Deck 8: Inflation

Question 1

When discussing inflation, we generally speak of it in terms of:

A) the percent change in the consumer price index.
B) the percent change in the GDP deflator.
C) the level of the consumer price index.
D) one over the consumer price index.
E) the change in the producer price index.

Answer 1

the percent change in the consumer price index.

Question 2

In 1979, President Carter appointed ________ as chairman of the Board of Governors of the Federal Reserve to battle ________.

A) Greenspan; inflation
B) Volcker; the Soviet Union
C) Volcker; inflation
D) Bernanke; unemployment
E) Powell; Ayatollah Khomeini

Answer 2

Volcker; inflation

Question 3

In 1979, in the face of rising competition in the fast food hamburger market, McDonald's reduced the price of its cheeseburger to $0.43. If the CPI in 1979 was 37.2 and the CPI in 2005 was 100, what is the price of a 1979 cheeseburger in 2005 dollars?

A) $0.77
B) $7.36
C) $1.16
D) $0.43
E) $0.14

Answer 3

$1.16

Question 4

Fiat money has value because:

A) people believe it has value.
B) it is backed by silver.
C) it is backed by gold.
D) it has intrinsic value.
E) it is a commodity.

Question 5

The measure of money that includes demand deposits and currency only is called:

A) M0.
B) MZ.
C) M2.
D) M1.
E) MB.

Question 6

In 2015, The Avengers: Age of Ultron generated about $191.2 million on its opening weekend. In 2007, Spider Man 3 generated $151.1 million on its opening weekend. If the CPI in 2000 was 100, the CPI in 2007 was 113.4, and the CPI in 2015 was 137.6, ________ is the larger single-day grossing movie, with about ________ million in revenues in 2000 dollars.

A) Spider Man; $168.6
B) Spider Man; $133.6
C) Avengers; $138.9
D) Spider Man; $171.3
E) Avengers; $263.2

Question 7

In 2015, the Wendy's Junior Cheeseburger Deluxe was on the "Right Price Right Size" menu and was priced at $1.89. If the CPI in 1979 was 72.6 and the CPI in 2015 was 237.0, what is the price of a 2015 cheeseburger in 1979 dollars?

A) $4.28
B) $8.06
C) $0.97
D) $0.58
E) $6.17

Question 8

In the United States, money is backed by:

A) oil.
B) gold.
C) silver.
D) no physical commodity.
E) None of these answers is correct.

Question 9

Money that has no intrinsic value except as money is called ________ money.

A) bonded
B) commodity
C) fiat
D) intrinsic
E) None of these answers is correct.

Question 10

Money made with silver, gold, and chocolate are examples of ________ money.

A) fiat
B) commodity
C) backed
D) government
E) None of these answers is correct.

Question 11

Liquidity is a measure of:

A) the monetary base.
B) how many coins are in circulation.
C) how quickly coins can be melted down.
D) how quickly an asset can be converted to currency.
E) the amount of reserves.

Question 12

A country on the silver standard uses:

A) coins.
B) fiat money.
C) bond money.
D) commodity money.
E) None of these answers is correct.

Question 13

What is a critical factor that contributed to Reagan's defeat of Carter in the 1980 presidential election?

A) double-digit inflation
B) the low rate of unemployment
C) the takeover of the U.S. embassy in Baghdad, Iraq
D) Billy Carter's beer
E) Margaret Thatcher

Question 14

M2 includes M1 and:

A) large time deposits.
B) overnight repurchase agreements.
C) savings accounts.
D) long-term bonds.
E) gold reserves.

Question 15

Sometimes when discussing inflation, we use a measure of inflation that excludes ________ prices from its calculation because these prices tend to be volatile.

A) commodity and energy
B) food and energy
C) housing
D) food and housing
E) energy and housing

Question 16

The quote "Inflation is always and everywhere a monetary phenomenon" is attributed to:

A) Karl Marx.
B) Thomas Sargent.
C) Milton Friedman.
D) Alan Greenspan.
E) David Ricardo.

