Deck 25: Inflation and Money

Question 1

Timing evidence suggests that inflation in the 1960s caused rapid growth in M1.

Answer 1

False

Question 2

An increase in investment leads to cost-pull inflation.

Answer 2

False

Question 3

A currency appreciation leads to demand-pull inflation.

Answer 3

False

Question 4

Attempts by monetary policymakers to keep unemployment very low could lead to high inflation.

Question 5

Inflation can arise if a central banker's target for the unemployment rate is too low.

Question 6

There is no limit on the supply of money.

Question 7

A decrease in gas prices leads to cost-push inflation.

Question 8

No part of North America has ever experienced a hyperinflation.

Question 9

Hyperinflations have always been associated with rapid increases in the money supply.

Question 10

There is evidence that the Federal Reserve had a goal for GDP growth that was too high during the 1960s.

Question 11

An increase in wages due to unionization can lead to hyperinflation.

Question 12

Only increases in government spending can lead to continually rising inflation.

Question 13

An increase in consumer confidence can lead to continually rising prices.

Question 14

Increased commodity prices lead to demand-pull inflation.

Question 15

A tight labor market leads to cost-push inflation.

Question 16

Demands by workers for higher wages are more likely when monetary policy is focused on keeping inflation low.

Question 17

Independent central banks are more likely to monetize government debt.

Question 18

Government budget deficits are a source of inflation.

Question 19

During the 1960s, the Federal Reserve was monetizing the debt to some degree.

Question 20

A tax cut leads to demand-pull inflation.

Question 21

Lags are the amount of time between an economic change and the impact of a policy response.

Question 22

Zimbabwe experienced hyperinflation in 2008.

Question 23

Governments with low budget deficits and independent central banks are more likely to experience high inflation.

Question 24

Implementation lag in monetary policy is more of a problem with discount lending than for open market operations.

Question 25

An independent central bank is less likely to fund government expenditures by buying bonds.

Question 26

Demand-pull inflation can set off accommodative monetary policy and inflation.

Question 27

Deflation would cause currency appreciation, ceteris paribus.

Question 28

An increase in the money supply does not increase the natural rate of output.

Question 29

With a fixed exchange rate and free capital flows, monetizing the debt is impossible.

Question 30

Lags force central bankers to conduct policy based on forecasts.

Question 31

If the monetary policymaker keeps trying to keep output above the natural rate

A) inflation will remain high.
B) wages will continue to rise.
C) output will return to the natural rate.
D) all of the above.

Question 32

If the monetary policymaker keeps trying to keep unemployment exceptionally low

A) output will stay below the natural rate.
B) prices will continually rise.
C) real interest rates will remain high.
D) all of the above.

Question 33

Implementation lag is a more serious problem for monetary policy than fiscal policy.

Question 34

The uncertain effects of bond purchases and sales on the federal funds rate are examples of effectiveness lags for monetary policy.

Question 35

Changes in the money supply can never move equilibrium output above the natural rate.

Question 36

When output is above the natural rate, the labor market is _____ and wages should

A) tight, rise.
B) tight, fall.
C) loose, rise.
D) loose, fall.

Question 37

Which of the following could cause continually rising prices?

A) an improvement in technology
B) lower oil prices
C) an increasing money supply
D) all of the above

Question 38

Legislative lags are more of a problem with bailouts than with emergency discount lending.

Question 39

A primary cause of the depreciation of the Confederate currency was the disruption of international trade with the South.

Question 40

Prices that rise continually are always associated with

A) increases in government spending.
B) decreases in government spending.
C) increases in the money supply.
D) decreases in the money supply.

Question 41

Recognition lag is a particularly difficult problem for which variable?

A) potential GDP
B) interest rates
C) unemployment rate
D) none of the above

Question 42

If workers successfully demand higher wages, _____ shifts to the

A) AD, left.
B) AD, right.
C) AS, left.
D) AS, right.

Question 43

The money supply is different from other economic variables because

A) it never decreases.
B) it has no upper limit.
C) it is controlled by the government.
D) all of the above.

Question 44

Inflation arising from increased business confidence and investment is an example of

A) demand-pull inflation.
B) cost-push inflation.
C) both of the above.
D) neither of the above.

Question 45

The lag for monetary policymakers obtaining information about unemployment is called

A) data lag.
B) legislative lag.
C) implementation lag.
D) recognition lag.

Question 46

In a wage-price spiral, when higher wage demands and accommodative monetary policy follow each other, the wage increase is represented by a shift in _____ and the change in monetary policy is represented by a shift in

A) AD, AD.
B) AD, AS.
C) AS, AD.
D) AS, AS.

