either a rise in output or a fall in the rate at which money changes hands.
C)either a fall in output or a rise in the rate at which money changes hands.
D)either a fall in output or a fall in the rate at which money changes hands.

Question 35

Velocity is computed as

A)(P $\times$ Y)/M.
B)(P $\times$ M)/Y.
C)(Y $\times$ M)/P.
D)(Y $\times$ M)/V.

Question 36

Which of the following is an example of menu costs?

A)deciding on new prices
B)printing new price lists
C)advertising new prices
D)All of the above are examples of menu costs.

Question 37

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

A)decrease,which encourages savings.
B)decrease,which discourages savings.
C)increase,which encourages savings.
D)increase,which discourages savings.

Question 38

Higher inflation

A)causes firms to change prices less frequently and makes relative prices less variable.
B)causes firms to change prices less frequently and makes relative prices more variable.
C)causes firms to change prices more frequently and makes relative prices less variable.
D)causes firms to change prices more frequently and makes relative prices more variable.

Question 39

High and unexpected inflation has a greater cost

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 who have fixed nominal wages than for those who have nominal wages that adjust with inflation.
D)All of the above are correct.

Question 40

The velocity of money is

A)the rate at which the Fed puts money into the economy.
B)the same thing as the long-term growth rate of the money supply.
C)the money supply divided by nominal GDP.
D)the average number of times per year a dollar is spent.

Question 41

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?

Question 42

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

Question 43

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

Question 44

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

Question 45

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 46

Inflation is costly only if it is unanticipated.

Question 47

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

Question 48

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

Question 49

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

Question 50

Using separate graphs,demonstrate what happens to the money supply,money demand,the value of money,and the price level if:
a.the Fed increases the money supply.
b.people decide to demand less money at each value of money.

Question 51

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

Question 52

Explain the adjustment process in the money market that creates a change in the price level when the money supply increases.

Question 53

If money demand shifts right,the price level falls.

Question 54

Suppose the Fed sells government bonds.Use a graph of the money market to show what this does to the value of money.

Question 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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 60

Which of the following is accurate?

A)Monetary policy is neutral in both the short run and the long run.
B)Though monetary policy is neutral in the long run,it may have effects on real variables in the short run.
C)Monetary policy has profound effects on real variables in both the short run and the long run.
D)Monetary policy has profound effects on real variables in the long run,but is neutral in the short run.

Question 61

Economists agree that increases in the money-supply growth rate increase inflation and that inflation is undesirable.So why have there been hyperinflations and how have they been ended?