Question 1

When an increase in the money supply is unexpected by firms and workers,real GDP:
A) increases in the short run.
B) decreases in the short run.
C) increases in the long run.
D) decreases in the long run.

Accepted Answer

When the increase in the money supply is unexpected, firms and workers will increase their spending and investment as they perceive that they have additional buying power. This leads to an increase in demand for goods and services in the short run, which leads to an increase in real GDP. However, in the long run, the increase in the money supply will lead to inflation and a decrease in the value of money, which will lead to a decrease in real GDP.

Question 2

In times of financial panic,we expect the velocity of money to:
A) increase.
B) decrease.
C) remain relatively constant.
D) first increase and then decrease.

Accepted Answer

During times of financial panic, people tend to hoard their money and spend less, causing the velocity of money to decrease.

Question 3

According to the quantity theory of money,the primary cause of inflation is:
A) the growth rate of the money supply.
B) the growth rate of real GDP.
C) productivity growth.
D) the number of real economic shocks.

Accepted Answer

According to the quantity theory of money, inflation is primarily caused by the growth rate of the money supply. The theory suggests that if the money supply grows faster than the growth rate of real GDP, there will be too much money chasing too few goods and services, causing prices to increase.

Question 4

Why could very high rates of inflation cause velocity to increase?
A) The more people earn,the faster they spend it.
B) The more money loses its value,the faster people try to spend it.
C) The more people earn,the faster prices rise.
D) The more inflation there is,the more there is to buy.

Accepted Answer

Very high rates of inflation cause the value of money to decrease rapidly, which incentivizes people to spend it faster before it loses even more value. This can lead to an increase in velocity, which measures how quickly money changes hands in the economy. Choice A is not necessarily true because people may choose to save some of their increased earnings rather than spend it all immediately. Choice C is not directly related to velocity. Choice D is incorrect because inflation does not increase the amount of goods and services available for purchase.

Question 5

Suppose real GDP and velocity of money remain constant.If money supply doubles,then the inflation rate will be:
A) 10%.
B) 50%.
C) 100%.
D) 200%.

Accepted Answer

The quantity theory of money states that MV=PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the real output (real GDP). Given that real GDP and velocity of money remain constant, we can assume QV is constant. If M doubles, then PQ must also double to maintain the equation. This means that the price level (inflation) must double as well, resulting in a 100% increase. Therefore, the correct answer is C) 100%.

Question 6

The quantity theory of money is a theory of:
A) money growth in the United States.
B) inflation.
C) economic growth.
D) the growth of tax burdens.

Accepted Answer

The quantity theory of money is a theory that suggests the general price level of goods and services in an economy is directly proportional to the amount of money in circulation, which means that an increase in the supply of money leads to inflation. Therefore, the answer is B, inflation.

Question 7

Deflation is a decrease in the:
A) exchange rate.
B) average level of prices.
C) inflation rate.
D) velocity of money.

Accepted Answer

Deflation refers to a decrease in the average level of prices, which means the economy experiences negative inflation. This is different from a decrease in the exchange rate or velocity of money, and it may or may not lead to a decrease in the inflation rate depending on the cause of deflation.

Question 8

Disinflation is a decrease in the:
A) exchange rate.
B) average level of prices.
C) inflation rate.
D) the velocity of money.

Accepted Answer

Disinflation refers to a slowdown in the rate of inflation, meaning the general level of prices is still rising but at a slower pace than before.

Question 9

The quantity theory states that money is neutral:
A) in both the short run and the long run.
B) only in the short run.
C) only in the long run.
D) neither in the short run nor in the long run.

Accepted Answer

The quantity theory of money states that in the long run, changes in the quantity of money lead to proportional changes in prices, but do not affect real variables, such as output or employment. Therefore, money is neutral only in the long run, and option C is correct.

Question 10

If the growth rate of the money supply decreases from 10% to 5%,which of the following is a prediction of the quantity theory of money?
A) disinflation
B) deflation
C) hyperinflation
D) money illusion

Accepted Answer

The quantity theory of money suggests that if the growth rate of the money supply decreases, it would lead to a slower rate of inflation, or disinflation, as there is less money chasing the same amount of goods and services.

Question 11

Between 1960 and 1990,Argentina's money supply grew at approximately 80%.According to the quantity theory of money,inflation rates in Argentina should have been approximately _____ during this period.
A) 20%
B) 40%
C) 80%
D) 160%

Accepted Answer

The quantity theory of money suggests that if the money supply in an economy grows at a certain rate, the price level (and thus the inflation rate) should grow at a similar rate, assuming velocity of money and output remain constant. Therefore, if Argentina's money supply grew at approximately 80%, the inflation rate should have been approximately 80% as well, according to this theory.

Question 12

In the long run,an increase in the money supply will cause real GDP to:
A) increase.
B) decrease.
C) remain constant.
D) deflate.

Accepted Answer

In the long run, an increase in the money supply is typically neutral with respect to real GDP, meaning it does not affect the real output of the economy, but rather affects the price level (inflation). Real GDP is determined by factors such as technology, resources, and labor, not the amount of money in circulation.

