Question 1

As people get used to inflation:

Accepted Answer

As people get used to inflation, they start expecting higher prices and demand higher wages to compensate for it. This leads to faster wage adjustments, which in turn shifts the short-run aggregate supply curve to the left. Therefore, the correct choice is C, as wages adjust faster and the short-run aggregate supply shifts quickly to the left.

Question 2

The Fed monetizes the debt when it:

Accepted Answer

Monetizing the debt refers to the process of the central bank, in this case the Fed, printing money and using that money to buy government debt from the public. This increases the money supply in the economy and is often used as a way to finance government spending when other forms of financing, such as borrowing from private investors, are not available or desirable. Selling bonds, decreasing the money supply, and targeting interest rates are not examples of monetizing the debt.

Question 3

If the money held by the public is $3 billion and inflation is 6%, the inflation tax is:

Accepted Answer

The inflation tax on the money held by the public can be calculated by multiplying the amount of money held ($3 billion) by the inflation rate (6%). This calculation gives $3 billion * 0.06 = $180 million.

Question 4

The inflation tax is the effect on the public of the:

Accepted Answer

The inflation tax refers to the reduction in the value of money caused by inflation. When the value of money decreases, it takes more money to purchase the same goods and services, effectively reducing the purchasing power of currency. This results in consumers paying higher prices for goods and services due to inflation, thus acting as a tax on their purchasing power.

Question 5

In economies with persistently high inflation, an increase in the money supply will have:

Accepted Answer

In the long run, money is neutral, meaning changes in the money supply do not affect real variables like the real quantity of money or real output.

Question 6

According to the classical model of the price level, an increase in the money supply will cause _____ and _____ increase in real GDP.

Accepted Answer

In the classical model, an increase in the money supply is believed to lead to inflation in the long term, without affecting the real GDP. This is because the model assumes prices are flexible, and the economy is always at or returns quickly to full employment.

Question 7

Use the following to answer questions: 
-(Figure: AD-AS) Refer to Figure: AD-AS. If our economy is at equilibrium and the Fed uses expansionary monetary policy, _____ will shift to _____ and the economy will move from _____. Then nominal wages will _____ and _____ will shift to _____. The economy will move from _____.

Accepted Answer

Expansionary monetary policy shifts the aggregate demand curve to the right, leading to an increase in nominal wages and a subsequent rightward shift of the short-run aggregate supply curve.

Question 8

Fiat money is:

Accepted Answer

Fiat money is paper money that has no intrinsic value, meaning it is not backed by a physical commodity such as gold or silver. Its value is based solely on the faith and credit of the government that issued it. Fiat money is used in many countries around the world, not just in the United States.

Question 9

Use the following to answer questions: -(Figure: AD-AS) Refer to Figure: AD-AS. Suppose that the economy starts at E₁ and moves to E₂, where AD₂intersects SRAS₁. Finally, the economy moves to E₃. The classical model of price level assumes that the economy moves from _____; thus, inflation _____ and real GDP _____.

Accepted Answer

The classical model assumes that the economy will always return to its long-run equilibrium, which occurs at the intersection of the AD and LRAS curves. In this case, the economy moves from E₁ to E₂, and then to E₃, which is the long-run equilibrium point. Therefore, the classical model assumes that inflation increases and real GDP remains the same as the economy moves from E₁ to E₃, ignoring the temporary movement to E₂.

Question 10

The inflation tax is the effect on the public of:

Accepted Answer

The inflation tax refers to the decrease in the real value of money caused by inflation. As prices for goods and services increase, the purchasing power of money decreases, resulting in a de facto tax on the public.

Question 11

Use the following to answer questions: 
-(Figure: AD-AS) Refer to Figure: AD-AS. If our economy is at equilibrium with low-level inflation and the Fed uses expansionary monetary policy, the initial effect is that _____ will shift to _____ and the economy will move from _____.

Accepted Answer

With expansionary monetary policy, the aggregate demand (AD) curve will shift to the right (AD₁ to AD₂) and the economy will move from equilibrium point E1 to E2, with higher output (E₁ to E₂) and higher price level (P1 to P2).

Question 12

In economies with persistently high inflation, an increase in the money supply will:

Accepted Answer

In economies with persistently high inflation, consumers and firms may begin to anticipate future price increases and adjust their behavior accordingly. This can lead to a much faster translation of an increase in the money supply into an increase in the aggregate price level. This is known as the "velocity of money," and in high inflation economies, velocity tends to be much higher than in low inflation economies. Therefore, option A is the correct answer.

