Chapter 30 Money Growth and Inflation

Transcription

1 Chapter 30 Money Growth and Inflation TRUE/FALSE 1. The inflation rate is measured as the percentage change in a price index. ANS: T DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation KEY: 2. U.S. prices rose at an average annual rate of about 4 percent over the last 70 years. ANS: T DIF: 1 REF: 30-0 TOP: Inflation 3. The United States has never had deflation. ANS: F DIF: 1 REF: 30-0 TOP: Deflation 4. In the 1990s, U.S. prices rose at about the same rate as in the 1970s. ANS: F DIF: 1 REF: 30-0 TOP: U.S. inflation 5. As the price level falls, the value of money falls. ANS: F DIF: 1 REF: 30-1 TOP: Value Money 6. The price level is determined by the supply of, and demand for, money. ANS: T DIF: 1 REF: 30-1 TOP: Money market 7. If the quantity of money supplied is greater than the quantity demanded, then prices should fall. ANS: F DIF: 2 REF: 30-1 TOP: Money market 8. Dollar prices and relative prices are both nominal variables. ANS: F DIF: 1 REF: 30-1 TOP: Nominal variables Real variables 9. The quantity equation is M x V = P x Y. ANS: T DIF: 1 REF: 30-1 TOP: Quantity equation 10. According to the Fisher effect, if inflation rises then the nominal interest rate rises. ANS: T DIF: 1 REF: 30-1 TOP: Fisher effect 11. An increase in money demand would create a surplus of money at the original value of money. ANS: F DIF: 2 REF: 30-1 TOP: Money market 2014

2 Chapter 30 /Money Growth and Inflation Hyperinflations are associated with governments printing money to finance expenditures. ANS: T DIF: 1 REF: 30-1 NAT: Analytic LOC: Unemployment and inflation TOP: Hyperinflation 13. For a given level of money and real GDP, an increase in velocity would lead to an increase in the price level. ANS: T DIF: 2 REF: 30-1 TOP: Velocity of money 14. The quantity theory of money can explain hyperinflations but not moderate inflation. ANS: F DIF: 1 REF: 30-1 TOP: Hyperinflation 15. If P represents the price of goods and services measured in money, then 1/P is the value of money measured in terms of goods and services. ANS: T DIF: 1 REF: 30-1 TOP: Money Value 16. When the value of money is on the vertical axis, an increase in the price level shifts money demand to the right. ANS: F DIF: 1 REF: 30-1 TOP: Money demand 17. The money supply curve shifts to the left when the Fed buys government bonds. ANS: F DIF: 2 REF: 30-1 TOP: Money supply 18. When the value of money is on the vertical axis, the money supply curve slopes upward because an increase in the value of money induces banks to create more money. ANS: F DIF: 2 REF: 30-1 TOP: Money supply 19. If the Fed increases the money supply, the equilibrium value of money decreases and the equilibrium price level increases. ANS: T DIF: 1 REF: 30-1 TOP: Money market 20. A rising price level eliminates an excess supply of money. ANS: T DIF: 2 REF: 30-1 TOP: Money market 21. A rising value of money eliminates an excess supply of money. ANS: F DIF: 2 REF: 30-1 TOP: Money market 22. Nominal GDP measures output of final goods and services in physical terms. ANS: F DIF: 1 REF: 30-1 TOP: Nominal variables

3 2016 Chapter 30 /Money Growth and Inflation 23. The classical dichotomy is useful for analyzing the economy because in the long run nominal variables are heavily influenced by developments in the monetary system, and real variables are not. ANS: T DIF: 1 REF: 30-1 TOP: Classical dichotomy 24. The irrelevance of monetary changes for real variables is called monetary neutrality. Most economists accept monetary neutrality as a good description of the economy in the long run, but not the short run. ANS: T DIF: 2 REF: 30-1 TOP: Monetary neutrality 25. The quantity theory of money implies that if output and velocity are constant, then a 50 percent increase in the money supply would lead to less than a 50 percent increase in the price level. ANS: F DIF: 1 REF: 30-1 TOP: Quantity theory 26. The source of all four classic hyperinflations was high rates of money growth. ANS: T DIF: 1 REF: 30-1 TOP: Hyperinflation 27. In the long run, an increase in the growth rate of the money supply leads to an increase in the real interest rate, but no change in the nominal interest rate. ANS: F DIF: 1 REF: 30-1 TOP: Quantity theory 28. Inflation induces people to spend more resources maintaining lower money holdings. The costs of doing this are called shoeleather costs. ANS: T DIF: 1 REF: 30-2 TOP: Shoeleather costs of inflation 29. Shoeleather costs and menu costs are both costs of anticipated inflation. ANS: T DIF: 1 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Shoeleather costs of inflation Menu costs of inflation 30. For a given real interest rate, an increase in the inflation rate reduces the after-tax real interest rate. ANS: T DIF: 2 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation Taxes Real interest rate 31. Inflation necessarily distorts saving when either real interest income or nominal interest income is taxed. ANS: F DIF: 2 REF: 30-2 TOP: Inflation Real interest rate 32. Inflation distorts savings when real interest income, rather than nominal interest income, is taxed. ANS: F DIF: 2 REF: 30-2 TOP: Inflation Real interest rate 33. Suppose the nominal interest rate is 10 percent; the tax rate on interest income is 28 percent, and the inflation rate is 6 percent. Then the after-tax real interest rate is -3.2 percent. ANS: F DIF: 2 REF: 30-2 TOP: Taxes Real interest rate

