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1 Homework A price that has been corrected for inflation is referred to as a A. stated price. B. nominal price. C. real price. D. listed price. 2. (P 2 P 1 )/P 1 is the formula used to calculate A. the velocity of money. B. the quantity of money. C. the inflation rate. D. the Fisher effect. 3. When people mistake changes in nominal prices for changes in real prices, economists call this A. money illusion. B. monetary inefficiency. C. money neutrality. D. monetary distortion. 4. Which of the following measures the average price for a basket of goods bought by a typical American consumer? Answer: B A. producer price index B. consumer price index C. manufacturer's price index D. quantity of money index 5. Which of the following countries had the highest average annual inflation rate between 2002 and 2007? A. The United States B. Saudi Arabia C. Hong Kong D. Japan 6. Money illusion occurs when

2 A. people mistake changes in nominal prices for changes in real prices. B. people mistake changes in real prices for changes in nominal prices. C. people mistake the prices of goods in foreign markets for prices in domestic markets. D. people mistake monetary changes for fiscal changes. 7. In identity for the Quantity Theory of Money, what does M represent? A. money supply B. price level C. real GDP D. velocity of money 8. In identity for the Quantity Theory of Money, what does M represent? A. money supply B. price level C. real GDP D. velocity of money 9. In identity for the Quantity Theory of Money, what does V represent? A. money supply B. price level C. real GDP D. velocity of money Answer: D 10. In identity for the Quantity Theory of Money, what does Y represent? R A. money supply B. price level C. real GDP D. velocity of money 11. What relationship exists between nominal interest rates and inflation rates? A. Nominal interest rates tend to decrease with inflation rates. B. There is no relationship between nominal interest rates and inflation rates. C. Nominal interest rates are not correlated with inflation rates. D. Nominal interest rates tend to increase with inflation rates. Answer: D

3 12. If individuals choose to hold their money, afraid to spend it, what impact would this have on the velocity of money? A. The velocity of money would decrease. B. The velocity of money would remain unchanged. C. The velocity of money would increase. D. There would be no impact on the velocity of money. 13. Which of the following best represents an increase in the average level of prices? A. inflation B. deflation C. disflation D. disinflation 14. What does the Quantity Theory of Money assume about the relationship of M and Y R? A. The quantity theory assumes that changes in M cannot change Y R. B. The quantity theory assumes that changes in M will have a small impact on Y R. C. The quantity theory assumes that changes in M will have a large impact on Y R. D. The quantity theory assumes that changes in M will have a indeterminate impact on Y R. 15. What does the inflation parable tell us? A. An unexpected increase in the money supply can boost the economy in the short run. B. An expected increase in the money supply can boost the economy in the short run. C. An unexpected increase in the money supply will have no impact on the economy in the short run. D. An unexpected increase in the money supply cannot boost the economy in the short run. 16. The tendency of nominal interest rates to increase with expected inflation rates is called A. the Fisher effect B. the monetary illusion C. the velocity of money D. the inflation effect 17. When the government pays off its debts by printing money, this is referred to as

4 A. monetizing the debt. B. money illusion. C. the Fisher effect. D. the velocity of money. 18. The Producer Price Index A. measures the average price paid by producers. B. measures the average price received by producers. C. measures the average price received by consumers. D. measures the maximum price received by producers. Answer: B 19. In economics, a real price is A. a price that has been corrected for inflation. B. a price listed on goods for sale this year. C. a price listed on goods for sale 20 years ago. D. a price listed on goods in a base year. 20. Velocity of Money is defined as A. the average number of times a dollar is spent on final goods and services in a year. B. how fast a dollar can be spent by consumers. C. how fast a dollar can be spent by firms. D. the speed at which money spent in foreign countries returns to the USA. 21. If we assume that v is stable, A. there is a direct relationship of money and nominal GDP. B. there is an inverse relationship of money and nominal GDP. C. there is no relationship of money and nominal GDP. D. there is an uncorrelated relationship of money and nominal GDP. 22. Deflation is defined as A. a decrease in the average level of prices. B. an increase in the average level of prices. C. a decrease in the rate of the increase in the average level of prices. D. an increase in the minimum level of prices.