Question 13

Government debt is monetized when:

Accepted Answer

Monetizing debt occurs when the Federal Reserve (or central bank) purchases government securities (like Treasury bills) from the market to increase the money supply, effectively turning government debt into new money. This is closely related to the concept of open-market operations, where the central bank buys or sells government securities in the open market to control the money supply.

Question 14

Historical evidence has led economists to conclude that during periods of high inflation, the _____ model of the price level is a good approximation of reality because nominal wages and prices adjust more _____ than during periods of low inflation.

Accepted Answer

The classical model assumes that markets quickly clear and that prices and wages adjust to changes in supply and demand. During periods of high inflation, prices and wages are expected to adjust more quickly, making the classical model a better approximation of reality. The modern model, in contrast, assumes that prices and wages are sticky and adjust slowly, making it less applicable during periods of high inflation.

Question 15

Use the following to answer questions: -(Figure: AD-AS) Refer to Figure: AD-AS. Suppose that the economy starts at E₁ and moves to E₂, where AD₂intersects SRAS_1. SRAS₁willshift to SRAS₂because:

Accepted Answer

The shift from SRAS1 to SRAS2 in the AD-AS model typically occurs due to an increase in nominal wages in the long run. As the economy moves to a new equilibrium with higher prices, workers and firms adjust their expectations and contracts, leading to higher nominal wages to maintain real purchasing power, which in turn shifts the short-run aggregate supply (SRAS) curve.

Question 16

The inflation tax is likely to be high when:

Accepted Answer

The inflation tax is essentially the loss of purchasing power that individuals experience when prices rise due to inflation. When the government relies on seignorage (i.e. the profits made from printing money) to finance a large portion of its budget deficit, it is essentially creating more money without increasing the output of goods and services in the economy. This results in an increase in the money supply, which can lead to inflation and ultimately result in an inflation tax on individuals.

Question 17

When the Treasury Department borrows from the public to finance the government's purchases of goods and services and the Fed buys the debt back from the public in the form of Treasury bills, it is known as:

Accepted Answer

When the Fed buys the debt back from the public, it increases the money supply and effectively creates new money, which is known as monetizing the debt. This has implications for inflation and the value of the currency.

Question 18

Use the following to answer questions: -(Figure: AD-AS) Refer to Figure: AD-AS. Suppose that the economy is initially at E₁, where AD₁intersects SRAS₁ and LRAS. Now, suppose that the AD₁shifts to AD_2.That shift could be due to a(n):

Accepted Answer

A shift in the AD curve from ADS1U1B11S1U1B0 to ADS1U1B12 could be due to an increase in the money supply, which stimulates spending and shifts the AD curve to the right. A decrease in government expenditure or an increase in tax rates would decrease AD and shift the curve to the left. An increase in the aggregate price level would move the economy upward along the AD curve, but would not shift the curve itself.

Question 19

The main difference between the classical model of the price level and the modern understanding of the relationship between the money supply, the price level, and real GDP is that according to classical economists, _____, while today's economists _____.

Accepted Answer

Classical economists believed that prices adjust quickly to changes in the money supply, maintaining the neutrality of money in the long run. Modern economists, however, recognize that price adjustments can take time, indicating a non-instantaneous response to changes in the money supply.

Question 20

If the Fed increases the monetary base by $40 billion through open-market operations:

Accepted Answer

Increasing the monetary base through open-market operations involves the Fed buying government securities, which reduces the amount of government debt held by the public. The increase in the monetary base does not necessarily result in an increase in GDP, the price level, or government spending.

Quiz 16: Inflation, Disinflation, and Deflation

As people get used to inflation:

The Fed monetizes the debt when it:

If the money held by the public is $3 billion and inflation is 6%, the inflation tax is:

The inflation tax is the effect on the public of the:

In economies with persistently high inflation, an increase in the money supply will have:

According to the classical model of the price level, an increase in the money supply will cause _ and _ increase in real GDP.

Use the following to answer questions: -(Figure: AD-AS) Refer to Figure: AD-AS. If our economy is at equilibrium and the Fed uses expansionary monetary policy, ___ will shift to _ and the economy will move from _. Then nominal wages will _ and _ will shift to _. The economy will move from ___.