4 Chapter 30 /Money Growth and Inflation Suppose the nominal interest rate is 5 percent; the tax rate on interest income is 30 percent, and the after-tax real interest rate is 0.8 percent. Then the inflation rate is 2.7 percent. ANS: T DIF: 2 REF: 30-2 TOP: Taxes Real interest rate 35. If the Fed were to unexpectedly increase the money supply, creditors would gain at the expense of debtors. ANS: F DIF: 1 REF: 30-2 TOP: Wealth redistribution Inflation 36. If inflation is higher than expected, then borrowers make nominal interest payments that are less than they expected. ANS: F DIF: 2 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Menu costs of inflation 37. Inflation is costly only if it is unanticipated. ANS: F DIF: 1 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation costs 38. Even though monetary policy is neutral in the short run, it may have profound real effects in the long run. ANS: F DIF: 1 REF: 30-3 TOP: Monetary neutrality SHORT ANSWER 1. Why did farmers in the late 1800s dislike deflation? ANS: Most had large nominal debts. The decrease in the price level meant that they received less for what they produced and so made it harder to pay off the debts whose real value rose as prices fell. DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Deflation 2. Explain the adjustment process in the money market that creates a change in the price level when the money supply increases. ANS: When the money supply increases, there is an excess supply of money at the original value of money. After the money supply increases, people have more money than they want to hold in their purses, wallets and checking accounts. They use this excess money to buy goods and services or lend it out to other people to buy goods and services. The increase in expenditures causes prices to rise and the value of money to fall. As the value of money falls, the quantity of money people want to hold increases so that the excess supply is eliminated. At the end of this process the money market is in equilibrium at a higher price level and a lower value of money. DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Money market

5 2018 Chapter 30 /Money Growth and Inflation 3. Suppose the Fed sells government bonds. Use a graph of the money market to show what this does to the value of money. ANS: When the Fed sells government bonds, the money supply decreases. This shifts the money supply curve from MS 1 to MS 2 and makes the value of money increase. Since money is worth more, it takes less to buy goods with it, which means the price level falls. DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Money market 4. Using separate graphs, demonstrate what happens to the money supply, money demand, the value of money, and the price level if: a. the Fed increases the money supply. b. people decide to demand less money at each value of money. ANS: a. The Fed increases the money supply. When the Fed increases the money supply, the money supply curve shifts right from MS 1 to MS 2. This shift causes the value of money to fall, so the price level rises. b. People decide to demand less money at each value of money. Since people want to hold less at each value of money, it follows that the money demand curve will shift to the left from MD 1 to MD 2. The decrease in money demand results in a lower value of money and so a higher price level. DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Money market

6 Chapter 30 /Money Growth and Inflation According to the classical dichotomy, what changes nominal variables? What changes real variables? ANS: The classical dichotomy argues that nominal variables are determined primarily by developments in the monetary system such as changes in money demand and supply. Real variables are largely independent of the monetary system and are determined by productivity and real changes in the factor and loanable funds markets. DIF: 1 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Classical dichotomy 6. Suppose that monetary neutrality holds. Of the following variables, which ones do not change when the money supply increases? a. real interest rates b. inflation c. the price level d. real output e. real wages f. nominal wages ANS: a. real interest rates d. real output e. real wages DIF: 1 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Monetary neutrality 7. Wages and prices are many times higher today than they were 30 years ago, yet people do not work a lot more hours or buy fewer goods. How can this be? ANS: Inflation has raised the general price level. An increase in the general price level has no effect on real variables in the long run. Wages are higher, but so are prices. Prices are higher, but so are wages and incomes. In the long run, people change their behavior in response to changes in real variables, not nominal ones. DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Nominal variables Real variables 8. Identify each of the following as nominal or real variables. a. the physical output of goods and services b. the overall price level c. the dollar price of apples d. the price of apples relative to the price of oranges e. the unemployment rate f. the amount that shows up on your paycheck after taxes g. the amount of goods you can purchase with the wage you get each hour h. the taxes that you pay the government ANS: a. real variable b. nominal variable c. nominal variable d. real variable e. real variable f. nominal variable g. real variable h. nominal variable DIF: 1 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Nominal variables Real variables

7 2020 Chapter 30 /Money Growth and Inflation 9. Define each of the symbols and explain the meaning of M V = P Y. ANS: M is the quantity of money, V is the velocity of money, P is the price level, and Y is the quantity of output. P nominal GDP. The amount people spend should equal the amount of money in the economy times the average number of times each unit of currency is spent. DIF: 1 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Velocity 10. What assumptions are necessary to argue that the quantity equation implies that increases in the money supply lead to proportional changes in the price level? ANS: We must suppose that V is relatively constant and that changes in the money supply have no effect on real output. DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Quantity theory 11. What is the inflation tax, and how might it explain the creation of inflation by a central bank? ANS: The inflation tax refers to the fact that inflation is a tax on money. When prices rise, the value of money currently held is reduced. Hence, when a government raises revenue by printing money, it obtains resources from households by taxing their money holdings through inflation rather than by sending them a tax bill. In countries where governments are unable or unwilling to raise revenues by raising taxes explicitly, the inflation tax may be an alternative source of revenue. DIF: 1 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Inflation tax 12. Economists agree that increases in the money-supply growth rate increase inflation and that inflation is undesirable. So why have there been hyperinflations and how have they been ended? ANS: Typically, the government in countries that had hyperinflation started with high spending, inadequate tax revenue, and limited ability to borrow. Therefore, they turned to the printing presses to pay their bills. Massive and continued increases in the quantity of money led to hyperinflation, which ended when the governments instituted fiscal reforms eliminating the need for the inflation tax and subsequently slowed money supply growth. DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Hyperinflation 13. Suppose that velocity and output are constant and that the quantity theory and the Fisher effect both hold. What happens to inflation, real interest rates, and nominal interest rates when the money supply growth rate increases from 5 percent to 10 percent? ANS: Inflation and nominal interest rates each increase by 5 percent points. There is no change in the real interest rate or any other real variable. DIF: 1 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Inflation 14. In recent years Venezuela and Russia have had much higher nominal interest rates than the United States while Japan has had lower nominal interest rates. What would you predict is true about money growth in these other countries? Why? ANS: The Fisher effect says that increases in the inflation rate lead to one-to-one increases in nominal interest rates. The quantity theory says that in the long run, inflation increases one-to-one with money supply growth. It follows that differences in nominal interest rates may be due to differences in money supply growth rates. It is reasonable to guess that much higher nominal interest rates in Venezuela and Russia indicate higher money supply growth while lower interest rates in Japan indicate lower money supply growth. DIF: 1 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Fisher effect Y is

8 Chapter 30 /Money Growth and Inflation The U.S. Treasury Department issues inflation-indexed bonds. What are inflation-indexed bonds and why are they important? ANS: Inflation-indexed bonds are bonds whose interest and principal payments are adjusted upward for inflation, guaranteeing their real purchasing power in the future. They are important because they provide a safe, inflation-proof asset for savers and they may allow the Treasury to borrow more easily at a lower current cost. DIF: 1 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Index bonds 16. List and define any two of the costs of high inflation. ANS: The costs include: Shoeleather costs: the resources wasted when inflation induces people to reduce their money holdings. Menu costs: the cost of more frequent price changes at higher inflation rates. Relative Price Variability: because prices change infrequently, higher inflation causes relative prices to vary more. Decisions based on relative prices are then distorted so that resources may not be allocated efficiently. Inflation Induced Tax Distortions: the income tax is not completely indexed for inflation; an increase in nominal income created by inflation results in higher real tax rates that discourage savings. Confusion and Inconvenience: inflation decreases the reliability of the unit of account making it more complicated to differentiate successful and unsuccessful firms thereby impeding the efficient allocation of funds to alternative investments. Unexpected Inflation: inflation decreases the real value of debt thereby transferring wealth from creditors to debtors. DIF: 1 REF: 30-2 NAT: Analytic LOC: The role of money TOP: Inflation costs 17. Inflation distorts relative prices. What does this mean and why does it impose a cost on society? ANS: Relative prices are the value of one good in terms of other goods. Relative prices ordinarily provide signals concerning the relative scarcity of goods so the goods may be allocated efficiently. Some prices change infrequently, so that when inflation rises, there is greater variation in relative prices. However, changes in relative prices created by inflation do not signal changes in the scarcity of goods and so lead to an inefficient allocation of goods and resources. DIF: 1 REF: 30-2 NAT: Analytic LOC: The role of money TOP: Relative price variability 18. Explain how inflation affects savings. ANS: Inflation discourages savings. Income tax is collected on nominal rather than real interest rates. So an increase in inflation will increase nominal interest rates and taxes. The increase in taxes in turn lowers the real return on savings and so discourages savings. DIF: 1 REF: 30-2 NAT: Analytic LOC: The role of money TOP: Saving Inflation

9 2022 Chapter 30 /Money Growth and Inflation 19. The U.S. Treasury Department began issuing inflation-indexed bonds in early Since these assets are virtually risk free, both in terms of default risk and inflation risk, will they quickly replace all other kinds of assets that still entail risk of one kind or another, such as ordinary government bonds or corporate bonds? Explain. ANS: When individuals are choosing between assets of different kinds, they consider both expected return and risk. Because the new inflation-indexed bonds have very low risk, they will also have very low real interest rates. So they will not replace other, more risky assets that promise to pay a much higher real interest rate. They do, however, offer a way of escaping some inflation risk, and have become a popular addition to portfolios. DIF: 1 REF: 30-2 NAT: Analytic LOC: The role of money TOP: Index bonds Sec00 - Money Growth and Inflation MULTIPLE CHOICE 1. Over the past 70 years, prices in the U.S. have risen on average about a. 2 percent per year. b. 4 percent per year. c. 6 percent per year. d. 8 percent per year. ANS: B DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate 2. Over the past 70 years, the overall price level in the U.S. has experienced a(n) a. 4-fold increase. b. 8-fold increase. c. 12-fold increase. d. 16-fold increase. ANS: D DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate 3. Over the last 70 years, the average annual U.S. inflation rate was about a. 2 percent, implying that prices have increased 10-fold. b. 4 percent, implying that prices have increased 10-fold. c. 2 percent, implying that prices have increased 16-fold. d. 4 percent, implying that prices increased about 16-fold. ANS: D DIF: 2 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate 4. Inflation can be measured by the a. change in the consumer price index. b. percentage change in the consumer price index. c. percentage change in the price of a specific commodity. d. change in the price of a specific commodity. ANS: B DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation

10 Chapter 30 /Money Growth and Inflation Which of the following is not correct? a. The inflation rate is measured as the percentage change in a price index. b. For the last 40 or so years, U.S. inflation hasn t shown much variation from its average rate of about 2 percent. c. During the 19th century there were long periods of falling prices. d. Some economists argue that the costs of moderate inflation are not nearly as large as the general public believes. ANS: B DIF: 2 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation 6. In which of the following cases was the inflation rate 10 percent over the last year? a. One year ago the price index had a value of 110 and now it has a value of 120. b. One year ago the price index had a value of 120 and now it has a value of 132. c. One year ago the price index had a value of 126 and now it has a value of 140. d. One year ago the price index had a value of 145 and now it has a value of 163. ANS: B DIF: 2 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate 7. If the price level increased from 120 to 126, then what was the inflation rate? a. 3 percent b. 5 percent c. 6 percent d. None of the above is correct. ANS: B DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate 8. If the price level increased from 120 to 150, then what was the inflation rate? a. 30 percent b. 25 percent c. 20 percent d. None of the above is correct. ANS: B DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate 9. When prices are falling, economists say that there is a. disinflation. b. deflation. c. a contraction. d. an inverted inflation. ANS: B DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Deflation 10. Deflation a. increases incomes and enhances the ability of debtors to pay off their debts. b. increases incomes and reduces the ability of debtors to pay off their debts. c. decreases incomes and enhances the ability of debtors to pay off their debts. d. decreases incomes and reduces the ability of debtors to pay off their debts. ANS: D DIF: 2 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Deflation

11 2024 Chapter 30 /Money Growth and Inflation 11. If the price index in some country were falling over time, economists would say that country had a. disinflation. b. deflation. c. a contraction. d. an inverted inflation. ANS: B DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Deflation 12. The term hyperinflation refers to a. the spread of inflation from one country to others. b. a decrease in the inflation rate. c. a period of very high inflation. d. inflation accompanied by a recession. ANS: C DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Hyperinflation 13. Which of the following statements about U.S. inflation is not correct? a. Low inflation was viewed as a triumph of President Carter's economic policy. b. There were long periods in the nineteenth century during which prices fell. c. The U.S. public has viewed inflation rates of even 7 percent as a major economic problem. d. The U.S. inflation rate has varied over time, but international data show even more variation. ANS: A DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation 14. Which of the following statements concerning the history of U.S. inflation is not correct? a. Prices rose at an average annual rate of about 4 percent over the last 70 years. b. There was about a 16-fold increase in the price level over the last 70 years. c. Inflation in the 1970s was below the average over the last 70 years. d. During its history the United States has experienced periods of deflation. ANS: C DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation 15. Which of the following is correct? a. A period of hyperinflation is a period of extraordinarily high or extraordinarily low inflation. b. A period of deflation is any period during which the inflation rate is decreasing. c. During the 1990s, U.S. inflation averaged about 2 percent per year. d. All of the above are correct. ANS: C DIF: 2 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation 16. There was hyperinflation during the a. period in the United States. b. 1970s in the United States. c. early part of the current century in Zimbabwe. d. All of the above are correct. ANS: C DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Hyperinflation

12 Chapter 30 /Money Growth and Inflation In early 2008, the central bank of Zimbabwe announced the inflation rate in that country had reached a. 60 percent. b. 80 percent. c. 220 percent. d. 24,000 percent. ANS: D DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Hyperinflation 18. Economists agree that a. neither high inflation nor moderate inflation is very costly. b. both high and moderate inflation are quite costly. c. high inflation is costly, but they disagree about the costs of moderate inflation. d. moderate inflation is as costly as high inflation. ANS: C DIF: 2 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation costs Sec01 - Money Growth and Inflation - The Classical Theory of Inflation MULTIPLE CHOICE 1. Inflation is a. more about the value of goods than about the value of money. b. more about the value of money than about the value of goods. c. best understood by looking at the individual prices that make up price indexes. d. viewed by most economists today as a phenomenon that cannot be explained by the ideas of the classical economists. NAT: Analytic LOC: Unemployment and inflation TOP: Inflation 2. The value of money falls as the price level a. rises, because the number of dollars needed to buy a representative basket of goods rises. b. rises, because the number of dollars needed to buy a representative basket of goods falls. c. falls, because the number of dollars needed to buy a representative basket of goods rises. d. falls, because the number of dollars needed to buy a representative basket of goods falls. ANS: A DIF: 1 REF: 30-1 TOP: Inflation 3. If P denotes the price of goods and services measured in terms of money, then a. 1/P represents the value of money measured in terms of goods and services. b. P can be regarded as the overall price level. c. an increase in the value of money is associated with a decrease in P. d. All of the above are correct. ANS: D DIF: 2 REF: 30-1 TOP: Price level Value 4. If P denotes the price of goods and services measured in terms of money, then a. 1/P represents the value of money measured in terms of goods and services. b. P can be interpreted as the inflation rate. c. the supply of money influences the value of P, but the demand for money does not. d. All of the above are correct. ANS: A DIF: 2 REF: 30-1 TOP: Price level Value

