Question 1

If your salary increased by 8 percent and prices increased by 4 percent, how much did your real wage rise by?

Accepted Answer

The answer of If your salary increased by 8 percent...

Question 2

What does the shoe leather cost of inflation refer to?

Accepted Answer

The answer of What does the shoe leather cost of...

Question 3

Greta puts money in a savings account at her bank, earning 3.5 percent. One year later, she takes her money out and notes that while her money was earning interest, prices rose 1.5 percent. How has the amount of goods Greta can buy changed one year later?

Accepted Answer

The answer of Greta puts money in a savings account...

Question 4

Suppose that velocity and output are constant, the quantity theory and Fisher effect are correct, the nominal interest rate is 7 percent, and money growth is 3 percent. Which statement is consistent with these facts?

Accepted Answer

The answer of Suppose that velocity and output are constant,...

Question 5

People use more resources to reduce their money holdings because of high inflation. What is this an example of?

Accepted Answer

This is an example of shoe leather costs, which refers to the increased costs of time and resources spent in managing cash and reducing money holdings due to high inflation.

Question 6

Suppose that velocity and output are constant and that the quantity theory and Fisher effect are both correct. If the nominal interest rate is 8 percent and inflation is 4 percent, what is the money supply growth rate or the real interest rate?

Accepted Answer

The answer of Suppose that velocity and output are constant...

Question 7

What do shoe leather costs refer to?

Accepted Answer

Shoe leather costs refer to the resources used to maintain lower money holdings when inflation is high. This includes the cost of additional trips to the bank or ATM to withdraw more cash due to the loss in purchasing power caused by inflation.

Question 8

If the money supply growth rate permanently increased from 5 percent to 30 percent, what would we expect to happen to inflation?

Accepted Answer

This is because inflation and money supply growth rate are directly related. With a 25% increase in the money supply growth rate, we would expect a 25% increase in inflation in the long run, all else equal.

Question 9

Which of the following best defines menu costs?

Accepted Answer

Menu costs are the costs associated with more frequent price changes caused by higher inflation. These costs include reprinting menus, updating price lists, and communicating the changes to customers. As inflation increases, businesses may need to adjust their prices more frequently, leading to additional costs.

Question 10

In the long run, when money is neutral, which of the following increases when the money supply growth rate increases?

Accepted Answer

In the long run, when money is neutral, real variables such as real output growth and real interest rates are not affected by changes in the money supply growth rate. However, nominal variables such as nominal interest rates and the price level do change with the money supply growth rate. When the money supply growth rate increases, nominal interest rates also increase as the demand for credit increases. The ratio of the money supply to the price level (also known as the quantity of money theory of inflation) is not affected by changes in the money supply growth rate, as the price level adjusts accordingly to changes in the money supply.

Question 11

If the nominal interest rate is 9 percent and the real interest rate is 4 percent, what is the inflation rate?

Accepted Answer

The inflation rate can be found by subtracting the real interest rate from the nominal interest rate:

Inflation rate = Nominal interest rate - Real interest rate
Inflation rate = 9% - 4%
Inflation rate = 5%

Therefore, the answer is B) 5 percent.

Question 12

What terms refers to the cost of changing price tags and price listings?

Accepted Answer

The cost of changing price tags and price listing is known as menu costs.

Question 13

If a country had deflation of 2 percent while the nominal interest rate increased by 1 percentage point, how would the real interest rate change?

Accepted Answer

The answer of If a country had deflation of 2...

Question 14

What is inflation positively correlated with?

Accepted Answer

The answer of What is inflation positively correlated with?
...

Question 15

What does the Fisher effect imply?

Accepted Answer

The Fisher effect implies that the nominal interest rate adjusts one for one with the inflation rate, meaning that if inflation increases, the nominal interest rate will increase by the same amount to maintain the real interest rate.

Question 16

What can a country increase in the long run by increasing its money growth rate?

Accepted Answer

Increasing the money growth rate leads to an increase in the supply of money in the economy, which results in higher prices for goods and services. Therefore, the price level will increase in the long run. However, there is no increase in real output, as the economy's productive capacity remains the same. Real interest rates may decline due to the inflationary pressure, discouraging savings and investment. The nominal wage may increase, but this will be offset by the rise in the price level, so the real wage remains the same.

Question 17

Arnold puts money into an account. One year later, he sees that he has 7 percent more dollars and that his money will buy 3 percent more goods. Which of the following is consistent with these facts?

Accepted Answer

The answer of Arnold puts money into an account. One...

Question 18

Which inflation cost matters even if actual inflation and expected inflation are the same?

Accepted Answer

Menu costs refer to the costs associated with changing prices due to inflation. Even if actual and expected inflation rates are the same, businesses still incur menu costs when adjusting prices, which can affect their profitability. Therefore, menu costs matter even if actual and expected inflation rates are the same.

Question 19

If the money supply growth rate permanently increased from 4 percent to 10 percent, what would we expect to happen to the inflation rate and the nominal interest rate?

Accepted Answer

The answer of If the money supply growth rate permanently...

Question 20

Which of the following does an increase in the money supply growth rate increase?

Accepted Answer

An increase in the money supply growth rate increases the supply of money which results in an increase in demand for goods and services, which in turn causes inflation. Nominal interest rates are also likely to increase as lenders demand higher interest rates to compensate for the anticipated inflation. However, real interest rates (nominal interest rates adjusted for inflation) are not necessarily affected by changes in the money supply growth rate.

Quiz 11: Money Growth and Inflation