Question 13

_____ is a decrease in the average level of prices,whereas _____ is a reduction in the inflation rate.
A) Deflation;disinflation
B) Disinflation;deflation
C) Stagflation;disinflation
D) Deflation;stagflation

Accepted Answer

Deflation is a decrease in the average level of prices, whereas disinflation is a reduction in the inflation rate. Stagflation is a situation where inflation and stagnation occur simultaneously, which is not the same as deflation or disinflation.

Question 14

When economists state that "money is neutral," they mean that the:
A) overall price level has no effect on consumers;only relative prices do.
B) overall price level has no effect on people's inflation expectations.
C) money supply does not affect inflation or nominal GDP.
D) money supply does not affect real GDP or unemployment.

Accepted Answer

The statement that "money is neutral" implies that changes in the money supply do not have an impact on real variables such as real GDP or unemployment in the long run. Instead, changes in the money supply primarily affect nominal variables like the price level.

Question 15

According to the quantity theory,what causes inflation in the long run?
A) unemployment
B) unexpected inflation
C) money supply growth
D) aggregate demand shocks

Accepted Answer

According to the quantity theory of money, the long-run cause of inflation is the growth rate of the money supply. This theory assumes that changes in the money supply are the primary determinant of changes in the price level. When the money supply grows faster than the supply of goods and services, the result is inflation. Therefore, C is the correct answer.

Question 16

According to the quantity theory of money,money growth in the long run:
A) affects both real GDP growth and inflation.
B) affects real GDP growth only.
C) affects inflation only.
D) has no effect on either real GDP growth or inflation.

Accepted Answer

The quantity theory of money, in the long run, posits that money growth affects inflation only, as real GDP growth is determined by real factors like technology and resources, not by the money supply.

Question 17

According to Nobel laureate Milton Friedman,"inflation is _____."
A) a good thing
B) found everywhere
C) always present
D) always and everywhere a monetary phenomenon

Accepted Answer

According to Milton Friedman, inflation is always and everywhere a monetary phenomenon. This means that inflation is caused by an increase in the supply of money in the economy. Friedman believed that controlling the money supply was the key to controlling inflation.

Question 18

The inflation parable discussed in the text suggests a:
A) short-run relationship between unexpected inflation and output.
B) short-run relationship between expected inflation and output.
C) long-run relationship between unexpected inflation and output.
D) long-run relationship between expected inflation and output.

Accepted Answer

The inflation parable discussed in the text highlights a short-run relationship between unexpected inflation and output. The parable suggests that unexpected increases in inflation lead to a temporary increase in output as firms may mistake the rise in prices for an increase in demand and increase production in response. However, over time, as the true nature of the inflation becomes apparent, firms adjust their output levels accordingly leading to no long-term effects on output. Therefore, choice A) short-run relationship between unexpected inflation and output is the best answer.

Question 19

Disinflation occurs when the overall price level:
A) falls.
B) rises at a decreasing rate.
C) rises at an exponential rate.
D) falls at an increasing rate.

Accepted Answer

Disinflation refers to a slowdown in the rate of inflation, meaning that prices are still increasing but at a slower pace than before.

Question 20

According to the quantity theory of money,a change in the money supply affects:
A) real GDP in the short run but not in the long run.
B) real GDP in the long run but not in the short run.
C) nominal GDP in the short run but not in the long run.
D) nominal GDP in the long run but not in the short run.

Accepted Answer

In the short run, changes in the money supply can affect real GDP due to price and wage stickiness. However, in the long run, the economy is expected to return to its potential output, and changes in the money supply primarily affect nominal variables like the price level, not real GDP.

Quiz 12: Inflation and the Quantity Theory of Money

When an increase in the money supply is unexpected by firms and workers,real GDP:

In times of financial panic,we expect the velocity of money to:

According to the quantity theory of money,the primary cause of inflation is:

Why could very high rates of inflation cause velocity to increase?

Suppose real GDP and velocity of money remain constant.If money supply doubles,then the inflation rate will be:

The quantity theory of money is a theory of:

Deflation is a decrease in the:

Disinflation is a decrease in the:

The quantity theory states that money is neutral:

If the growth rate of the money supply decreases from 10% to 5%,which of the following is a prediction of the quantity theory of money?

Between 1960 and 1990,Argentina's money supply grew at approximately 80%.According to the quantity theory of money,inflation rates in Argentina should have been approximately _____ during this period.

In the long run,an increase in the money supply will cause real GDP to:

_ is a decrease in the average level of prices,whereas _ is a reduction in the inflation rate.

When economists state that "money is neutral," they mean that the:

According to the quantity theory,what causes inflation in the long run?

According to the quantity theory of money,money growth in the long run:

According to Nobel laureate Milton Friedman,"inflation is _____."

The inflation parable discussed in the text suggests a:

Disinflation occurs when the overall price level:

According to the quantity theory of money,a change in the money supply affects: