Deck 34: Inflation, Deflation, and Macro Policy

Question 1

If expectations of inflation are greater than actual inflation, the short-run Phillips curve will eventually shift upward.

Answer 1

False

Question 2

The usefulness of standard goods market price indexes for judging policy is limited because:

A)they include the prices of assets.
B)they include only the price of gold and silver.
C)the United States is no longer on the gold standard.
D)they do not include the price of assets.

Answer 2

they do not include the price of assets.

Question 3

Asset price inflation can be a problem because it:

A)gives people the illusion that their real wealth has decreased more than it really has.
B)makes people switch their resources from risky investments to conservative investments.
C)gives people the illusion that their real wealth has increased more than it really has.
D)typically increases at the same rate as goods price inflation.

Answer 3

gives people the illusion that their real wealth has increased more than it really has.

Question 4

Asset price inflation occurs when the prices of assets rise.

Question 5

Asset inflation tends to hurt those who save in risky assets.

Question 6

Expectations of inflation are assumed to be constant at each point on a given short-run Phillips curve.

Question 7

Economists who accept the quantity theory of money believe that inflation is always and everywhere a monetary phenomenon.

Question 8

Inflation redistributes income from people who do not raise their prices to people who do raise their prices.

Question 9

The prices of assets are included in standard measures of inflation.

Question 10

Asset inflation is when:

A)asset prices rise regardless of their real value.
B)the money supply rises leads to inflation.
C)asset prices rise more than their real value.
D)expansionary fiscal policy leads to inflation.

Question 11

Inflation has both benefits and costs.

Question 12

The long-run Phillips curve shifts to the left or the right as expectations of inflation change.

Question 13

Asset inflation has a danger of:

A)obscuring goods inflation.
B)accommodating contractionary monetary policy.
C)reducing the productive capacity of assets.
D)leading to a misallocation of resources to risky investments.

Question 14

If global prices are lower than domestic prices, the short-run Phillips curve is likely to be horizontal.

Question 15

It's difficult to measure asset inflation because asset prices can increase when assets become more productive.

Question 16

Economists before the 1940s were most likely to call a rise in asset prices an inflation as long as it is accompanied by an increase in:

A)the money supply.
B)GDP.
C)goods inflation.
D)a price index.

Question 17

According to the Phillips curve model, when expectations of inflation increase, the same level of unemployment will be associated with a higher rate of inflation.

Question 18

Economists who accept the quantity theory of money favor a monetary rule because they believe the short-run effects of monetary policy are unpredictable and the long-run effects are on the price level, not real output.

Question 19

Asset inflation:

A)is equal to goods inflation.
B)is the rise in the physical increase in assets.
C)is the rise in asset prices that exceed the rise in the real value of assets.
D)does not occur when the economy faces globalization because prices are capped.

Question 20

One way to measure asset inflation is to:

A)multiply the GDP deflator times nominal net worth; if it increases there is asset inflation.
B)multiply the GDP deflator times real net worth; if it increases there is asset inflation.
C)divide GDP by nominal net worth; if it increases there is asset inflation.
D)divide nominal net worth by GDP; if it increases there is asset inflation.

Question 21

Currently if inflation is 2% and the goods inflation target is 2.5%, policymakers

A)congratulate themselves for coming in under their target
B)are unhappy because they have come in under their target
C)are indifferent because they don't have an inflation target
D)are indifferent because they are more interested in asset inflation.

Question 22

Inflation frees policy makers from

A)the 2.5% interest rate lower bound
B)the 2.5% growth rate bound
C)the zero interest rate lower bound
D)the zero interest rate upper bound.

Question 23

Generally in the United States today, goods inflation

A)under 5% is considered acceptable
B)under 2.5% is considered acceptable
C)at zero is considered acceptable.
D)that is negative is preferable

Question 24

If inflation is highly volatile

A)mortgage contracts will likely be more complicated
B)mortgage contracts will likely be less complicated
C)there will be no mortgage contracts
D)there will be no effect on mortgage contracts.

