Deck 24: Money and Inflation

Question 1

A one-time increase in the price level

A)is rarely reported by the news media as inflation,but is nevertheless considered to be inflation by economists.
B)is regularly reported by the news media as inflation,but is not considered to be inflation by economists.
C)is rarely reported by the news media as inflation because it is not considered to be inflation by economists.
D)is regularly reported by the news media as inflation because it is considered to be inflation by economists.

Answer 1

is regularly reported by the news media as inflation,but is not considered to be inflation by economists.

Question 2

The Zimbabwean hyperinflation of 2008 supports the proposition that excessive monetary growth causes inflation and not the other way around since the increase in monetary growth appears to have been

A)unintentional.
B)intentional.
C)endogenous.
D)exogenous.

Answer 2

exogenous.

Question 3

The German hyperinflation of 1921-1923 provides important support for the view that high money growth results when

A)the government sets an employment target that is too high.
B)the government expands the money supply to finance its expenditures.
C)the government raises taxes to finance its expenditures.
D)the government sells bonds to the public.

Answer 3

the government expands the money supply to finance its expenditures.

Question 4

The condition of a continually rising price level is defined as

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

Question 5

Milton Friedman's proposition concerning the cause of inflation implies a simple solution to the inflation problem:

A)reduce government budget deficits.
B)limit the ability of fiscal policymakers to bring pressure to bear on the monetary authority.
C)limit the number of terms that politicians are allowed to serve.
D)reduce the growth rate of the money supply.

Question 6

"How do we prevent the inflationary fire from igniting again and stop the roller coaster ride in the inflation rate of the last 40 years?" Milton Friedman's famous proposition suggests the simple solution:

A)reduce the number of terms that politicians are allowed to serve.
B)reduce the growth rate of the money supply.
C)reduce the marginal tax rate on low-income wage earners.
D)increase the marginal tax rates on businesses that hike prices in excess of 5 percent per year.

Question 7

When inflation is defined to be a condition of a continually rising price level,________ economists agree with Milton Friedman's proposition that inflation is a monetary phenomenon.

A)no
B)very few
C)about half of practicing
D)almost all

Question 8

Aggregate demand and supply analysis conclude that continuously growing ________ will cause the price level to rise continually,thus generating inflation.

A)money supply
B)government spending
C)interest rates
D)consumer expenditure

Question 9

Inflation occurs whenever

A)the price level rises.
B)the money supply increases.
C)the price level rises continuously over a period of time.
D)the price level falls continuously over a period of time.

Question 10

The proposition that inflation is the result of a high rate of money growth is

A)not supported by evidence from the German hyperinflation.
B)held only by sociologists and is no longer believed by economists.
C)supported by evidence from inflationary episodes throughout the world.
D)largely a political fabrication designed to make the Fed a scapegoat for poor fiscal policy.

Question 11

Which of the following would provide the strongest evidence that rapid money growth is the driving force behind inflation?

A)An endogenous increase in the money supply that preceded the onset of inflation.
B)An exogenous increase in the money supply that preceded the onset of inflation.
C)An endogenous increase in the money supply that lagged the onset of inflation.
D)An exogenous increase in the money supply that lagged the onset of inflation.

Question 12

Evidence strongly supports the view that countries with high inflation also have

A)the lowest nominal interest rates.
B)the highest rates of money growth.
C)the smallest budget deficits.
D)the lowest interest rates.

Question 13

Complete Milton Friedman's famous proposition: "Inflation is always and everywhere a ________ phenomenon."

A)monetary
B)political
C)policy
D)budgetary

Question 14

At first cut,the simple solution to fighting inflation is

A)reducing the growth rate of the money supply.
B)limiting the number of terms that politicians can serve in elective office.
C)returning the economy to barter by prohibiting the use of fiat money.
D)to impose price controls on businesses that attempt to raise prices.

Question 15

Milton Friedman's proposition that inflation is always and everywhere a monetary phenomenon holds only if

A)government budget deficits do not rise continually.
B)the unemployment rate does not rise continually.
C)the price level rises continually.
D)the United States does not experience more than one negative supply shock per decade.

Question 16

According to aggregate demand and supply analysis,a continually increasing money supply causes a ________ in aggregate demand,everything else held constant.