13 2026 Chapter 30 /Money Growth and Inflation 5. When we assume that the supply of money is a variable that the central bank controls, we a. must then assume as well that the demand for money is not influenced by the value of money. b. must then assume as well that the price level is unrelated to the value of money. c. are ignoring the fact that, in the real world, households are suppliers of money also. d. are ignoring the complications introduced by the role of the banking system. ANS: D DIF: 1 REF: 30-1 TOP: Money supply 6. With the value of money on the vertical axis, the money supply curve is a. upward-sloping. b. downward-sloping. c. horizontal. d. vertical. ANS: D DIF: 1 REF: 30-1 TOP: Money market Money supply 7. When the money market is drawn with the value of money on the vertical axis, a decrease in the price level causes a a. movement to the right along the money demand curve. b. movement to the left along the money demand curve. c. shift to the right of the money supply curve. d. shift to the left of the money supply curve. TOP: Money market Money demand 8. When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve buys bonds, then the money supply curve a. shifts rightward, causing the price level to rise. b. shifts rightward, causing the price level to fall. c. shifts leftward, causing the price level to rise. d. shifts leftward, causing the price level to fall. ANS: A DIF: 2 REF: 30-1 NAT: Analytic LOC: Monetary and fiscal policy TOP: Money market Money supply 9. When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve sells bonds, then the money supply curve a. shifts rightward, causing the value of money measured in terms of goods and services to rise. b. shifts rightward, causing the value of money measured in terms of goods and services to fall. c. shifts leftward, causing the value of money measured in terms of goods and services to rise. d. shifts leftward, causing the value of money measured in terms of goods and services to fall. ANS: C DIF: 2 REF: 30-1 NAT: Analytic LOC: Monetary and fiscal policy TOP: Money market Money supply 10. When the money market is drawn with the value of money on the vertical axis, if money demand shifts leftward, then initially there is an a. excess demand for money which causes the price level to rise. b. excess demand for money which causes the price level to fall. c. excess supply of money which causes the price level to rise. d. excess supply of money which causes the price level to fall. ANS: C DIF: 2 REF: 30-1 TOP: Money market

14 11. The price level falls if either a. money demand or money supply shifts rightward. b. money demand shifts rightward or money supply shifts leftward. c. money demand shifts leftward or money supply shifts rightward. d. money demand or money supply shifts leftward. Chapter 30 /Money Growth and Inflation 2027 ANS: B DIF: 2 REF: 30-1 TOP: Money market Price level 12. The price level rises if either a. money demand shifts rightward or money supply shifts leftward; this rise in the price level is associated with a rise in the value of money. b. money demand shifts rightward or money supply shifts leftward; this rise in the price level is associated with a fall in the value of money. c. money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a rise in the value of money. d. money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a fall in the value of money. ANS: D DIF: 2 REF: 30-1 TOP: Money market Price level 13. As the price level rises, the value of money a. falls, and people desire to hold less of it. b. falls, and people desire to hold more of it. c. rises, and people desire to hold less of it. d. rises, and people desire to hold more of it. ANS: B DIF: 2 REF: 30-1 TOP: Money demand 14. Money demand depends on a. the price level and the interest rate. b. the price level but not the interest rate. c. the interest rate but not the price level. d. neither the price level nor the interest rate. ANS: A DIF: 2 REF: 30-1 TOP: Money demand 15. If M = 3,000, P = 2, and Y = 12,000, what is velocity? a. 1/2 b. 2 c. 4 d. 8 ANS: D DIF: 2 REF: 30-1 TOP: Quantity equation 16. If M = 10,000, P = 2, and Y = 20,000, then velocity = a. 4. Velocity will rise if money changes hands more frequently. b. 4. Velocity will rise if money changes hands less frequently. c. 8. Velocity will rise if money changes hands more frequently. d. 8. Velocity will rise if money changes hands less frequently. ANS: A DIF: 2 REF: 30-1 TOP: Quantity equation