Question 47

If workers successfully demand higher wages, but monetary policy is not accommodative, then prices will _____ in the short run and _____ in the long run.

A) rise, rise
B) rise, fall
C) fall, rise
D) fall, fall

Question 48

When policy makers want to get out of a recession, they might respond with

A) EMP.
B) borrowing from other countries.
C) lowering taxes.
D) none of the above.

Question 49

Which of the following could cause continually rising prices?

A) a rise in commodity prices
B) low interest rates
C) increasing demand for exports
D) none of the above

Question 50

If monetary policymakers overestimate the level of full employment, then prices will _____ in the short run and _____ in the long run.

A) rise, rise
B) rise, fall
C) fall, rise
D) fall, fall

Question 51

When a central bank buys the bonds of its government to pay for expenditures, it is said to _____ the debt.

A) monetize
B) dollarize
C) currency cover
D) none of the above

Question 52

A monetary policymaker using a Taylor Rule could cause persistently increasing inflation if

A) the estimate of the equilibrium real federal funds rate is too high.
B) the inflation target is too high.
C) the estimate of potential GDP is too high.
D) all of the above.

Question 53

Which of the following are reasons a monetary policymaker might cause inflation due to excessive money supply growth?

A) high employment policies
B) overestimating the level of full employment
C) high government debt
D) all of the above

Question 54

The type of lag that can be more serious for monetary policy than fiscal policy is

A) data lag.
B) recognition lag.
C) legislative lag.
D) effectiveness lag.

Question 55

The problem of determining whether new data is random or represents the economic environment is called

A) data lag.
B) recognition lag.
C) legislative lag.
D) effectiveness lag.

Question 56

Which lag affects monetary policy the most?

A) the time to get legislation passed
B) the time to implement a change in the interest rate
C) the time it takes for an interest rate change to affect the economy
D) the time it takes to observe the change in longer term interest rates

Question 57

When workers negotiate higher wages but monetary policy is accommodative, the resulting decrease in equilibrium output is due to a shift in _____, while the long-run return to the natural rate of output is due to a shift in

A) AD, AD.
B) AD, AS.
C) AS, AD.
D) AS, AS.

Question 58

Effectiveness lags are a problem for monetary policymakers due to the uncertain effect of _____ changes on

A) tax rate, consumption
B) interest rate, investment
C) lending, productivity
D) all of the above

Question 59

An increase in the money supply leads to a shift in AD in the _____ run and AS in the _____ run.

A) short, short
B) short, long
C) long, short
D) long, long

Question 60

Inflation arising from a rise in the price of imported input goods like copper is an example of

A) demand-pull inflation.
B) cost-push inflation.
C) both of the above.
D) neither of the above.

Question 61

Explain why lags are "long and variable."

Question 62

What cause is common to all hyperinflations?

Question 63

Independent central banks are better able to

A) withstand political pressure to monetize debt.
B) respond to "high" levels of unemployment with an EMP.
C) more credible commitments to stop inflation.
D) all of the above

Question 64

Workers successfully negotiate higher wages and employment falls as a result. Then monetary policymakers act to raise employment. Show (and explain) these changes on a graph of AS and AD.

Question 65

In the long run, the quantity theory of money implies that the rate of money supply growth and inflation is identical with one additional assumption. What is the assumption? Explain.

Question 66

Increased government expenditures cause AD to shift _____ and AS to shift

A) right, right
B) left, left
C) right, left
D) left, right

Question 67

There is often pressure on central banks to raise output and reduce unemployment in the short run. Explain how this creates a time consistency problem.

Question 68

Draw a graph showing the short- and long-run effects of an increase in the money supply.

Question 69

Explain why interest rate targeting might be superior to money supply growth targeting for monetary policy in terms of lags.

Question 70

What are the three ways governments can pay for expenditures?

Question 71

Monetary policymakers are unsure about the effects of an interest rate change on exchange rates. What type of lag is this?

Question 72

If workers successfully demand higher wages, but monetary policy is not accommodative, then the unemployment rate will _____ in the short run and _____ in the long run.

A) rise, rise
B) rise, fall
C) fall, rise
D) fall, fall

Question 73

Which of the following are probable causes of the inflation of the Confederate currency during the Civil War?

A) fear that the South would lose the war
B) lack of international trade with the South
C) excessive money supply growth
D) all of the above

Question 74

If the President controlled monetary policy, would you expect higher or lower inflation? Why?

Question 75

Unions temporarily gain additional bargaining power. Show the short-run impact on an AS-AD graph. Also show the long-run result, if monetary policy is not accommodative.