A)continual increase
B)continual decrease
C)one-time increase
D)one-time decrease

Question 17

According to aggregate demand and supply analysis of inflation and with everything else held constant,a continually increasing money supply causes

A)aggregate demand to increase along a stationary aggregate supply curve,leading to continually increasing aggregate output and prices.
B)aggregate supply to decrease along a stationary aggregate demand curve,leading to continually contracting aggregate output and prices.
C)aggregate demand to increase continually as aggregate supply decreases continually,leading to higher and higher price levels.
D)aggregate demand to decrease continually as aggregate supply increases continually,leading to higher and higher price levels.

Question 18

According to aggregate demand and supply analysis,inflation is caused by

A)supply shocks.
B)expansionary fiscal policies.
C)expansionary monetary policies.
D)rising prices.

Question 19

The economist who proposed that,"Inflation is always and everywhere a monetary phenomenon" was

A)John Maynard Keynes.
B)John R.Hicks.
C)Milton Friedman.
D)Franco Modigliani.

Question 20

Countries with the highest inflation rates are likely to have

A)the highest rates of money growth.
B)small budget deficits relative to GDP.
C)the lowest interest rates.
D)nonaccommodating monetary policy.

Question 21

Suppose that the economy is at the natural rate of output.Explain how a positive supply shock,followed by a more restrictive monetary policy,allows policymakers a painless way to reduce inflation.

Question 22

If workers do not believe that policymakers are serious about fighting inflation,they are most likely to push for higher wages,which will ________ aggregate ________ and lead to unemployment or inflation or both,everything else held constant.

A)decrease; demand
B)increase; demand
C)decrease; supply
D)increase; supply

Question 23

If the Fed responds by increasing the money supply in response to a successful wage push by workers,monetary policy is said to be

A)accomplishing.
B)nonaccommodating.
C)nonaccomplishing.
D)accommodating.

Question 24

Methods of financing government spending are described by an expression called the government budget constraint,which states the following:

A)the government budget deficit must equal the sum of the change in the monetary base and the change in government bonds held by the public.
B)the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the public.
C)the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the Fed.
D)the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the Treasury.

Question 25

According to aggregate demand and supply analysis,an increase in government spending will cause aggregate demand to ________,causing output to ________ ,everything else held constant.

A)increase; fall
B)increase; rise
C)decrease; fall
D)decrease; rise

Question 26

Which of the following is most likely to lead to inflationary monetary policy?

A)Declining oil prices
B)Resolution of conflict in the Middle East
C)The enactment of a free-trade agreement with Mexico
D)Rising unemployment

Question 27

If workers believe that government policymakers will increase aggregate demand to avoid a politically unpopular increase in unemployment when workers demand higher wages,then workers will not fear higher unemployment and their wage demands will result in

A)demand-pull inflation.
B)hyperinflation.
C)deflation.
D)cost-push inflation.

Question 28

Workers will have greater incentives to push for higher wages when government policymakers place greater concern on ________ than ________ and are thus ________ likely to adopt accommodative policies.

A)inflation; unemployment; less
B)inflation; unemployment; more
C)unemployment; inflation; less
D)unemployment; inflation; more

Question 29

Aggregate demand and supply analysis indicates that negative supply shocks

A)decrease the price level,but cannot decrease the inflation rate.
B)increase the price level,but cannot increase the inflation rate.
C)increase both the price level and the inflation rate.
D)decrease both the price level and the inflation rate.

Question 30

According to aggregate demand and supply analysis and with everything else held constant,a continuous increase in the money supply causes

A)the price level to increase,but has no lasting effect on the inflation rate.
B)the price level to fall.
C)inflation.
D)output to increase,but leaves the price level and inflation unchanged.

Question 31

Suppose that the economy is at the natural rate of output.In the absence of accommodating policy and everything else held constant,the net result of a negative supply shock is that

A)the economy returns to full employment at the initial price level.
B)the economy returns to full employment at a higher price level.
C)the economy returns to full employment at a lower price level.
D)aggregate output increases above the natural rate level,but only temporarily.