15 2028 Chapter 30 /Money Growth and Inflation 17. If velocity = 5, the price level = 1.5, and the real value of output is 2,500, then the quantity of money is a b c. 1, d. 8, ANS: B DIF: 2 REF: 30-1 TOP: Quantity equation 18. If velocity = 3.5, the quantity of money = 15,000, and the price level = 1.2, then the real value of output is a. 3, b. 4, c. 5, d. 43, ANS: D DIF: 2 REF: 30-1 TOP: Quantity equation 19. According to the classical dichotomy, which of the following is affected by monetary factors? a. nominal wages b. the price level c. nominal GDP d. All of the above are correct. ANS: D DIF: 1 REF: 30-1 TOP: Classical dichotomy 20. Other things the same, an increase in velocity means that a. the rate at which money changes hands falls, so the price level rises. b. the rate at which money changes hands falls, so the price level falls. c. the rate at which money changes hands rises, so the price level rises. d. the rate at which money changes hands rises, so the price level falls. ANS: C DIF: 2 REF: 30-1 TOP: Velocity 21. According to the quantity theory of money, a 2 percent increase in the money supply a. causes the price level to fall by 2 percent. b. leaves the price level unchanged. c. causes the price level to rise by less than 2 percent. d. causes the price level to rise by 2 percent. ANS: D DIF: 1 REF: 30-1 TOP: The quantity equation 22. The inflation tax refers to a. the revenue a government creates by printing money. b. higher inflation which requires more frequent price changes. c. the idea that, other things the same, an increase in the tax rate raises the inflation rate. d. taxes being indexed for inflation. ANS: A DIF: 1 REF: 30-1 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation tax

16 Chapter 30 /Money Growth and Inflation If the nominal interest rate is 8 percent and expected inflation is 3.5 percent, then what is the real interest rate? a percent b. 7.5 percent c. 4.5 percent d. 2.5 percent ANS: C DIF: 2 REF: 30-1 NAT: Analytic LOC: Unemployment and inflation TOP: Real interest rate Nominal interest rate 24. Which of the following combinations of real interest rates and inflation implies a nominal interest rate of 7 percent? a. a real interest rate of 2.5 percent and an inflation rate of 2 percent b. a real interest rate of 4 percent and an inflation rate of 11 percent c. a real interest rate of 6 percent and an inflation rate of 1 percent d. a real interest rate of 5.5 percent and an inflation rate of 3 percent ANS: C DIF: 1 REF: 30-1 NAT: Analytic LOC: Unemployment and inflation TOP: Real interest rate Nominal interest rate 25. The classical theory of inflation a. is also known as the quantity theory of money. b. was developed by some of the earliest economic thinkers. c. is used by most modern economists to explain the long-run determinants of the inflation rate. d. All of the above are correct. ANS: D DIF: 1 REF: 30-1 NAT: Analytic LOC: Unemployment and inflation TOP: Classical dichotomy 26. To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the a. quantity theory of money. b. price-index theory of money. c. theory of hyperinflation. d. disequilibrium theory of money and inflation. ANS: A DIF: 1 REF: 30-1 NAT: Analytic LOC: Unemployment and inflation TOP: Quantity theory of money 27. The quantity theory of money a. is a fairly recent addition to economic theory. b. can explain both moderate inflation and hyperinflation. c. argues that inflation is caused by too little money in the economy. d. All of the above are correct. TOP: Quantity theory of money 28. As the price level decreases, the value of money a. increases, so people want to hold more of it. b. increases, so people want to hold less of it. c. decreases, so people want to hold more of it. d. decreases, so people want to hold less of it. ANS: B DIF: 2 REF: 30-1 TOP: Money demand

17 2030 Chapter 30 /Money Growth and Inflation 29. An increase in the price level makes the value of money a. increase, so people want to hold more of it. b. increase, so people want to hold less of it. c. decrease, so people want to hold more of it. d. decrease, so people want to hold less of it. ANS: C DIF: 2 REF: 30-1 TOP: Money demand 30. When the price level falls, the number of dollars needed to buy a representative basket of goods a. increases, so the value of money rises. b. increases, so the value of money falls. c. decreases, so the value of money rises. d. decreases, so the value of money falls. ANS: C DIF: 1 REF: 30-1 TOP: Value of money 31. When the price level rises, the number of dollars needed to buy a representative basket of goods a. increases, and so the value of money rises. b. increases, and so the value of money falls. c. decreases, and so the value of money rises. d. decreases, and so the value of money falls TOP: Value of money 32. The supply of money is determined by a. the price level. b. the Treasury and Congressional Budget Office. c. the Federal Reserve System. d. the demand for money. ANS: C DIF: 1 REF: 30-1 TOP: Money supply 33. The supply curve of money is vertical because the quantity of money supplied increases a. when the value of money increases. b. when the value of money decreases. c. only if people desire to hold more money. d. only if the central bank increases the money supply. ANS: D DIF: 1 REF: 30-1 TOP: Money supply 34. The supply of money increases when a. the value of money increases. b. the interest rate increases. c. the Fed makes open-market purchases. d. None of the above is correct. ANS: C DIF: 2 REF: 30-1 TOP: Money supply

