Question 1

When actual inflation is less than expected, wealth is transferred from the borrower to the lender.

Accepted Answer

When inflation is less than expected, the value of money increases. This means that the purchasing power of the money borrowed decreases, and the borrower ends up paying back less in real terms than they had anticipated. This results in a transfer of wealth from the borrower to the lender, as the lender benefits from receiving the money back with a higher value than when it was lent out.

Question 2

When expected inflation is less than actual inflation, inflation causes wealth redistribution from lenders to borrowers.

Accepted Answer

When expected inflation is less than actual inflation, lenders suffer losses because the money they receive back from borrowers is worth less than what they lent. On the other hand, borrowers benefit from inflation because they are able to pay back their loans with money that is worth less than what they borrowed. This results in a wealth redistribution from lenders to borrowers.

Question 3

The quantity theory of money is consistent with economist Milton Friedman's argument that "inflation is always and everywhere a monetary phenomenon."

Accepted Answer

The quantity theory of money states that the overall price level in an economy is proportional to the amount of money in circulation, i.e. there is a direct relationship between the quantity of money and the general level of prices. Therefore, if there is an increase in the money supply without a corresponding increase in output, there will be inflation. This is consistent with Milton Friedman's argument that inflation is always and everywhere a monetary phenomenon, as he believed that changes in the money supply were the primary cause of inflation.

Question 4

Nobel Laureate Milton Friedman said, "Inflation is always and everywhere an unemployment phenomenon."

Accepted Answer

While Friedman did believe that inflation and unemployment were linked, he did not believe that inflation was solely caused by unemployment. He believed that long-term inflation was caused by excessive growth in the money supply.

Question 5

In the long run, money is neutral.

Accepted Answer

In the long run, changes in the money supply do not affect real variables such as output, employment, and productivity. Therefore, money is neutral in the long run.

Question 6

Wealth will be redistributed from borrowers to lenders when expected inflation is less than actual inflation.

Accepted Answer

Wealth is redistributed from lenders to borrowers when expected inflation is less than actual inflation, as lenders receive repayment in dollars with less purchasing power than they had anticipated.

Question 7

According to the quantity theory of money, the primary cause of inflation is an increase in real GDP.

Accepted Answer

According to the quantity theory of money, inflation is primarily caused by an increase in the money supply relative to the available goods and services in an economy. An increase in real GDP can also contribute to inflation if it leads to increased demand for goods and services, but it is not the primary cause.

Question 8

According to the quantity theory of money, the velocity of money equals the amount of money people spend divided by the product of the price level and the quantity of goods and services they purchase.

Accepted Answer

The answer of According to the quantity theory of money,...

Question 9

Monetizing the debt occurs when the government pays off its debts by printing money.

Accepted Answer

Monetizing the debt involves the government using the central bank to create new money to purchase its own debt, effectively printing money to pay off its debts.

Question 10

Although money is neutral in the short run, it's possible that changes in money supply can change real GDP in the long run.

Accepted Answer

In the long run, changes in the money supply are neutral with respect to real variables like real GDP, according to the classical dichotomy. In the long run, money is neutral, meaning changes in the money supply only affect nominal variables (like the price level) and have no effect on real variables.

Question 11

Money is neutral in the long run but not in the short run.

Accepted Answer

Money is considered neutral in the long run because changes in the money supply do not affect the level of output or employment, but it can have significant short-run impacts on inflation, interest rates, and exchange rates.

Question 12

Government debt monetization generally leads to inflation.

Accepted Answer

When a government monetizes its debt, it essentially creates new money to purchase its own debt. This increases the money supply in the economy, which can lead to inflation as the value of money decreases.

Question 13

The Fisher effect is the tendency of nominal interest rates to rise with expected inflation rates.

Accepted Answer

The Fisher effect states that nominal interest rates in an economy will increase with expected inflation rates, in order to maintain real interest rates at a certain level. This is because lenders need to be compensated for the loss in purchasing power due to inflation.

Question 14

Deflation always implies the inflation rate is negative.

Accepted Answer

Deflation is the opposite of inflation and occurs when the overall price level of goods and services in an economy decreases. This means that the inflation rate, which measures the rate of change in the general price level over time, is negative during a period of deflation.

Question 15

The terms "deflation" and "disinflation" have the same meaning.

Accepted Answer

Deflation refers to a sustained decrease in the general price level of goods and services in an economy, while disinflation refers to a decrease in the rate of inflation. They are not the same thing.

Question 16

Sustained inflation tends to increase nominal wages.

Accepted Answer

Sustained inflation tends to lead to higher prices, which can increase the cost of living. In response, workers may demand higher wages to maintain their standard of living. As a result, nominal wages may increase in response to sustained inflation.

Question 17

If the CPI for this year is lower than the CPI for last year, disinflation must have occurred.

Accepted Answer

The answer of If the CPI for this year is...

Question 18

Inflation has no economic costs as long as it is fully expected.

Accepted Answer

Inflation, even if fully expected, has economic costs such as uncertainty in prices, redistribution of wealth, and difficulty in long-term planning. Additionally, high inflation rates can lead to hyperinflation which can severely harm an economy.

Question 19

Changes in money velocity and GDP are the main determinants of the inflation rate.

Accepted Answer

The answer of Changes in money velocity and GDP are...

Question 20

Most cases of national hyperinflation are caused by governments attempting to redistribute wealth to poorer citizens.

Accepted Answer

Most cases of hyperinflation are caused by factors such as excessive money printing, a loss of confidence in the currency, political instability, and poor economic policies, rather than a deliberate attempt to redistribute wealth.

Quiz 12: Inflation and the Quantity Theory of Money