Question 32

To say that inflation is a monetary phenomenon seems to beg the question:

A)Why does inflationary monetary policy occur?
B)Why do politicians seek reelection?
C)Why is the Fed independent?
D)Why does the U.S.Treasury print so much money?

Question 33

Demand-pull inflation can result when

A)policymakers set an unemployment target that is too high.
B)a persistent budget deficit is financed by selling bonds to the public.
C)a persistent budget deficit is financed by selling bonds to the central bank.
D)workers get numerous wage increases.

Question 34

In the absence of an accommodating monetary policy,a push by workers to get higher wages will cause

A)cost-push inflation.
B)demand-pull inflation.
C)higher unemployment.
D)a lower price level.

Question 35

Which of the following is most likely to lead to inflationary monetary policy?

A)Declining oil prices
B)Resolution of conflict in the Middle East
C)The enactment of a free-trade agreement with Mexico
D)Rising government budget deficits

Question 36

Theoretically,one can distinguish a demand-pull inflation from a cost-push inflation by comparing

A)how fast prices rise relative to wages.
B)the unemployment rate with its natural rate level.
C)when prices rise relative to wages.
D)government debt to real GDP.

Question 37

If policymakers set a target for unemployment that is too low because it is less than the natural rate of unemployment,this can set the stage for a higher rate of money growth and

A)cost-push inflation.
B)demand-pull inflation.
C)cost-pull inflation.
D)demand-push inflation.

Question 38

Explain and show graphically why continuous monetary growth is needed to generate inflation.Describe how the inflation process is generated.

Question 39

The combination of a successful wage push by workers and the government's commitment to high employment leads to

A)demand-pull inflation.
B)supply-side inflation.
C)supply-shock inflation.
D)cost-push inflation.

Question 40

Which of the following is least likely to lead to inflationary monetary policy?

A)Rising unemployment
B)Expanding federal budget deficits
C)Declining oil prices
D)Conflict in the Middle East

Question 41

Evidence from episodes of hyperinflation indicates that

A)wage-push demands have been the ultimate source of inflationary monetary policies.
B)supply shocks have been the ultimate source of inflationary monetary policies.
C)huge government budget deficits have been the ultimate source of inflationary monetary policies.
D)there is no common source of inflationary monetary policies.

Question 42

Analysis of episodes of hyperinflation indicate that the rapid money growth leading to the inflation is the result of

A)governments financing massive budget deficits by printing money.
B)central banks' attempts to peg interest rates.
C)central banks' attempts to peg exchange rates.
D)increases in taxes.

Question 43

The financing of government spending by issuing debt

A)causes both reserves and the monetary base to rise.
B)causes both reserves and the monetary base to decline.
C)causes reserves to rise,but the monetary base to decline.
D)has no net effect on the monetary base.

Question 44

Moderate deficits,such as those experienced by the United States in the last decade,present an inflationary problem if

A)they put upward pressure on interest rates,and the Fed has a goal of preventing high interest rates.
B)they put upward pressure on interest rates,and the Fed has a goal of preventing interest rates from falling too low.
C)the Fed responds by reducing the growth of high-powered money.
D)the Fed cuts money growth to offset the expansionary fiscal effects.

Question 45

If the government finances its spending by selling bonds to the central bank,the monetary base will ________ and the money supply will ________.

A)increase; increase
B)increase; decrease
C)decrease; decrease
D)not change; not change

Question 46

If the Fed pursues a policy goal of

A)preventing high interest rates,and deficits cause interest rates to rise,then deficits will lead to money creation.
B)preventing high inflation,and deficits cause inflation to rise,then deficits will lead to money creation.
C)preventing high bond prices,and deficits cause bond prices to rise,then deficits will lead to money creation.
D)preventing high stock prices,and deficits cause stock prices to rise,then deficits will lead to money creation.

Question 47

Although the U.S.has a well-developed government bond market and has experienced relatively small budget deficits relative to GDP,deficits can be inflationary if

A)deficits put upward pressure on interest rates,and the Fed attempts to keep interest rates from rising.
B)deficits put upward pressure on interest rates,and fiscal authorities raise taxes in an attempt to keep interest rates from rising.
C)the Fed refuses to purchase government bonds.
D)the world's supply of gold expands because of new gold discoveries.