18 35. Money demand refers to a. the total quantity of financial assets that people want to hold. b. how much income people want to earn per year. c. how much wealth people want to hold in liquid form. d. how much currency the Federal Reserve decides to print. Chapter 30 /Money Growth and Inflation 2031 ANS: C DIF: 1 REF: 30-1 TOP: Money demand 36. When the money market is drawn with the value of money on the vertical axis, the money demand curve slopes a. upward, because at higher prices people want to hold more money. b. downward, because at higher prices people want to hold more money. c. downward, because at higher price people want to hold less money. d. upward, because at higher prices people want to hold less money. TOP: Money demand 37. When the money market is drawn with the value of money on the vertical axis, as the price level increases the quantity of money a. demanded increases. b. demanded decreases. c. supplied increases. d. supplied decreases. ANS: A DIF: 1 REF: 30-1 TOP: Money demand 38. When the money market is drawn with the value of money on the vertical axis, an increase in the price level causes a a. shift to the right of the money demand curve. b. shift to the left of the money demand curve. c. movement to the left along the money demand curve. d. movement to the right along the money demand curve. ANS: D DIF: 2 REF: 30-1 TOP: Money demand 39. When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of money a. increases, so the quantity of money demanded increases. b. increases, so the quantity of money demanded decreases. c. decreases, so the quantity of money demanded decreases. d. decreases, so the quantity of money demanded increases. ANS: D DIF: 2 REF: 30-1 TOP: Money demand 40. When the money market is drawn with the value of money on the vertical axis, a. money demand slopes upward and money supply is horizontal. b. money demand slopes downward and money supply is horizontal. c. money demand slopes upward and money supply is vertical. d. money demand slope downward and money supply is vertical. TOP: Money demand Money supply

19 2032 Chapter 30 /Money Growth and Inflation 41. When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal due to adjustments in a. the value of money. b. real interest rates. c. nominal interest rates. d. the money supply. ANS: A DIF: 1 REF: 30-1 TOP: Money market 42. When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is an a. excess demand for money, so the price level will rise. b. excess demand for money, so the price level will fall. c. excess supply of money, so the price level will rise. d. excess supply of money, so the price level will fall. ANS: B DIF: 3 REF: 30-1 TOP: Money market 43. When the money market is drawn with the value of money on the vertical axis, if the value of money is below the equilibrium level, a. the price level will rise. b. the value of money will rise. c. money demand will shift leftward. d. money demand will shift rightward. ANS: B DIF: 2 REF: 30-1 TOP: Money market 44. Suppose the money market, drawn with the value of money on the vertical axis, is in equilibrium. If the money supply increases, then at the old value of money there is an a. excess demand for money that will result in an increase in spending. b. excess demand for money that will result in a decrease in spending. c. excess supply of money that will result in an increase in spending. d. excess supply of money that will result in a decrease in spending. ANS: C DIF: 2 REF: 30-1 TOP: Money market 45. Which of the following is correct? a. If the Fed purchases bonds in the open market, then the money supply curve shifts right. A change in the price level does not shift the money supply curve. b. If the Fed sells bonds in the open market, then the money supply curve shifts right. A change in the price level does not shift the money supply curve. c. If the Fed purchases bonds, then the money supply curve shifts right. An increase in the price level shifts the money supply curve right. d. If the Fed sells bonds, then the money supply curve shifts right. A decrease in the price level shifts the money supply curve right. ANS: A DIF: 2 REF: 30-1 TOP: Money supply

20 Chapter 30 /Money Growth and Inflation When the money market is drawn with the value of money on the vertical axis, an increase in the money supply shifts the money supply curve to the a. right, lowering the price level. b. right, raising the price level. c. left, raising the price level. d. left, lowering the price level. ANS: B DIF: 2 REF: 30-1 TOP: Money market 47. If the Fed increases the money supply, then 1/P a. falls, so the value of money falls. b. falls, so the value of money rises. c. rises, so the value of money falls. d. rises, so the value of money rises. ANS: A DIF: 1 REF: 30-1 TOP: Deflation Inflation 48. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply a. increases the price level and increases the value of money. b. increases the price level and decreases the value of money. c. decreases the price level and increases the value of money. d. decreases the price level and decreases the value of money. ANS: B DIF: 2 REF: 30-1 TOP: Money market 49. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply causes the equilibrium value of money a. and equilibrium quantity of money to increase. b. and equilibrium quantity of money to decrease. c. to increase, while the equilibrium quantity of money decreases. d. to decrease, while the equilibrium quantity of money increases. ANS: D DIF: 2 REF: 30-1 TOP: Money market 50. When the money market is drawn with the value of money on the vertical axis, if the Fed sells bonds then a. the money supply and the price level increase. b. the money supply and the price level decrease. c. the money supply increases and the price level decreases. d. the money supply increases and the price level increases. TOP: Money supply 51. When the money market is drawn with the value of money on the vertical axis, if there is a surplus of money then a. the value of money rises which will make people desire to hold more money. b. the value of money rises which will make people desire to hold less money. c. the value of money falls which will make people desire to hold more money. d. the value of money falls which will make people desire to hold less money. ANS: C DIF: 2 REF: 30-1 TOP: Money market equilibrium

