Question 1

The proposition that changes in the money supply have no long-run effect on real variables is known as the ________.

Accepted Answer

The proposition that changes in the money supply have no long-run effect on real variables is known as the neutrality of money. The classical dichotomy refers to the separation of real and nominal variables, the quantity theory of money relates changes in the money supply to changes in nominal variables, and the Fisher effect refers to the relationship between inflation rates and nominal interest rates.

Question 2

Figure 5.1 
-Figure 5.1 provides support for the Fisher effect,by ________.

Accepted Answer

Figure 5.1 displays a positive relationship between the inflation rate and the nominal interest rate, which supports the Fisher effect.

Question 3

Hyperinflation typically ________.

Accepted Answer

Hyperinflation is characterized by extremely high and typically accelerating inflation, often exceeding 50% per month, and is usually caused by excessive money supply growth due to large fiscal imbalances.

Question 4

How have financial innovations such as direct deposit of paychecks,electronic payment of bills,and automated teller machines (ATMs)affected the velocity of money and the demand for real money balances?

Accepted Answer

The answer of How have financial innovations such as direct...

Question 5

The proposition that the velocity of money is fairly constant in the long run is known as the ________.

Accepted Answer

The answer of The proposition that the velocity of money...

Question 6

Figure 5.1 
-According to Figure 5.1,the real interest rate is relatively low in ________.

Accepted Answer

The answer of Figure 5.1 
-According to Figure 5.1,the real...

Question 7

The quantity theory of money ________.

Accepted Answer

The quantity theory of money suggests that the amount of money in circulation in an economy is directly proportional to the level of prices of goods and services. It does not imply that inflation equals the ratio of the growth rates of the money supply and of real income (A), nor does it provide central banks with a tool to prevent the rate of inflation from fluctuating (B). It also does not imply that changes in the money supply will be matched by changes in real income in the long run (C), as it primarily suggests a direct relationship between money supply and price levels, rather than real income.

Question 8

The root cause of the hyperinflation that plagued Zimbabwe in the 2000s is ________.

Accepted Answer

The answer of The root cause of the hyperinflation that...

Question 9

Figure 5.1 
-According to Figure 5.1,the real interest rate is relatively high in ________.

Accepted Answer

According to Figure 5.1, the real interest rate is relatively high in Brazil.

Question 10

The main reason that hyperinflation renders a currency worthless is that ________.

Accepted Answer

Hyperinflation creates a cycle where people lose confidence in the currency, so they try to exchange it quickly for goods, causing prices to rise even further. This creates a self-reinforcing loop where everyone knows the currency will soon lose its value, making it effectively worthless. The government may try to print more money to keep up with rising prices, but this only exacerbates the problem by worsening inflation. Therefore, option E is the best choice.

Question 11

The quantity theory of money ________.

Accepted Answer

The quantity theory of money primarily suggests that inflation is a monetary phenomenon over the long term, but it does not always perfectly align with short-term data, nor does it validate the assumption that wages and prices are completely flexible in the short run. It also generally provides a better description of the long-run relationship between money growth and inflation, rather than short-run fluctuations.

Question 12

The direct cause of the hyperinflation that plagued Zimbabwe in the 2000s is ________.

Accepted Answer

The direct cause of the hyperinflation that plagued Zimbabwe in the 2000s is the printing of too much money by the central bank. The excessive printing of money led to an increase in the money supply, which created a situation of too many dollars chasing too few goods, resulting in skyrocketing prices. This led to a loss of confidence in the local currency and a switch to foreign currencies, exacerbating the hyperinflation.

Question 13

The real interest rate ________ inflation ________.

Accepted Answer

In the long run, the real interest rate is unaffected by inflation due to the classical dichotomy, which separates real and nominal variables.

Question 14

The quantity theory of money ________.

Accepted Answer

The quantity theory of money provides a long run theory of inflation because it is based on the assumption that prices and wages are fully flexible. Therefore, option C is correct. Option A is incorrect as the theory focuses on the long run relationship between the money supply, price level, and real output. Option B is incorrect as while it may not hold empirically for all countries in the long run, it is not limited to the US. Option D is incorrect as option A is incorrect. Option E is incorrect as there is a correct answer.

Question 15

The proposition that the amount of goods and services produced in an economy in the long run is not affected by the price level is known as the ________.

Accepted Answer

The classical dichotomy is the proposition that real variables, like the amount of goods and services produced, are not affected by nominal variables, like the price level, in the long run.

Question 16

The Fisher effect ________.

Accepted Answer

The Fisher effect is a concept in economics that describes the relationship between real and nominal interest rates under the influence of inflation. It combines the Fisher equation, which relates nominal interest rates, real interest rates, and expected inflation, with the classical dichotomy, which separates real and nominal variables. It predicts that nominal interest rates will rise with increases in expected inflation, a phenomenon observed in economies experiencing high inflation, where nominal interest rates are typically high to compensate for the loss of purchasing power.

Question 17

Hyperinflation typically ________.

Accepted Answer

Hyperinflation is characterized by extreme price increases, usually more than 50% per month or 1,000% per year. It often results from large fiscal imbalances that lead to periods of excessive money growth. Hyperinflation can occur in both poor and developed economies. Therefore, all of the options are correct.

Question 18

The real interest rate ________ inflation ________.

Accepted Answer

The Fisher equation states that the real interest rate is the nominal interest rate minus the expected inflation rate.

Question 19

During the Great Inflation of the 1970s,(a)the growth rates of M1 and M2 were higher than previously,and (b)the growth rate of M2 was much higher than the growth rate of M1.Explain how the high inflation of the decade relates to each of these facts.

Accepted Answer

The answer of During the Great Inflation of the 1970s,(a)the...

Question 20

Suppose Y = 100,P = 80,and V = 3.2.If Y rises to 105,and the inflation rate is 10 percent,what is the new value of M?

Accepted Answer

The answer of Suppose Y = 100,P = 80,and V...

Quiz 5: Money and Inflation

The proposition that changes in the money supply have no long-run effect on real variables is known as the ________.

Figure 5.1 -Figure 5.1 provides support for the Fisher effect,by ________.

Hyperinflation typically ________.

How have financial innovations such as direct deposit of paychecks,electronic payment of bills,and automated teller machines (ATMs)affected the velocity of money and the demand for real money balances?

The proposition that the velocity of money is fairly constant in the long run is known as the ________.

Figure 5.1 -According to Figure 5.1,the real interest rate is relatively low in ________.

The quantity theory of money ________.

The root cause of the hyperinflation that plagued Zimbabwe in the 2000s is ________.

Figure 5.1 -According to Figure 5.1,the real interest rate is relatively high in ________.

The main reason that hyperinflation renders a currency worthless is that ________.

The quantity theory of money ________.

The direct cause of the hyperinflation that plagued Zimbabwe in the 2000s is ________.

The real interest rate inflation .

The quantity theory of money ________.

The proposition that the amount of goods and services produced in an economy in the long run is not affected by the price level is known as the ________.

The Fisher effect ________.

Hyperinflation typically ________.

The real interest rate inflation .

During the Great Inflation of the 1970s,(a)the growth rates of M1 and M2 were higher than previously,and (b)the growth rate of M2 was much higher than the growth rate of M1.Explain how the high inflation of the decade relates to each of these facts.

Suppose Y = 100,P = 80,and V = 3.2.If Y rises to 105,and the inflation rate is 10 percent,what is the new value of M?