Question 48

The finance of government spending through a Treasury sale of bonds which are then purchased by the Fed

A)causes both reserves and the monetary base to rise.
B)causes both reserves and the monetary base to decline.
C)causes reserves to rise,but the monetary base to decline.
D)has no net effect on the monetary base.

Question 49

Financing government spending by selling bonds to the public,which pays for the bonds with currency,

A)leads to a permanent decline in the monetary base.
B)leads to a permanent increase in the monetary base.
C)leads to a temporary increase in the monetary base.
D)has no net effect on the monetary base.

Question 50

If an economist were interested in testing whether government budget deficits had been the cause of excessive monetary growth for a country for the period 1950-2000,she would examine the behavior of

A)the ratio of government spending to GDP.
B)the money supply-to-monetary-base ratio.
C)interest rates.
D)the government debt-to-GDP ratio.

Question 51

If the government finances its spending by issuing debt to the public,the monetary base will ________ and the money supply will ________.

A)increase; increase
B)increase; decrease
C)decrease; increase
D)not change; not change

Question 52

Financing government spending with taxes

A)causes both reserves and the monetary base to rise.
B)causes both reserves and the monetary base to decline.
C)causes reserves to rise,but the monetary base to decline.
D)has no net effect on the monetary base.

Question 53

If moderate deficits put upward pressure on interest rates,the Fed may ________ bonds,leading to a ________ in high-powered money.

A)sell; fall
B)buy; fall
C)sell; rise
D)buy; rise

Question 54

If the deficit is financed by selling bonds to the ________,the money supply will ________,causing aggregate demand to ________.

A)public; rise; increase
B)public; fall; decrease
C)central bank; rise; increase
D)central bank; fall; decrease

Question 55

If the deficit is financed by selling bonds to the ________,the money supply will ________,increasing aggregate demand,and leading to a rise in the price level.

A)public; rise
B)public; fall
C)central bank; rise
D)central bank; fall

Question 56

This method of financing government spending is frequently called printing money because high-powered money (the monetary base)is created in the process.

A)Financing government spending with taxes.
B)The finance of government spending through a Treasury sale of bonds that are then purchased by the Fed.
C)Financing government spending by selling bonds to the public,which pays for the bonds with currency.
D)Financing government spending by selling bonds to the public,which pays for the bonds with checks.

Question 57

Kayla,an economist,is interested in knowing if government deficits have been a factor in explaining rapid money growth in her country in the past twenty years.What ratio should Kayla examine?

A)The ratio of money to the monetary base
B)The ratio of currency to demand deposits
C)The ratio of money to government debt
D)The ratio of government debt to GDP

Question 58

Methods of financing government spending are described by an expression called the government budget constraint,which states the following:

A)DEFICIT = (G - T)= ΔMB + ΔBONDS.
B)DEFICIT = (G - T)= ΔMB - ΔBONDS.
C)DEFICIT = (G - T)= ΔBONDS - ΔMB.
D)DEFICIT = (G - T)= ΔMB/ΔBONDS.

Question 59

If moderate deficits put ________ pressure on interest rates,the Fed may ________ bonds,leading to an increase in high-powered money.

A)upward; sell
B)upward; buy
C)downward; sell
D)downward; buy

Question 60

Only when budget deficits are financed by money creation does the increased government spending lead to ________ in the ________.

A)a decrease; monetary base
B)an increase; monetary base
C)a decrease; money multiplier
D)an increase; money multiplier

Question 61

The ________ lag is the time it takes for policymakers to change policy instruments once they have decided on the new policy,while the ________ lag is the time it takes for the policy to actually have an impact on the economy.

A)recognition; implementation
B)legislative; effectiveness
C)implementation; recognition
D)implementation; effectiveness

Question 62

The time that it takes for an discretionary policy to actually influence economic activity is called the

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

Question 63

Of the five time lags that prevent a discretionary policy from returning aggregate output to full employment instantaneously,two do not slow the effectiveness of monetary policy-the

A)implementation and effectiveness lags.
B)legislative and effectiveness lags.
C)legislative and implementation lags.
D)recognition and effectiveness lags.

