Question 1

Which of the following is not one of the ways that the German government ended the hyperinflation of the 1920s?

Accepted Answer

Raising the required reserve ratio to reduce bank loans was not a method used by the German government to end the hyperinflation of the 1920s. The primary strategies included negotiating the Dawes Plan to restructure reparations, balancing the budget, and introducing a new currency, the Rentenmark, to stabilize the economy.

Question 2

In countries that have experienced hyperinflation, what role have large government budget deficits played in causing the very high inflation rates?

Accepted Answer

The answer of In countries that have experienced hyperinflation, what...

Question 3

For the purchasing power of money to increase, the price level has to fall.

Accepted Answer

Purchasing power is the amount of goods or services that can be purchased with a unit of money. If the price level (the average price of goods and services in an economy) decreases, the purchasing power of money increases because the same amount of money can now buy more goods or services.

Question 4

Suppose the velocity of money is not fixed, but stable at about two percent growth per year.How could the quantity theory of money be modified to include a stable growth rate of the velocity of money? In this modified quantity theory of money with velocity growing at two percent per year, what would the growth rate of the other variables in the theory need to be to cause inflation?

Accepted Answer

The answer of Suppose the velocity of money is not...

Question 5

If the rate of growth in real GDP exceeds the rate of growth in the money supply, the quantity theory of money predicts a price deflation.

Accepted Answer

According to the quantity theory of money, the general price level is directly proportional to the money supply and inversely proportional to real GDP. If the rate of growth in real GDP exceeds the rate of growth in the money supply, then there will be a fall in prices, i.e. deflation.

Question 6

The quantity equation states that

Accepted Answer

The quantity equation is M × V = P × Y, which means that the money supply times the velocity of money equals the price level times real output. This equation is often used to understand the relationship between changes in the money supply and changes in inflation.

Question 7

The quantity theory of money assumes that

Accepted Answer

The quantity theory of money assumes that the velocity of money (the rate at which money changes hands in the economy) is constant. This allows for a simple equation to be used to understand the relationship between the money supply, prices, and output in the economy. However, in reality, the velocity of money can fluctuate over time.

Question 8

According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be

Accepted Answer

The quantity theory of money is often expressed by the equation MV = PQ, where M is the money supply, V is the velocity of money (assumed constant in this scenario), P is the price level, and Q is the real GDP. If the money supply grows by 6% and real GDP grows by 2%, with the velocity of money constant, the difference (6% - 2% = 4%) would be reflected in the price level, indicating an inflation rate of 4%.

Question 9

In 2008, Zimbabwe ran out of locally produced Coca-Cola and local Coke bottlers were not able to import the concentrated syrup needed to make Coke from the United States because they could not obtain U.S.dollars.A small amount of Coke was imported from South Africa, but a single bottle sold for around 15 billion Zimbabwean dollars.Zimbabwe was experiencing rapid increases in the price level, which is known as

Accepted Answer

Zimbabwe was experiencing hyperinflation, which is a rapid increase in the price level. The high prices for the imported Coke from South Africa is indicative of this phenomenon.

Question 10

The quantity theory of money seeks to explain the connection between money and

Accepted Answer

The quantity theory of money explains that the supply of money in an economy has a direct relationship with the general level of prices in the long run. As the quantity of money increases, so do the prices of goods and services, and vice versa. The theory does not seek to explain the connection between money and interest rates, unemployment, output, or consumer confidence.

Question 11

The velocity of money is defined as

Accepted Answer

The velocity of money is the number of times a unit of currency is used to purchase goods or services in a given time period. It is calculated as the total value of transactions divided by the average stock of money. Therefore, it represents the frequency with which the same unit of money is used to buy goods or services during a given time period.

Question 12

How is the quantity theory of money different from the quantity equation and why must the quantity equation always be true?

Accepted Answer

The answer of How is the quantity theory of money...

Question 13

When a government has a budget deficit, it must issue (sell)government bonds to finance the deficit.Does it matter for the rate of inflation if the government sells the government bonds to the public or sells the government bonds to the central bank? Explain why it does or does not matter.

Accepted Answer

The answer of When a government has a budget deficit,...

Question 14

Hyperinflations occur because governments want to spend more than they raise in taxes, and they pay for the extra purchases by printing money.

Accepted Answer

Hyperinflations occur when a government prints large amounts of money to finance its spending, causing the value of the currency to decrease rapidly and leading to a sharp rise in prices. This is typically caused by a combination of high government spending, low tax revenue, and excessive money creation.

Question 15

During the German hyperinflation of the 1920s, the large increases in the money supply were generated by the German government

Accepted Answer

The answer of During the German hyperinflation of the 1920s,...

Question 16

According to the quantity theory of money, inflation is caused by

Accepted Answer

According to the quantity theory of money, inflation is caused by an increase in the money supply relative to the growth rate of real output. If the money supply grows faster than real GDP, there will be more money in circulation than there are goods and services available, causing the value of money to decrease and prices to rise, leading to inflation.

Question 17

Hyperinflation is caused by

Accepted Answer

Hyperinflation occurs when the rate of growth in the money supply exceeds the rate of growth in real output. So, a high rate of growth in the money supply causes hyperinflation, making option B the correct choice. Choice A is incorrect because a constant increase in the money supply would not necessarily lead to hyperinflation unless it was at a high rate. Choice C and D are also incorrect because they suggest that hyperinflation is caused by the money supply growing more slowly than GDP, which is not the case. Finally, choice E is incorrect because large government surpluses would tend to reduce inflation rather than cause hyperinflation.

Question 18

An increase in the purchasing power of money would not, on average, result in an increase in the purchasing power of people's income because a ________ price level would likely mean ________ wages and salaries.

Accepted Answer

If there is an increase in the purchasing power of money, it means that prices are falling. If prices are falling, it is unlikely that wages and salaries will increase because businesses will likely be making less profit, and may need to cut costs. Therefore, with falling prices, it is likely that wages and salaries will also fall, resulting in a decrease in the purchasing power of people's income.

Question 19

If GDP is currently growing at 28 % a year, the velocity of money is growing at 1% a year, and the growth rate of money supply is 15%, what rate of inflation can this country expected based on the quantity theory of money?

Accepted Answer

The answer of If GDP is currently growing at 28...

Question 20

The quantity theory of money implies that the price level will be stable (no inflation or deflation)when the growth rate of the money supply equals

Accepted Answer

The quantity theory of money, often represented by the equation MV = PQ (where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced), implies that the price level will be stable when the growth rate of the money supply equals the growth rate of real GDP. This is because, if the amount of money in the economy grows at the same rate as the economy itself, there should be no inflationary or deflationary pressure on prices, assuming velocity is constant.

Quiz 10: Money, Banks, and the Bank of Canada