Deck 5: Inflation: Its Causes, Effects, and Social Costs

Question 1

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.

Answer 1

velocity is constant.

Question 2

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.

Answer 2

transactions velocity of money.

Question 3

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 inflation rate in this economy?

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

Answer 3

7 percent

Question 4

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 5

If income velocity is assumed to be constant, but no other assumptions are made, the level of ______ is determined by M.

A) prices
B) income
C) transactions
D) nominal GDP

Question 6

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 7

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 8

If the quantity of real money balances is kY, where k is a constant, then velocity is:

A) k.
B) 1/k.
C) kP.
D) P/k.

Question 9

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 10

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 11

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 12

The income velocity of money increases and the money demand parameter k ______ when people want to hold ______ money.

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

Question 13

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 14

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 15

The transactions velocity of money indicates the _____ in a given period, while the income velocity of money indicates the _____ in a given period.

A) number of transactions; amount of income earned
B) quantity of money used for transactions; quantity of money paid as income
C) number of times a dollar bill changes hands; number of times a dollar bill enters someone's income
D) volume of transactions; flow of income

Question 16

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 17

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 Federal Reserve.
D) private citizens.

Question 18

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) is the same as the number of times a dollar bill changes hands.

Question 19

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 20

The quantity equation for money, by itself:

A) may be thought of as a definition for velocity of money.
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 21

According to the quantity theory a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation a 5 percent increase in the rate of inflation increases the nominal interest rate by _____.

A) 1; 5
B) 5; 1
C) 1; 1
D) 5; 5

Question 22

Evidence from the past 40 years in the United States supports the Fisher effect and shows that when the inflation rate is high, the ______ interest rate tends to be ______.

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

Question 23

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 24

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 25

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 26

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 27

"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 28

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 29

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 30

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 31

During the American Revolution, the price of gold measured in continental dollars increased to more than ______ times its previous level.

A) 2
B) 10
C) 50
D) 100

Question 32

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 33

The inflation tax is paid:

A) only by the central bank.
B) by all holders of money.
C) only by government bond holders.
D) equally by every household.

Question 34

Using decade-long data across countries from 2000-2010, countries with high money growth tend to have _____ inflation.

A) high
B) low
C) constant
D) decreasing

Question 35

The right of seigniorage is the right to:

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

Question 36

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 37

In the classical model, according to the quantity theory and the Fisher equation, an increase in money growth increases:

A) output.
B) velocity
C) the nominal interest rate.
D) the real interest rate.

Question 38

According to the quantity theory and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase:

A) 2 percent.
B) 3 percent.
C) 5 percent.
D) 6 percent.

Question 39

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 40

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 41

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

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

Question 42

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 43

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

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

Question 44

Which of the following is NOT an effect of 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.

Question 45

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 46

If the demand for money depends on the nominal interest rate, then via the quantity theory and the Fisher equation, the price level depends on:

A) only the current money supply.
B) only the expected future money supply.
C) both the current and expected future money supply.
D) neither the current nor the expected future money supply.

Question 47

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 48

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 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

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 51

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 52

The ex ante real interest rate is based on _____ inflation, while the ex post real interest rate is based on _____ inflation.

A) expected; actual
B) core; actual
C) actual; expected
D) expected; core

Question 53

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 54

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 55

The opportunity cost of holding money is the:

A) nominal interest rate.
B) real interest rate.
C) federal funds rate.
D) prevailing Treasury bill rate.

Question 56

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 57

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 58

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ______ percent.

A) 1
B) 3
C) 4
D) 7

Question 59

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 60

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 61

The costs of unexpected inflation, but not of expected inflation, are:

A) menu costs.
B) the arbitrary redistribution of wealth between debtors and creditors.
C) unintended distortions of individual tax liabilities
D) the costs of relative price variability.

Question 62

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 63

One possible benefit of moderate inflation is:

A) a reduction in boredom attributable to the changing prices.
B) the elimination of menu costs.
C) better functioning labor markets.
D) increased certainty about the future.

Question 64

In instances of hyperinflation, the delays involved in collecting taxes often result in:

A) decreased real government tax revenue.
B) large capital gains for creditors.
C) higher shoeleather costs of inflation.
D) higher ex ante real interest rates.

Question 65

A variable rate of inflation is undesirable because:

A) debtors and creditors cannot protect themselves by indexing contracts.
B) shoeleather costs are greater under variable inflation than under constant inflation.
C) menu costs are greater under variable inflation than under constant inflation.
D) variable inflation leads to greater uncertainty and risk as compared to constant inflation.

Question 66

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 67

During hyperinflation real tax revenue of the government often drops substantially because of the:

A) delay between when a tax is levied and when it is collected.
B) significantly greater menu costs of printing tax forms.
C) additional deductions taken for increased shoeleather costs.
D) greater uncertainty associated with extreme rates of inflation.

Question 68

Which of the following would most likely be called a hyperinflation?

A) Price increases averaged 300 percent per year.
B) The inflation rate was 10 percent per year.
C) Real GDP grew at a rate of 12 percent over a year.
D) A stock market index rose by 1,000 points over a year.

Question 69

A rate of inflation that exceeds 50 percent per month is typically referred to as a(n):

A) conflagration.
B) hyperinflation.
C) deflation.
D) disinflation.

Question 70

If inflation is 6 percent and a worker receives a 4 percent nominal wage increase, then the worker's real wage:

A) increased 4 percent.
B) increased 2 percent.
C) decreased 2 percent.
D) decreased 6 percent.

Question 71

Inflation ______ the variability of relative prices and ______ allocative efficiency.

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

Question 72

Hyperinflations ultimately are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is frequently a government's:

A) desire to increase prices throughout the economy.
B) need to generate revenue to pay for spending.
C) responsibility to increase nominal interest rates by increasing expected inflation.
D) inability to conduct open-market operations.

Question 73

Most hyperinflations end with _____ reforms that eliminate the need for _____.

A) monetary; taxes
B) monetary; currency
C) fiscal; seigniorage
D) fiscal; currency

Question 74

The major source of government revenue in most countries that are experiencing hyperinflation is:

A) customs duties.
B) income taxes.
C) seigniorage.
D) borrowing.

Question 75

In practice, in order to stop a hyperinflation, in addition to stopping monetary growth, the government must:

A) lower taxes and raise government spending.
B) raise taxes and reduce government spending.
C) change from one kind of currency to another.
D) call for a new election.

Question 76

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 77

To end a hyperinflation, a government trying to reduce its reliance on seigniorage would:

A) print more money.
B) raise taxes and cut spending.
C) lower taxes and increase spending.
D) lower interest rates.

Question 78

Compared to periods of lower rates of inflation, during a hyperinflation all of the following occur except:

A) shoeleather costs increase.
B) menu costs become larger.
C) relative prices do a better job of reflecting true scarcity.
D) tax distortions increase.

Question 79

If nominal wages cannot be cut, then the only way to reduce real wages is by:

A) adjustments via inflation.
B) unions.
C) legislation.
D) productivity increases.

Question 80

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