Fiat money is:

The inflation tax is the effect on the public of:

Use the following to answer questions: -(Figure: AD-AS) Refer to Figure: AD-AS. If our economy is at equilibrium with low-level inflation and the Fed uses expansionary monetary policy, the initial effect is that ___ will shift to _ and the economy will move from ___.

In economies with persistently high inflation, an increase in the money supply will:

Government debt is monetized when:

Historical evidence has led economists to conclude that during periods of high inflation, the _ model of the price level is a good approximation of reality because nominal wages and prices adjust more _ than during periods of low inflation.

Use the following to answer questions: -(Figure: AD-AS) Refer to Figure: AD-AS. Suppose that the economy starts at E₁ and moves to E₂, where AD₂intersects SRAS_1. SRAS₁willshift to SRAS₂because:

The inflation tax is likely to be high when:

When the Treasury Department borrows from the public to finance the government's purchases of goods and services and the Fed buys the debt back from the public in the form of Treasury bills, it is known as:

Use the following to answer questions: -(Figure: AD-AS) Refer to Figure: AD-AS. Suppose that the economy is initially at E₁, where AD₁intersects SRAS₁ and LRAS. Now, suppose that the AD₁shifts to AD_2.That shift could be due to a(n) :

The main difference between the classical model of the price level and the modern understanding of the relationship between the money supply, the price level, and real GDP is that according to classical economists, _, while today's economists _.

If the Fed increases the monetary base by $40 billion through open-market operations:

Quiz 16: Inflation, Disinflation, and Deflation

As people get used to inflation:

The Fed monetizes the debt when it:

If the money held by the public is $3 billion and inflation is 6%, the inflation tax is:

The inflation tax is the effect on the public of the:

In economies with persistently high inflation, an increase in the money supply will have:

According to the classical model of the price level, an increase in the money supply will cause _____ and _____ increase in real GDP.

Fiat money is:

The inflation tax is the effect on the public of:

Use the following to answer questions: -(Figure: AD-AS) Refer to Figure: AD-AS. If our economy is at equilibrium with low-level inflation and the Fed uses expansionary monetary policy, the initial effect is that _____ will shift to _____ and the economy will move from _____.

In economies with persistently high inflation, an increase in the money supply will:

Government debt is monetized when:

Historical evidence has led economists to conclude that during periods of high inflation, the _____ model of the price level is a good approximation of reality because nominal wages and prices adjust more _____ than during periods of low inflation.

Use the following to answer questions: -(Figure: AD-AS) Refer to Figure: AD-AS. Suppose that the economy starts at E1 and moves to E2, where AD2 intersects SRAS1. SRAS1 will shift to SRAS2 because:

The inflation tax is likely to be high when:

When the Treasury Department borrows from the public to finance the government's purchases of goods and services and the Fed buys the debt back from the public in the form of Treasury bills, it is known as:

Use the following to answer questions: -(Figure: AD-AS) Refer to Figure: AD-AS. Suppose that the economy is initially at E1, where AD1 intersects SRAS1 and LRAS. Now, suppose that the AD1 shifts to AD2. That shift could be due to a(n) :

The main difference between the classical model of the price level and the modern understanding of the relationship between the money supply, the price level, and real GDP is that according to classical economists, _____, while today's economists _____.

If the Fed increases the monetary base by $40 billion through open-market operations:

According to the classical model of the price level, an increase in the money supply will cause _ and _ increase in real GDP.

Use the following to answer questions: -(Figure: AD-AS) Refer to Figure: AD-AS. If our economy is at equilibrium with low-level inflation and the Fed uses expansionary monetary policy, the initial effect is that ___ will shift to _ and the economy will move from ___.

Historical evidence has led economists to conclude that during periods of high inflation, the _ model of the price level is a good approximation of reality because nominal wages and prices adjust more _ than during periods of low inflation.

Use the following to answer questions: -(Figure: AD-AS) Refer to Figure: AD-AS. Suppose that the economy starts at E₁ and moves to E₂, where AD₂intersects SRAS_1. SRAS₁willshift to SRAS₂because:

Use the following to answer questions: -(Figure: AD-AS) Refer to Figure: AD-AS. Suppose that the economy is initially at E₁, where AD₁intersects SRAS₁ and LRAS. Now, suppose that the AD₁shifts to AD_2.That shift could be due to a(n) :

The main difference between the classical model of the price level and the modern understanding of the relationship between the money supply, the price level, and real GDP is that according to classical economists, _, while today's economists _.