Question 64

The ________ lag is the time it takes for policymakers to obtain the data that tell them what is happening to the economy,while the ________ lag is the time it takes for policymakers to be sure of what the data are signaling about the future course of the economy.

A)data; recognition
B)recognition; data
C)data; implementation
D)implementation; recognition

Question 65

Economists usually view ________ policy as having a shorter implementation lag than ________ policy,but there is substantial uncertainty about how long this lag is.

A)fiscal; incomes
B)fiscal; monetary
C)monetary; incomes
D)monetary; fiscal

Question 66

Proponents of Ricardian Equivalence reject the view that deficits

A)cause the monetary base to decrease.
B)cause the monetary base to increase.
C)have no effect on the monetary base.
D)cannot be inflationary,even when financed by tax hikes.

Question 67

According to economists who believe in Ricardian Equivalence,when the government runs a deficit and issues bonds,

A)the public recognizes that it will be subject to higher taxes in the future in order to pay off these bonds.
B)the public works less to avoid these future taxes,causing the demand for bonds to decrease.
C)the Fed must purchase bonds to keep the interest rate from rising.
D)the Fed must sell bonds to keep the interest rate from rising.

Question 68

The ________ lag is the time it takes for policymakers to obtain the information that tells them what is happening to the economy,while the ________ lag represents the time it takes to implement a particular fiscal policy.

A)data; legislative
B)recognition; data
C)data; implementation
D)recognition; legislative

Question 69

In the period 1965 through the 1970s,policymakers pursued ________ policies in order to achieve ________.

A)expansionary; high employment
B)expansionary; low inflation
C)contractionary; high employment
D)contractionary; low inflation

Question 70

Advocates of discretionary policy usually view ________ policy as having a longer effectiveness lag than ________ policy,but there is substantial uncertainty about how long this lag is.

A)fiscal; incomes
B)fiscal; monetary
C)monetary; incomes
D)monetary; fiscal

Question 71

The ________ lag is the time it takes for policymakers to be sure of what the information is signaling about the future course of the economy,while the ________ lag is the time it takes for policymakers to change policy instruments once they have decided on the new policy.

A)recognition; implementation
B)recognition; legislative
C)data; legislative
D)data; implementation

Question 72

Because policies in the United States were too expansionary from 1965 through 1973,the U.S.suffered

A)demand-pull inflation.
B)cost-push inflation,as workers sought higher wages in order to keep up with inflation.
C)both demand-pull and cost-push inflation.
D)neither demand-pull nor cost-push inflation.

Question 73

Evidence from the time period 1960-1980 indicates that inflation in the United States resulted from

A)an employment target that was set too high.
B)the government's inability to sell bonds to the Fed.
C)an expansion in the money supply to finance federal government expenditures.
D)the excessive sale of government bonds to the public.

Question 74

The time it takes for a policy to have an impact on the economy,once it has been implemented,is called the

A)implementation lag.
B)effectiveness lag.
C)legislative lag.
D)data lag.
E)inside lag.

Question 75

If aggregate output is below the natural rate level,advocates of discretionary policy would recommend that the government

A)do nothing.
B)try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right.
C)try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right.
D)try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left.

Question 76

The ________ lag represents the time it takes to pass legislation to implement a particular (fiscal)policy,while the ________ lag is the time it takes for policymakers to change policy instruments once they have decided on the new policy.

A)legislative; effectiveness
B)legislative; recognition
C)legislative; implementation
D)implementation; legislative

Question 77

The time it takes for policymakers to change policy instruments once they have decided on a new policy is called the

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

Question 78

If aggregate output is below the natural rate level,advocates of nondiscretionary policy would recommend that the government

A)do nothing.
B)try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right.
C)try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right.
D)try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left.

Question 79

Advocates of discretionary policy usually view ________ policy as having a shorter effectiveness lag than ________ policy,but there is substantial uncertainty about how long this lag is.

A)fiscal; incomes
B)fiscal; monetary
C)monetary; incomes
D)monetary; fiscal

Question 80

The ________ lag is the time it takes for policymakers to be sure of what the data are signaling about the future course of the economy,while the ________ lag represents the time it takes to pass legislation to implement a particular (fiscal)policy.

A)data; recognition
B)recognition; legislative
C)data; legislative
D)implementation; legislative