Question 25

With 6% inflation and a 1% nominal interest rate the real interest rate is

A)is 7%
B)1%
C)-5%
D)5%

Question 26

If monetary policy makers want to target a negative interest rate, they

A)cannot do so since negative interest rates are impossible.
B)need to stop inflation before they do it
C)need to encourage inflation before they do it.
D)need to stop asset inflation before they do it.

Question 27

A cost of inflation is that it:

A)makes everyone poorer.
B)makes the poor poorer and the rich richer.
C)reduces the informational content of prices.
D)it raises real interest rates.

Question 28

Suppose you sell surfboards for a living, expect the price of surfboards to increase at the same rate as inflation and adjust prices accordingly.If this does not occur, then it must be true that:

A)the price of surfboards is changing at a rate that is different from what was expected.
B)the inflation rate is different from what was expected.
C)both the price of surfboards and the inflation rate are different from what was expected.
D)the relative price of surfboards is changing.

Question 29

Inflation:

A)can obscure relative price changes.
B)redistributes income from those who can raise prices to those who cannot.
C)can undermine faith in the monetary system, the economy, and the government if it is high enough.
D)makes society poorer on average.

Question 30

If asset prices rise:

A)real wealth increases.
B)productive capacity increases.
C)inflation increases.
D)it is unclear whether wealth increases or inflation has occurred.

Question 31

Over the last twenty years, the United States had periods of considerable:

A)asset price inflation, followed by sudden spurts of asset price deflation.
B)goods price inflation, followed by sudden spurts of goods price deflation.
C)asset price deflation, followed by sudden spurts of goods price inflation.
D)asset price deflation, followed by sudden spurts of asset price inflation.

Question 32

Inflation

A)has only costs
B)has both benefits and costs
C)just exists; it does not have benefits or costs
D)has costs and benefits that generally offset each other.

Question 33

Inflation is undesirable because it:

A)always makes the nation poorer.
B)redistributes income from those who can raise prices to those who cannot.
C)distorts the information value of prices.
D)makes everyone worse off.

Question 34

Before the financial crisis of 2008,

A)the 2.5% inflation target was seen as a lower bound
B)the 2.5% inflation target was seen as an upper bound
C)the 2.5% inflation target was seen as a precise target
D)inflation was not seen as a target.

Question 35

The effects of asset price inflation and asset price deflation generally:

A)even out.
B)have unequal effects on the economy.
C)are unrelated.
D)are addressed by policymakers.

Question 36

If there is inflation

A)the unit of account function of money is improved
B)the unit of account function of money is undermined.
C)the distributional function of money is improved
D)the distributional function of money is undermined.

Question 37

Because inflation undermines money's unit of account function, government policy will try to keep it:

A)at zero.
B)a low rate
C)negative
D)at either a low or a negative rate.

Question 38

If inflation is highly volatile, money is

A)more valuable because you need more of it
B)less valuable because there is less of it.
C)more valuable because its unit of account function is reduced
D)less valuable because its unit of account function is reduced.

Question 39

Asset deflation generally:

A)is more harmful than the preceding inflation was helpful.
B)is less harmful than the preceding inflation was helpful.
C)is neither good nor bad, it merely redistributes income.
D)cannot occur because people will know it will follow asset inflation.

Question 40

Policy makers

A)like inflation because it allows individuals to maintain illusions
B)dislike inflation because it allows individuals to maintain illusions
C)like inflation because it makes society richer
D)dislike inflation because it redistributes income

Question 41

The last time the United States experienced hyperinflation was:

A)during the oil crisis of the 1970s.
B)during World War II.
C)during the Civil War.
D)during the Great Depression.

Question 42

The higher the rate of inflation, the lower the:

A)real interest rate can fall as long as it is positive
B)nominal interest rate can fall as long as it is positive
C)nominal interest rate can fall
D)real interest rate can fall

Question 43

According to the text, if individuals base their expectations on the past we could say that their expectations are:

A)rational.
B)historical.
C)adaptive.
D)regressive.

Question 44

According to the quantity theory:

A)unemployment is everywhere and always a monetary phenomenon.
B)inflation is everywhere and always a monetary phenomenon.
C)real output is everywhere and always a monetary phenomenon.
D)the equation of exchange does not hold true.

