Question 1

If the money supply growth rate permanently increased from 4 percent to 12 percent,what would we expect to happen to the inflation rate and the nominal interest rate?
A)The inflation rate would increase by 8 percent, and the nominal interest rate would increase by less than 10 percent.
B)The inflation rate would increase by less than 8 percent, and the nominal interest rate would increase by 8 percent.
C)Both the inflation rate and the nominal interest rate would increase by 8 percent.
D)Both the inflation rate and the nominal interest rate would increase by less than 8 percent.

Accepted Answer

According to the quantity theory of money and the Fisher effect, a permanent increase in the money supply growth rate would lead to a proportional increase in the inflation rate, and the nominal interest rate would also increase by the same amount.

Question 2

Which of the following best defines menu costs?
A)resources used by people to maintain lower money holdings when inflation is high
B)the distortion in resource allocation created by uncertainty concerning relative price changes created by inflation
C)the distortion in incentives created by inflation when taxes do not adjust for inflation
D)the cost of more frequent price changes induced by higher inflation

Accepted Answer

Menu costs refer to the cost of more frequent changes in prices due to higher inflation. This can include costs associated with printing new menus, updating price tags, and changing advertising materials.

Question 3

Which of the following inflation costs matter even if actual inflation and expected inflation are the same?
A)production costs
B)losses in real income
C)losses in tax revenue
D)menu costs

Accepted Answer

Menu costs refer to the costs involved in updating prices of goods and services to adjust for inflation. These costs exist regardless of whether actual inflation and expected inflation are the same, as prices still need to be adjusted to maintain profitability. The other options (A, B, and C) are all costs that arise due to unexpected inflation, and would not be relevant if actual and expected inflation are the same.

Question 4

Arnold puts money into an account.One year later,he sees that he has 7 percent more dollars and that his money will buy 3 percent more goods.Which of the following is consistent with these facts?
A)The nominal interest rate was 7 percent, and the inflation rate was 4 percent.
B)The nominal interest rate was 10 percent, and the inflation rate was 3 percent.
C)The nominal interest rate was 3 percent, and the inflation rate was -10 percent.
D)The nominal interest rate was 4 percent, and the inflation rate was -3 percent.

Accepted Answer

The answer of Arnold puts money into an account.One year...

Question 5

What does the shoeleather cost of inflation refer to?
A)the fall in real income associated with inflation
B)the time spent searching for low prices when inflation rises
C)the waste of resources used to maintain lower money holdings
D)the increased cost to the government of printing more money

Accepted Answer

The answer of What does the shoeleather cost of inflation...

Question 6

Greta puts money in a savings account at her bank,earning 6.5 percent.One year later,she takes her money out and notes that while her money was earning interest,prices rose 3.5 percent.How has the amount of goods Greta can buy changed one year later?
A)Greta can buy 6.5 percent more goods.
B)Greta can buy 6.5 percent less goods.
C)Greta can buy 3 percent more goods.
D)Greta can buy 3 percent less goods.

Accepted Answer

Greta's real purchasing power increased by the difference between the interest rate and the inflation rate, which is 6.5% - 3.5% = 3%.

Question 7

Suppose that velocity and output are constant and that the quantity theory and Fisher effect are both correct.If the nominal interest rate is 8 percent and inflation is 3 percent,what is the money supply growth rate or the real interest rate?
A)The money supply growth rate is 3 percent.
B)The real interest rate is 11 percent.
C)The real interest rate is 8 percent.
D)The money supply growth rate is 11 percent.

Accepted Answer

The answer of Suppose that velocity and output are constant...

Question 8

If the nominal interest rate is 8 percent and the real interest rate is 3 percent,what is the inflation rate?
A)3 percent
B)5 percent
C)8 percent
D)11 percent

Accepted Answer

The inflation rate can be calculated by subtracting the real interest rate from the nominal interest rate. In this case, 8 percent minus 3 percent equals 5 percent, which is the inflation rate. Therefore, the best choice is B.

Question 9

If a country had deflation of 2 percent while the nominal interest rate increased by 1 percentage point,how would the real interest rate change?
A)The real interest rate would decrease by 1 percentage point.
B)The real interest rate would increase by 1 percentage point.
C)The real interest rate would decrease by 3 percentage points.
D)The real interest rate would increase by 3 percentage points.

Accepted Answer

The answer of If a country had deflation of 2...

Question 10

Which of the following does an increase in the money supply growth rate increase?
A)inflation, nominal interest rates, and real interest rates
B)inflation and nominal interest rates, but it does not change real interest rates
C)inflation and real interest rates, but it does not change nominal interest rates
D)nominal and real interest rates, but it does not change inflation

Accepted Answer

An increase in the money supply growth rate tends to lead to an increase in inflation and nominal interest rates. This occurs because with more money in the economy, there is more demand for goods and services, driving up their prices, which in turn leads to higher nominal interest rates. However, real interest rates may not change because they are adjusted for inflation.

Question 11

What do shoeleather costs refer to?
A)the cost of more frequent price changes induced by higher inflation
B)the distortion in resource allocation created by distortions in relative prices due to inflation
C)resources used to maintain lower money holdings when inflation is high
D)the distortion in incentives created by inflation by taxes that do not adjust for inflation

Accepted Answer

Shoeleather costs refer to the resources used to maintain lower money holdings when inflation is high. This refers to the increased time and effort (similar to walking in uncomfortable shoes) that people must take to make more frequent trips to the bank or ATM to withdraw money to keep up with the rising cost of goods and services due to inflation.