5 23. Disinflation is defined as A. a decrease in the average level of prices. B. an increase in the average level of prices. C. a reduction in the increase in the average level of prices. D. an increase in the minimum level of prices. 24. When the government is spending more than it collects in tax revenue, they may choose to sell bonds in order to finance the deficit. If the government pays off its debt by printing money this is referred to as A. financially securing the debt. B. collateralizing the debt. C. monetizing the debt. D. compounding the debt. 25. Monetizing the debt is when the government A. pays off its debts by printing money. B. borrows more so that it may print money. C. finances its deficit by increasing taxes. D. finances its deficit by selling bonds. 26. Fill in the blanks to the following quotation, Inflation is and a phenomenon. A. seldom; anywhere; fiscal B. always; everywhere; fiscal C. always; everywhere; monetary D. seldom; anywhere; monetary 27. Section: Inflation Redistributes Wealth If a government pays off its debts by printing money, then all of the following will likely occur EXCEPT that: Answer: D A. nominal interest rates will increase. B. wealth will be redistributed from taxpayers to the government. C. taxpayers' tax liabilities will increase. D. the equilibrium interest rate will decrease.

6 28. Section: Inflation Redistributes Wealth If expected inflation is less than actual inflation, then wealth will be redistributed from: A. lenders to borrowers. B. borrowers to lenders. C. people to the government. D. the government to people. 29. Section: The Cause of Inflation According to the quantity theory, money in the long run affects: A. the velocity of money. B. real GDP. C. prices. D. none of the above.: Money affects nothing at all. 30. When the price of a good in Russia increases from 20 rubles to 20 million rubles in a single year, the nation is experiencing: A. deflation. B. falling GDP per capita. C. hyperinflation. D. high disinflation. 31. Table: Anticipating Inflation Year Predicted inflation rate Actual inflation rate % 3% % 2% % 9% % 4% % 7% Reference: Ref 11-4 (Table: Anticipating Inflation) Using the inflation data in the table above, assume that all loan contracts matured after one year, and that they all had fixed nominal interest rates of 10%. In which year did lenders receive exactly the amount of real interest they expected?

7 A B C D Monique lends Taylor $1,200 on March 15, Taylor is expected to return $1,260 on March 14, Monique expects inflation over the one-year period to be 2%. What is the real interest rate that Monique desires? Answer: B A. 2% B. 3% C. 5% D. 7% 33. Deflation can be differentiated from disinflation in that the deflation rate is always negative while the disinflation rate is always positive. Answer: True 34. Who is more likely to lobby the government for faster money growth? A. people who have mortgages B. people who own banks that lent money for mortgages C. people who have mortgages and people who own banks that lent money for those mortgages D. neither people who have mortgages nor people who own banks that lent money for those mortgages 35. Much of the economic news we read about can be interpreted within the Mv=PY framework. Turn each of the following news headlines into a precise statement about M,v, P, or Y: i= Deposits in U.S. banks fell in 2015 ; ii = American businesses are spending faster than ever ; iii = Workers produced 4 percent more output per hour last year A. i = Fall in M; ii = Rise in v; iii = Rise in Y. B. i = Fall in P; ii = Rise in v; iii = Rise in Y. C. i = Fall in M; ii = Rise in P; iii = Rise in Y. D. i = Fall in M; ii = Rise in v; iii = Rise in P. 36. If I get more money, that makes me richer. But if society gets more money, does that make society richer?

8 A. Yes, because more money makes everyone wealthier. B. Yes, because the resources in society have increased. C. No, because resources have not increased. D. No, because resources have decreased. 37. Who gets hurt most in the following cases: Banks, mortgage holders (i.e. homeowners), or neither? Who Gets Hurt? 4% 10% i 10% 4% ii 10% 10% iii A. i= Banks; ii= Mortgage holders; iii=neither B. i= Mortgage holders; ii= Banks; iii=neither C. i= Mortgage holders; ii= Banks; iii=banks D. i= Banks; ii= Mortgage holders; iii= Mortgage holders 38. If the inflation rate goes from 1% to 4% to 7% over two years, then the prices of most goods will generally A. go up. B. stay the same or constant. C. go down. D. be uncertain because there is not enough information to say. 39. Which of the following is an example of money illusion assuming that inflation is 5%? A. You receive a 5% raise on your part-time job and start spending extra money on entertainment every weekend. B. You receive a 5% raise on your part-time job, but do not increase or decrease your spending. C. You do not receive a raise on your part-time job, but cut out some expenses as you notice some prices rising. D. None of the answers is correct. 40. When the money supply and the demand for goods increase at the same time: A. producers understand how to react, but consumers are confused. B. consumers act rationally, but producers cannot read the market signals. C. the government is able to clarify how the markets will be affected.

9 Answer: D D. both consumers and producers are often confused.

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