Question 45

Given the basic rule of thumb for the relationship among inflation, productivity and nominal wage increases, if wages rise by 1 percent and productivity increases 2 percent, one would predict inflation to be:

A)-1 percent
B)0 percent
C)1.5 percent.
D)3 percent.

Question 46

Governments usually accept goods inflation as long as it stays low, which for the United States currently means around:

A)1 to 1.5 percent
B)2.5 to 3 percent.
C)3.5 to 4 percent.
D)5.5 to 6 percent.

Question 47

In an unexpected inflation, lenders will generally:

A)gain relative to borrowers.
B)lose relative to borrowers.
C)neither gain nor lose relative to borrowers.
D)The effect will be totally random.

Question 48

Given the basic rule of thumb for the relationship among inflation, productivity and nominal wage increases, if wages rise by 5 percent and productivity increases 3 percent, one would predict inflation to be:

A)-1 percent
B)0 percent
C)1 percent.
D)2 percent.

Question 49

If inflation is 3 percent last year and 2 percent this year an individual who follows extrapolative expectations, what is the inflation rate that the individual is likely to for the coming year?

A)0 percent
B)1 percent
C)3 percent.
D)5 percent.

Question 50

If productivity growth is 2 percent and inflation is 5 percent, on average nominal wage increases will be:

A)2 percent.
B)3 percent.
C)5 percent.
D)7 percent.

Question 51

Inflationary expectations are important because widespread changes in inflationary expectations affect:

A)the distribution of income.
B)relative prices.
C)actual inflation.
D)Okun's rule of thumb.

Question 52

According to the text, if individuals base their expectations on economic models we say that their expectations are:

A)rational.
B)historical.
C)adaptive.
D)extrapolative.

Question 53

If inflation increases unexpectedly, then:

A)borrowers tend to lose.
B)lenders tend to lose.
C)lenders and borrowers tend to gain.
D)neither borrowers nor lenders tend to lose.

Question 54

In a hyperinflation, the economy:

A)always collapses.
B)can continue to function but people are unwilling to hold any money.
C)can continue to function because people build expected inflation into wages and prices.
D)will slow on its own to lower inflation.

Question 55

A situation in which the price level increases at an extremely high rate is called:

A)hyperinflation.
B)disinflation.
C)inflation.
D)stagflation.

Question 56

A basic rule of thumb to predict inflation is inflation equals:

A)real wage increases minus productivity growth.
B)productivity growth plus nominal wage increases.
C)productivity growth minus nominal wage increases.
D)nominal wage increases minus productivity growth.

Question 57

Given the basic rule of thumb for the relationship among inflation, productivity and nominal wage increases, if wages rise by 2 percent and productivity increases 1 percent, one would predict inflation to be:

A)0 percent
B)1 percent
C)1.5 percent.
D)3 percent.

Question 58

One reason goods inflation is preferred by policymakers is that it

A)keeps the economy away from asset inflation
B)keeps the economy away from asset deflation
C)makes people richer
D)makes people see the importance of monetary policy

Question 59

In which case will adaptive, extrapolative and rational expectations predict the same inflation rate in the coming year?

A)Inflation is 4 percent last year, 2 percent this year, and the economist's model predicts 3 percent.
B)Inflation is 4 percent last year, 2 percent this year, and the economist's model predicts 0 percent.
C)Inflation is 3 percent last year, 2 percent this year, and the economist's model predicts 4.5 percent.
D)In none of the options would the predictions be the same.

Question 60

A central policy concern about inflation is to see that it

A)does not become built into expectations
B)does not redistribute income
C)does redistribute income
D)does become built into expectations

Question 61

Institutionally focused economists argue:

A)the equation of exchange is incorrect.
B)the equation of exchange should be read from right to left.
C)the equation of exchange should be read from left to right.
D)both the quantity theory and the equation of exchange are incorrect.

Question 62

According to the quantity theory of money, velocity:

A)varies substantially with changes in the rate of interest and the expected rate of inflation.
B)varies with changes in the growth rate of the money supply.
C)is fairly constant, responding only to changes in the expected rate of inflation.
D)is virtually constant, responding only to changes in the underlying institutional structure.

Question 63

If the money supply is 500 and velocity is 6, then nominal GDP:

A)is 83.33.
B)is500.
C)is3000.
D)cannot be determined.