Question 12

Which of the following can a country increase in the long run by increasing its money growth rate?
A)the nominal wage divided by the price level
B)real output
C)real interest rates
D)the price level

Accepted Answer

Increasing the money growth rate results in higher inflation, which leads to a higher price level in the long run. Therefore, the correct answer is D. The nominal wage divided by the price level (A) gives the real wage, which is determined by supply and demand in the labor market and is not affected by changes in the money growth rate. Real output (B) depends on factors such as technology, capital accumulation, and labor force growth, and is not affected by changes in the money growth rate. Real interest rates (C) are determined by the supply and demand of loanable funds and are not affected by changes in the money growth rate in the long run.

Question 13

What terms refers to the cost of changing price tags and price listings?
A)inflation-induced tax distortions
B)relative-price variability costs
C)shoeleather costs
D)menu costs

Accepted Answer

The term "menu costs" refers to the cost of changing price tags and price listings.

Question 14

If your salary increased by 7 percent and prices increased by 4 percent,how much did your real wage rise by?
A)3 percent
B)4 percent
C)6 percent
D)7 percent

Accepted Answer

Real wage = (1 + 7%) / (1 + 4%) - 1 = 1.03 / 1.04 - 1 = 0.03 = 3%

Question 15

People use more resources to reduce their money holdings because of high inflation.What is this an example of?
A)inflation-induced tax distortions
B)relative-price variability costs
C)shoeleather costs
D)menu costs

Accepted Answer

This is an example of shoeleather costs, which refer to the increased costs of time and effort that people incur when they have to reduce their money holdings more frequently due to high inflation.

Question 16

Which of the following does the Fisher effect imply?
A)The nominal interest rate adjusts one for one with the inflation rate.
B)The growth rate of the money supply determines the inflation rate.
C)Real variables are heavily influenced by the monetary system.
D)The real interest rate adjusts one for one with the inflation rate.

Accepted Answer

The answer of Which of the following does the Fisher...

Question 17

Suppose that velocity and output are constant,the quantity theory and Fisher effect are correct,the nominal interest rate is 7 percent,and money growth is 2 percent.Which of the following is consistent with these facts?
A)The real interest rate is 2 percent, and nominal wages are rising.
B)The real interest rate is 2 percent, and real wages are rising.
C)The real interest rate is 5 percent, and nominal wages are rising.
D)The real interest rate is 9 percent, and real wages are rising.

Accepted Answer

The answer of Suppose that velocity and output are constant,the...

Question 18

In the long run,when money is neutral,which of the following increases when the money supply growth rate increases?
A)real output growth
B)real interest rates
C)nominal interest rates
D)the money supply divided by the price level

Accepted Answer

In the long run, when money is neutral, real variables such as real output growth and real interest rates are not affected by changes in the money supply growth rate. However, nominal variables such as nominal interest rates and the price level are affected. When the money supply growth rate increases, nominal interest rates also increase as there is more money available to borrow and lend, leading to increased competition among borrowers and higher interest rates. The money supply divided by the price level is also affected, but this is simply a restatement of the nominal value of money in circulation. Therefore, the best choice is C, nominal interest rates.

Question 19

What is inflation positively correlated with?
A)nominal wage growth
B)real interest rate
C)productivity growth rate
D)the price level

Accepted Answer

The answer of What is inflation positively correlated with?
A)nominal wage...

Question 20

If the money supply growth rate permanently increased from 5 percent to 30 percent,what would we expect to happen to inflation?
A)It would increase by more than 25 percentage points.
B)It would increase by 25 percentage points.
C)It would increase by less than 25 percentage points.
D)It would decrease by more than 25 percentage points.

Accepted Answer

This is because inflation and money supply growth rate are directly related. With a 25% increase in the money supply growth rate, we would expect a 25% increase in inflation in the long run, all else equal.

Quiz 11: Money Growth and Inflation

If the money supply growth rate permanently increased from 4 percent to 12 percent,what would we expect to happen to the inflation rate and the nominal interest rate?

Which of the following best defines menu costs?

Which of the following inflation costs matter even if actual inflation and expected inflation are the same?

Arnold puts money into an account.One year later,he sees that he has 7 percent more dollars and that his money will buy 3 percent more goods.Which of the following is consistent with these facts?

What does the shoeleather cost of inflation refer to?

Greta puts money in a savings account at her bank,earning 6.5 percent.One year later,she takes her money out and notes that while her money was earning interest,prices rose 3.5 percent.How has the amount of goods Greta can buy changed one year later?

Suppose that velocity and output are constant and that the quantity theory and Fisher effect are both correct.If the nominal interest rate is 8 percent and inflation is 3 percent,what is the money supply growth rate or the real interest rate?

If the nominal interest rate is 8 percent and the real interest rate is 3 percent,what is the inflation rate?

If a country had deflation of 2 percent while the nominal interest rate increased by 1 percentage point,how would the real interest rate change?

Which of the following does an increase in the money supply growth rate increase?

What do shoeleather costs refer to?

Which of the following can a country increase in the long run by increasing its money growth rate?

What terms refers to the cost of changing price tags and price listings?

If your salary increased by 7 percent and prices increased by 4 percent,how much did your real wage rise by?

People use more resources to reduce their money holdings because of high inflation.What is this an example of?

Which of the following does the Fisher effect imply?

Suppose that velocity and output are constant,the quantity theory and Fisher effect are correct,the nominal interest rate is 7 percent,and money growth is 2 percent.Which of the following is consistent with these facts?

In the long run,when money is neutral,which of the following increases when the money supply growth rate increases?

What is inflation positively correlated with?

If the money supply growth rate permanently increased from 5 percent to 30 percent,what would we expect to happen to inflation?