Question 17

Fiat money has value because:

A) it is backed by gold.
B) people believe it has value.
C) it has intrinsic value.
D) it is backed by silver.
E) None of these answers is correct.

Question 18

The inflation rate is calculated as the:

A) overall price level.
B) change of the price level.
C) percent change in the price level.
D) difference in the price level.
E) percent change in output.

Question 19

The quote "Inflation is always and everywhere a fiscal phenomenon" is attributed to:

A) Adam Smith.
B) Thomas Sargent.
C) Karl Marx.
D) Alan Greenspan.
E) David Ricardo.

Question 20

If P_t is the price level in time, t, inflation is calculated as:

A) 1/P_t .
B) .
C) .
D) .
E) .

Question 21

In the simple quantity theory of money, the supply of money is:

A) exogenous.
B) a random variable.
C) determined by the relationship between output and the price level.
D) endogenous.
E) equal to the supply of gold reserves.

Question 22

Which of the following has NO effect on long-run economic growth?

A) institutions
B) money
C) productivity
D) investment
E) population

Question 23

In the quantity equation, the value P_tY_t is:

A) real GDP.
B) nominal GDP.
C) aggregate expenditure.
D) the velocity of money.
E) real money.

Question 24

The monetary base consists of:

A) reserves and currency.
B) M1 plus M2.
C) only M1.
D) gold reserves plus currency.
E) a country's holdings of foreign and domestic currencies.

Question 25

The velocity of money is:

A) another way of saying "monetizing the debt."
B) how quickly individuals spend their incomes.
C) a measure of liquidity.
D) how many times individuals are paid per year.
E) the average number of times a dollar is used in a transaction per year.

Question 26

Using the quantity equation, if M_t = $1,000, P_t = 1.1, and Y_t = 100,000, then the velocity of money is:

A) 100,000.
B) 0.09.
C) 110.
D) 9.09.
E) 0.11.

Question 27

If you withdraw $100 from your checking account and deposit it in your savings account:

A) M1 rises and M2 falls.
B) both M1 and M2 rise.
C) M1 falls by $50 and M2 rises by $50.
D) the monetary base rises.
E) M1 falls and M2 is unchanged.

Question 28

Alternative forms of money include:

A) frequent flier miles.
B) gift cards.
C) pre-paid debit cards.
D) PayPal.
E) All of these answers are correct.

Question 29

The velocity of money is:

A) how quickly money can be printed.
B) how quickly individuals spend their incomes.
C) the average number of times a dollar is used in a transaction per year.
D) how many times individuals are paid per year.
E) None of these answers is correct.

Question 30

The quantity theory states that the nominal GDP is equal to:

A) the real GDP.
B) the number of dollars in circulation.
C) the velocity of money.
D) the effective amount of money used in purchases.
E) velocity times real GDP.

Question 31

According to the classical dichotomy, in the long run there is:

A) accelerating economic growth.
B) perfect connectivity between the nominal and real sides of the economy.
C) complete separation of the nominal and real sides of the economy.
D) no growth after the economy reaches the steady state.
E) zero inflation.

Question 32

According to the quantity theory of money, the price level is:

A) exogenous.
B) determined by the money supply only.
C) determined by the ratio of the effective quantity of money to the volume of goods.
D) indeterminate in the long run.
E) determined by the volume of goods produced.

Question 33

If long-run real GDP growth is determined by real changes in the economy, the quantity theory of money implies that changes in:

A) the money growth rate lead one-for-one to changes in the inflation rate in the long run.
B) the money growth rate lead one-for-one to changes in the inflation rate, but only in the short run.
C) velocity lead one-for-one to changes in the inflation rate.
D) the money growth rate lead to a greater than one-for-one change in the inflation rate in the long run.
E) None of these answers is correct.

Question 34

In the quantity theory of money, the:

A) price level is exogenous.
B) real GDP, velocity, and money supply are endogenous.
C) real GDP and money supply are endogenous.
D) real GDP, velocity, and money supply are exogenous.
E) real GDP is endogenous.