21 2034 Chapter 30 /Money Growth and Inflation 52. When the money market is drawn with the value of money on the vertical axis, if the money supply rises a. the price level and the value of money rise. b. the price level rises and the value of money falls. c. the price level falls and the value of money rises. d. the price level and the value of money fall. ANS: B DIF: 2 REF: 30-1 NAT: Analytic LOC: Monetary and fiscal policy TOP: Money market equilibrium 53. When the money market is drawn with the value of money on the vertical axis, the value of money increases if a. either money demand or money supply shifts right. b. either money demand or money supply shifts left. c. money demand shifts right or money supply shifts left. d. money demand shifts left or money supply shifts right. ANS: C DIF: 2 REF: 30-1 TOP: Money market 54. When the money market is drawn with the value of money on the vertical axis, the price level increases if a. either money demand or money supply shifts right. b. either money demand or money supply shifts left. c. money demand shifts right or money supply shifts left. d. money demand shifts left or money supply shifts right. ANS: D DIF: 2 REF: 30-1 TOP: Money market 55. When the money market is drawn with the value of money on the vertical axis, the price level decreases if a. either money demand or money supply shifts right. b. either money demand or money supply shifts left. c. money demand shifts right or money supply shifts left. d. money demand shifts left or money supply shifts right. ANS: C DIF: 2 REF: 30-1 TOP: Money market 56. When the money market is drawn with the value of money on the vertical axis, the price level increases if a. money demand shifts right and decreases if money supply shifts right. b. money demand shifts right and decreases if money supply shifts left. c. money demand shifts left and decreases if money supply shifts right. d. money demand shifts left and decreases if money supply shifts left. ANS: D DIF: 2 REF: 30-1 TOP: Money market 57. Open-market purchases by the Fed make the money supply a. increase, which makes the value of money increase. b. increase, which makes the value of money decrease. c. decrease, which makes the value of money decrease. d. decrease, which makes the value of money increase. ANS: B DIF: 2 REF: 30-1 TOP: Money market

22 Chapter 30 /Money Growth and Inflation Consider the money market drawn with the value of money on the vertical axis. If money demand is unchanged and the price level rises, then a. the money supply must have increased, perhaps because the Fed bought bonds. b. the money supply must have increased, perhaps because the Fed sold bonds. c. the money supply must have decreased, perhaps because the Fed bought bonds. d. the money supply must have decreased, perhaps because the Fed sold bonds. ANS: A DIF: 2 REF: 30-1 TOP: Money market 59. In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold, which was in use as a medium of exchange. We would predict that this increase in gold a. raised both the price level and the value of gold in Cairo. b. raised the price level, but decreased the value of gold in Cairo. c. lowered the price level, but increased the value of gold in Cairo. d. lowered both the price level and the value of gold in Cairo. TOP: Money market 60. In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks in many countries increased their money supplies. The central banks might have done this by a. selling bonds on the open market, which would have raised the value of money. b. purchasing bonds on the open market, which would have raised the value of money. c. selling bonds on the open market, which would have raised the value of money. d. purchasing bonds on the open market, which would have lowered the value of money. ANS: D DIF: 2 REF: 30-1 TOP: Money market 61. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply creates an excess a. supply of money, causing people to spend more. b. supply of money, causing people to spend less. c. demand for money, causing people to spend more. d. demand for money, causing people to spend less. ANS: A DIF: 2 REF: 30-1 TOP: Money market 62. A decrease in the money supply creates an excess a. supply of money that is eliminated by rising prices. b. supply of money that is eliminated by falling prices. c. demand for money that is eliminated by rising prices. d. demand for money that is eliminated by falling prices. ANS: D DIF: 2 REF: 30-1 TOP: Money market 63. Suppose there is a surplus in the money market. a. This could have been created by an increase in the money supply. The value of money will rise. b. This could have been created by an increase in the money supply. The value of money will fall. c. This could have been created by a decrease in the money supply. The value of money will rise. d. This could have been created by a decrease in the money supply. The value of money will fall. ANS: B DIF: 2 REF: 30-1 TOP: Money market equilibrium

23 2036 Chapter 30 /Money Growth and Inflation 64. The price level falls. This might be because the Federal Reserve a. bought bonds which raised the money supply. b. bought bonds which reduced the money supply. c. sold bonds which raised the money supply. d. sold bonds which reduced the money supply. ANS: D DIF: 2 REF: 30-1 NAT: Analytic LOC: Monetary and fiscal policy TOP: Money market equilibrium Figure Refer to Figure If the money supply is MS 2 and the value of money is 2, then a. the value of money is lower than its equilibrium level. b. the price level is higher than its equilibrium level. c. the quantity of money demanded is greater than the quantity of money supplied. d. the quantity of money supplied is greater than the quantity of money demanded. ANS: D DIF: 2 REF: 30-1 TOP: Money market 66. Refer to Figure If the money supply is MS 2 and the value of money is 2, then there is an excess a. demand for money that is represented by the distance between points A and C. b. demand for money that is represented by the distance between points A and B. c. supply of money that is represented by the distance between points A and C. d. supply of money that is represented by the distance between points A and B. ANS: D DIF: 2 REF: 30-1 TOP: Money market 67. Refer to Figure When the money supply curve shifts from MS 1 to MS 2, a. the demand for goods and services decreases. b. the economy's ability to produce goods and services increases. c. the equilibrium price level increases. d. the equilibrium value of money increases. ANS: C DIF: 2 REF: 30-1 TOP: Money market 68. Refer to Figure When the money supply curve shifts from MS 1 to MS 2, a. the equilibrium value of money decreases. b. the equilibrium price level decreases. c. the supply of money has decreased. d. the demand for goods and services will decrease. ANS: A DIF: 2 REF: 30-1 TOP: Money market