Question 1

In the case of an unanticipated inflation:

Accepted Answer

Unanticipated inflation causes the value of money to decrease, leading to a decrease in purchasing power. Creditors with an unindexed contract, which means the loan's interest rate and payment amount are fixed, lose out because they receive less in real terms than they anticipated.

Question 2

According to the classical theory of money, inflation does not make workers poorer because wages increase:

Accepted Answer

The classical theory of money suggests that in the long run, nominal wages adjust to the increase in the overall price level, maintaining the purchasing power of workers. This means wages increase in proportion to inflation, keeping real wages relatively stable.

Question 3

According to the Fisher effect, the nominal interest rate moves one-for-one with changes in the:

Accepted Answer

The Fisher effect posits that the nominal interest rate adjusts one-for-one with changes in the expected inflation rate, keeping the real interest rate constant.

Question 4

The general demand function for real balances depends on the level of income and the:

Accepted Answer

The answer of The general demand function for real balances...

Question 5

If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in:

Accepted Answer

The quantity theory of money suggests that a 1 percent increase in the money supply, with real output (national income) and velocity of money constant, will lead to a 1 percent increase in the price level (inflation). The Fisher effect states that the nominal interest rate adjusts one-for-one with expected inflation, meaning a 1 percent increase in inflation leads to a 1 percent increase in the nominal interest rate, assuming the real interest rate is constant.

Question 6

When a person purchases a 90-day Treasury bill, he or she cannot know the:

Accepted Answer

The ex post real interest rate cannot be known because it depends on the actual inflation rate over the 90-day period, which cannot be predicted with certainty. The ex ante real interest rate, nominal interest rate, and expected rate of inflation can all be estimated or predicted to some extent.

Question 7

The inconvenience associated with reducing money holdings to avoid the inflation tax is called:

Accepted Answer

Shoeleather costs refer to the inconvenience and costs associated with reducing money holdings to avoid the inflation tax. Menu costs, variable yardstick costs, and fixed costs are not directly related to this concept.

Question 8

Consider the money demand function that takes the form (M/P)d = Y/4i, where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy?

Accepted Answer

The velocity of money (V) is defined as the number of times a unit of currency is spent in a given period of time. It can be calculated as:

V = (PY)/M

Substituting the given money demand function, we get:

V = (PY)/(M/P)d
V = (PY)/(Y/4i)
V = 4i

Therefore, the average velocity of money in this economy is 4i, which is option B.

Question 9

Devoting resources to avoiding the costs of expected inflation leads to:

Accepted Answer

Devoting resources to avoiding the costs of expected inflation can lead to economic inefficiency as resources are diverted from productive activities to inflation-hedging strategies such as stockpiling goods, investing in commodities, or holding foreign currency. These activities do not contribute towards productive economic output and can lead to a misallocation of resources.

Question 10

In the classical model, according to the quantity theory and the Fisher equation, an increase in money growth increases:

Accepted Answer

According to the quantity theory of money, an increase in the money supply leads to an increase in the price level. This results in an increase in the nominal interest rate, as lenders demand to be compensated for the higher inflation rate. The Fisher equation states that the real interest rate is equal to the nominal interest rate minus the inflation rate. Therefore, an increase in the inflation rate (caused by an increase in money growth) leads to a decrease in the real interest rate. However, neither output nor velocity necessarily increase in response to an increase in money growth in the classical model.

Question 11

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is:

Accepted Answer

Real interest rate = Nominal interest rate - Inflation rate
Real interest rate = 1% - 5%
Real interest rate = -4%

Question 12

Evidence from the past 40 years in the United States supports the Fisher effect and shows that when the inflation rate is high, the interest rate tends to be .

Accepted Answer

The answer of Evidence from the past 40 years in...

Question 13

According to the quantity theory a 5 percent increase in money growth increases inflation by percent. According to the Fisher equation a 5 percent increase in the rate of inflation increases the nominal interest rate by .

Accepted Answer

According to the quantity theory of money, a 5 percent increase in money growth increases inflation by the same amount, 5 percent. According to the Fisher equation, a 5 percent increase in the rate of inflation increases the nominal interest rate by the same amount, 5 percent.

Question 14

The opportunity cost of holding money is the:

Accepted Answer

The answer of The opportunity cost of holding money is...

Question 15

If the demand for money depends on the nominal interest rate, then via the quantity theory and the Fisher equation, the price level depends on:

Accepted Answer

According to the quantity theory of money, the price level is directly proportional to the money supply. Via the Fisher equation, the nominal interest rate is directly related to the real interest rate and the expected inflation rate. Therefore, if the demand for money depends on the nominal interest rate, then the price level is influenced by both the current and expected future money supply.

Question 16

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is percent.

Accepted Answer

The cost of holding money is the opportunity cost of not investing it, which is the sum of the real return on government bonds (3 percent) and the expected rate of inflation (4 percent), totaling 7 percent.

Question 17

Inflation the variability of relative prices and allocative efficiency.

Accepted Answer

Inflation leads to an increase in the variability of relative prices, as prices of different goods rise at different rates. This makes it more difficult for businesses and individuals to make informed decisions about how to allocate their resources. As a result, allocative efficiency decreases.

Question 18

A positive relationship between nominal interest rates and inflation in the United States is obvious in:

Accepted Answer

Recent data shows a positive relationship between nominal interest rates and inflation in the United States, but this relationship was not as consistent in nineteenth-century data.

Question 19

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must:

Accepted Answer

The nominal interest rate can be calculated as the sum of the real interest rate and the inflation rate. Therefore, if the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must increase by 1 percent (i.e. 2% - 1% = 1%).

Question 20

The ex ante real interest rate is equal to the nominal interest rate:

Accepted Answer

The ex ante real interest rate is the nominal interest rate adjusted for expected inflation. Therefore, it is equal to the nominal interest rate minus the expected inflation rate.

Quiz 5: The Open Economy