Question 64

If the velocity of money is increasing, but the money supply is not, it is likely the economy is experiencing:

A)a trade deficit.
B)deflation.
C)growth.
D)inflation.

Question 65

If the money stock grows by 13 percent, and during that same time nominal GDP grows by 3.3 percent, what can we deduce happens to velocity during this period?

A)We cannot tell without knowing what happened to prices.
B)It remained constant.
C)It rose.
D)It fell.

Question 66

According to the quantity theory of money, inflation is attributable to increases in:

A)velocity.
B)real GDP.
C)velocity in excess of increases in real GDP.
D)the money supply in excess of increases in real GDP.

Question 67

If the U.S.money supply increases from $7.6 trillion to $8.3 trillion.If there is zero real economic growth, and velocity stays constant, then according to the quantity theory of money, the U.S.inflation rate during this period would be:

A)3 percent.
B)6 percent.
C)9 percent.
D)12 percent.

Question 68

The quantity theory of money implies that an increase in the money supply will ultimately:

A)increase the price level and leave real GDP unchanged.
B)affect only the level of real GDP; the price level will remain unchanged.
C)increase the price level and the level of real GDP.
D)decrease the price level and the level of real GDP.

Question 69

One assumption that changes the equation of exchange into the quantity theory of money is:

A)velocity remains constant.
B)real output varies with the money supply.
C)expectations change with inflation.
D)ptimes quantity equals nominal output.

Question 70

Economists who believe in the quantity theory of money argue that:

A)the causation in the equation of exchange goes from PQ to MV.
B)the causation in the equation of exchange goes from MV to PQ.
C)the causation in the equation of exchange could go either way.
D)there is no causation in the equation of exchange.

Question 71

If the velocity of money is about 1.8 and money stock is about $8 trillion, what is real GDP?

A)$0.8 trillion
B)$4.4 trillion
C)$14.2 trillion
D)we cannot compute real GDP from the data; we can only compute nominal GDP

Question 72

Velocity can be calculated as the ratio of:

A)nominal GDP to real GNP.
B)nominal GDP to the money supply.
C)real GDP to the price level.
D)the money supply to the price level.

Question 73

The quantity theory of money concludes that if real output is constant:

A)changes in the price level are caused by changes in the money supply.
B)real GDP and the money supply are related in the long run.
C)changes in velocity are proportional to changes in nominal income.
D)changes in velocity are proportional to changes in the money supply.

Question 74

Assuming velocity is constant, the rate of inflation equals the difference between the rate of:

A)unemployment and the rate of economic growth.
B)growth in the money supply and the rate of growth in nominal GDP.
C)growth in real wages and the rate of growth in real GDP.
D)growth in the money supply and the rate of growth in real GDP.

Question 75

According to the quantity theory of money, persistent inflation can only be caused by:

A)a low rate of unemployment.
B)money supply growth that exceeds real GDP growth.
C)a high rate of unemployment.
D)a continually growing government deficit.

Question 76

If the velocity of money falls from 1.95 to 1.85, the decline in velocity implies that:

A)inflation increases.
B)inflation decreases.
C)money stock grows faster than nominal GDP.
D)money stock grows more slowly than nominal GDP.

Question 77

According to the quantity theory of money, if the monetary authorities allow the money supply to grow at a rate of 6 percent in an economy that is growing by 2 percent in real terms, then inflation will be:

A)2 percent.
B)4 percent.
C)6 percent.
D)8 percent.

Question 78

If the velocity of money is about 1.8 and nominal GDP is $14.4 trillion, what is the money supply?

A)$1.8 trillion
B)$8.0 trillion
C)$14.4 trillion
D)we cannot compute the money supply from the data given

Question 79

Suppose a country has a velocity of money equal to 12 and nominal GDP of $30 billion.This means that each dollar in this economy is supporting approximately:

A)$10 in total income.
B)$30 in total income.
C)$1.5 in total income.
D)$12 in total income.

Question 80

M2 is $8 trillion and nominal GDP is about $14.2 trillion.What is the velocity of money?

A)1.8
B)8.0
C)112
D)We cannot compute it without knowing real GDP