Question 35

In dollar amounts, which of the following is the largest?

A) MB
B) M2
C) M1
D) currency
E) demand deposits

Question 36

Using the quantity equation, if M_t = $1,000, P_t = 1.1, and V_t = 11, then real GDP is:

A) $100,000.
B) $0.01.
C) $10,000.
D) $909.19.
E) $826.45.

Question 37

The essence of the quantity theory of money is that:

A) the price level is indeterminate.
B) in the long run, the only determinant of the price level is the money supply.
C) in the long run, a key determinant of the price level is the money supply.
D) only the central bank knows what the price level is.
E) money cannot pin down the price level.

Question 38

Using the quantity theory of money, we can calculate inflation using ________, under the assumption that ________.

A) ; velocity is constant
B) ; percent change in velocity always equals one
C) ; velocity is constant
D) ; velocity is variable
E) ; velocity is constant

Question 39

According to the quantity theory of money, the price level can be written as:

A) .
B) .
C) .
D) .
E) .

Question 40

The velocity of money can be calculated from the quantity equation with:

A) P_tY_t .
B) P_tY_t M_t .
C) M_t /P_t Y_t .
D) P_tY_t /M_t .
E) M_t .

Question 41

Let R denote the real interest rate, i denote the nominal interest rate, and $\pi$ denote the rate of inflation. The equation i = R + $\pi$ is called:

A) the money supply.
B) the quantity equation.
C) the Fisher equation.
D) the quantity theory of money.
E) money neutrality.

Question 42

Empirically, a large amount of evidence suggests that money neutrality ________, but changes in money supply ________.

A) holds in the short run; do not affect nominal variables
B) does not hold in the long run; can have real effects in the short run
C) holds in the short run; can have real effects in the long run
D) holds in the long run; can have real effects in the short run
E) does not hold in the long run; have an effect on unemployment in the long run

Question 43

If the real GDP growth is 6 percent per year, the money growth rate is 4 percent, and velocity is constant, using the quantity theory, the inflation rate is ________ percent.

A) 4
B) -2
C) 2
D) 6
E) -4

Question 44

Figure 8.1: Money Growth and Inflation in the United States by Decade
The proposition that changes in money have no real effect on the economy and affect only prices is referred to as:

A) inflation.
B) the classical dichotomy.
C) the quantity equation.
D) the neutrality of money.
E) the quantity theory.

Question 45

If the inflation rate is larger than the nominal interest rate:

A) unemployment rises.
B) the real interest rate is zero.
C) the real interest rate is negative.
D) the real interest rate is larger than the nominal interest rate.
E) Not enough information is given.

Question 46

The implications of the quantity theory of money are the main basis for which of the following quotes?

A) "Inflation is always zero in the long run."
B) "Inflation is always and everywhere a fiscal phenomenon."
C) "Inflation is always and everywhere a monetary phenomenon."
D) "Velocity growth should be equal to 2 percent in the long run."
E) "Velocity is always constant."

Question 47

Suppose you put $100 in the bank on January 1, 2017. If the annual nominal interest rate is 2 percent and the inflation rate is 5 percent, you will be able to buy ________ worth of goods on January 1, 2018, valued at 2017's prices.

A) $95
B) $102
C) $97
D) $103
E) -$3

Question 48

The real interest rate describes the:

A) net return to government bonds.
B) rate of return adjusted for inflation.
C) rate of return in units of a currency.
D) return with an interest rate equal to zero.
E) rate of return in real goods.

Question 49

You are the head of the central bank and you want to maintain 2 percent long-run inflation. Using the quantity theory of money, if real GDP growth is 4 percent and velocity is constant, you suggest a:

A) 4 percent money supply growth.
B) 6 percent interest rate.
C) 2 percent money supply growth.
D) 0 percent money supply growth.
E) None of these answers is correct.

Question 50

The real interest rate is:

A) the interest rate not adjusted for inflation.
B) the "advertised" interest rate.
C) a description of the return in units of currency.
D) All of these answers are correct.
E) None of these answers is correct.

Question 51

Practically, in the long run the real interest rate is equal to:

A) a savings account.
B) the rate of return to long-term bonds.
C) the marginal product of capital.
D) the return to stock markets.
E) the return to housing.

Question 52

Suppose you put $100 in the bank on January 1, 2017. If the annual nominal interest rate is 5 percent and the inflation rate is 5 percent, you will be able to buy ________ worth of inflation-adjusted goods on January 1, 2018.

A) $90
B) $110
C) $100
D) $105
E) $95

Question 53

You are the head of the central bank and you want to maintain 2 percent long-run inflation, using the quantity theory of money. If the real GDP growth is 4 percent and velocity is constant, you suggest a:

A) 6 percent interest rate.
B) 6 percent money supply growth.
C) 2 percent money supply growth.
D) 0 percent money supply growth.
E) 2 percent interest rate.

Question 54

The nominal interest rate is:

A) the interest rate not adjusted for inflation.
B) the "advertised" interest rate.
C) a description of the return in units of currency.
D) All of these answers are correct.
E) None of these answers is correct.

Question 55

Let R denote the real interest rate and i denote the nominal interest rate; these two interest rates are related by:

A) i = $\pi$ .
B) i =R - $\pi$ .
C) i = R + $\pi$ .
D) i = R/ $\pi$ .
E) None of these answers is correct.

Question 56

Compared to the nominal interest rate, the real interest rate is:

A) negative.
B) always smaller.
C) always greater than zero.
D) relatively stable.
E) relatively volatile.

Question 57

If the real interest rate is negative, it must mean that:

A) in the short run, bond rates can be very volatile.
B) in the short run, the real interest rate equals the marginal product of capital.
C) in the short run, the real interest rate can deviate from the marginal product of capital.
D) it is difficult to predict long-term interest rates.
E) there is no relationship between long- and short-term interest rates.

Question 58

Figure 8.1: Money Growth and Inflation in the United States by Decade
The data presented in Figure 8.1 confirm that the relationship between inflation and money growth is ________, as suggested by ________.

A) positive; the Fisher equation
B) positive; money neutrality
C) positive; the quantity theory of money
D) negative; the quantity theory of money
E) None of these answers is correct.

Question 59

Suppose you put $100 in the bank on January 1, 2017. If the annual nominal interest rate is 5 percent and the inflation rate is 2 percent, you will be able to buy ________ worth of goods on January 1, 2018, valued at 2017's prices.

A) $93
B) $107
C) $103
D) $105
E) $99

Question 60

If the real GDP growth is 4 percent per year, the money growth rate is 6 percent, and velocity is constant, using the quantity theory, the inflation rate is ________ percent.

A) 6
B) 4
C) -2
D) 2
E) -4

Question 61

The revenue governments obtain from printing money is called:

A) issued debt.
B) the inflation tax.
C) raised taxes.
D) government expenditures.
E) None of these answers is correct.

Question 62

With unanticipated inflation:

A) creditors are hurt unless they have an indexed contract, because they get less than they expected in real terms.
B) debtors with an indexed contract are hurt, because they pay more than they contracted for in nominal terms.
C) debtors with an unindexed contract lose, because they pay exactly what they contracted for in nominal terms.
D) creditors with indexed contracts gain, because they receive more than they contracted for in nominal terms.
E) debtors with an indexed contract are hurt, because they pay more than they contracted for in real terms.

Question 63

If you decide to buy a house with an adjustable-rate mortgage (ARM), you are:

A) exposing yourself to inflation risk.
B) reducing your inflation risk.
C) passing inflation risk to the lender.
D) taking on some of the lender's inflation risk.
E) increasing your mortgage payment.

Question 64

By purchasing a fixed-rate 30-year mortgage, inflation risk is:

A) eradicated.
B) spread equally to the borrower and lender.
C) passed from the lender to the borrower.
D) passed from the borrower to the lender.
E) borne by the government.

Question 65

With an inflation tax:

A) everybody loses.
B) all individuals in an economy feel the pressures equitably.
C) there is a redistribution of income from owners of real assets to income earners.
D) there is a redistribution of income from currency holders to owners of real assets.
E) the government has a lot of debt to repay.

Question 66

According to the government's budget constraint, if the government spends more than it generates in taxes, it can raise revenues by:

A) printing money.
B) decreasing its debt.
C) lowering interest rates.
D) privatizing.
E) increasing interest rates.

Question 67

When calculating fixed retirement payments, it is important not to forget:

A) changes in flexible interest rates.
B) the decline in the payment's value due to inflation.
C) the increase in the payment's value due to inflation.
D) rates of return in other markets.
E) the price of tea in China.

Question 68

Inflation ________ price volatility and ________ allocative efficiency.

A) decreases; increases
B) decreases; leaves unchanged
C) increases; leaves unchanged
D) increases; decreases
E) leaves unchanged; increases

Question 69

The costs associated with changing prices in times of inflation are called:

A) inflation risks.
B) price staggering.
C) transaction costs.
D) shoe-leather costs.
E) menu costs.

Question 70

Negative inflationary surprises lead to a(n):

A) increase in the real interest rate.
B) redistribution of wealth from borrowers to lenders.
C) decline in the nominal interest rate.
D) decline in inflation risk for lenders.
E) redistribution of wealth from lenders to borrowers.

Question 71

During times of high inflation, people hold ________ and must incur ________.

A) less savings; lower interest rates
B) more money; lower interest rates
C) less money; higher shoe-leather costs
D) more savings; shoe-leather costs
E) less savings; higher transaction costs

Question 72

One problem with unexpected changes in inflation is that:

A) it steadily erodes real income.
B) it often comes in surprising and unpredictable ways.
C) nominal interest rates are not indexed to inflation.
D) fixed-rate mortgages are not adjusted for inflation.
E) price staggering occurs.

Question 73

The price controls imposed by the Nixon administration lasted for:

A) four weeks.
B) six months.
C) 90 days.
D) one year.
E) two years.

Question 74

If some goods' prices adjust more quickly than others during a period of high inflation, there is:

A) a perfect short-run allocation of resources.
B) a short-run misallocation of resources.
C) no inflation.
D) a hyperinflation.
E) a deflation.

Question 75

If income tax rates are based on nominal income, as inflation increases, taxpayers will see:

A) an increase in their real incomes.
B) their taxes fall as their incomes fall.
C) their taxes rise even though their real incomes are falling.
D) an increase in the nominal income.
E) their taxes fall even though their real incomes are rising.

Question 76

To minimize what was believed to be a wage-price spiral, the ________ administration ________.

A) Reagan; increased corporate income
B) Carter; increased interest rates
C) Clinton; released oil from the strategic reserves
D) first Bush; increased taxes
E) Nixon; imposed price controls

Question 77

When inflation is high and people are forced to make more trips to the bank, this is often referred to as:

A) marginal social cost.
B) hyperinflation.
C) the double coincidence of wants.
D) the neutrality of money.
E) shoe-leather costs.

Question 78

A government that relies on seignorage to finance excess government expenditures is the foundation for the following quote:

A) "Inflation is always zero in the long run."
B) "Inflation is always and everywhere a monetary phenomenon."
C) "Inflation is always and everywhere a fiscal phenomenon."
D) "Velocity growth should be equal to 2 percent in the long run."
E) "Velocity is always constant."

Question 79

A risk a bank takes on by offering long-term fixed interest rate loans is the:

A) loss of real returns due to anticipated inflation.
B) gain that could be made from offering short-term loans.
C) loss of real returns due to an unexpected inflation surprise.
D) gains that could have been made if the money were invested in an alternative asset.
E) loss of customers wanting flexible interest loans.

Question 80

The right to seignorage is the right to:

A) make coins.
B) raise tax revenues.
C) print money.
D) borrow from the public.
E) raise an army.