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

24 69. Refer to Figure If the current money supply is MS 1, then a. there is no excess supply or excess demand if the value of money is 2. b. the equilibrium is at point C. c. there is an excess supply of money if the value of money is 1. d. None of the above is correct. Chapter 30 /Money Growth and Inflation 2037 ANS: A DIF: 2 REF: 30-1 TOP: Money market Figure On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes MS MD MD 2 1 5, Refer to Figure What quantity is measured along the horizontal axis? a. the price level b. the real interest rate c. the value of money d. the quantity of money ANS: D DIF: 1 REF: 30-1 TOP: Money market 71. Refer to Figure If the relevant money-demand curve is the one labeled MD 1, then the equilibrium value of money is a. 0.5 and the equilibrium price level is 2. b. 2 and the equilibrium price level is 0.5. c. 0.5 and the equilibrium price level cannot be determined from the graph. d. 2 and the equilibrium price level cannot be determined from the graph. ANS: A DIF: 1 REF: 30-1 TOP: Money market Price level 72. Refer to Figure If the relevant money-demand curve is the one labeled MD 1, then a. when the money market is in equilibrium, one dollar purchases one-half of a basket of goods and services. b. when the money market is in equilibrium, one unit of goods and services sells for 2 dollars. c. there is an excess demand for money if the value of money in terms of goods and services is d. All of the above are correct. ANS: D DIF: 2 REF: 30-1 TOP: Money market Price level

25 2038 Chapter 30 /Money Growth and Inflation 73. Refer to Figure Which of the following events could explain a shift of the money-demand curve from MD 1 to MD 2? a. an increase in the value of money b. a decrease in the price level c. an open-market purchase of bonds by the Federal Reserve d. None of the above is correct. ANS: D DIF: 2 REF: 30-1 TOP: Money demand 74. Refer to Figure Suppose the relevant money-demand curve is the one labeled MD 1 ; also suppose the velocity of money is 3. If the money market is in equilibrium, then the economy s real GDP amounts to a. 5,000. b. 7,500. c. 10,000. d. 15,000. ANS: B DIF: 2 REF: 30-1 TOP: Velocity of money Real GDP 75. Refer to Figure Suppose the relevant money-demand curve is the one labeled MD 1 ; also suppose the economy s real GDP is 30,000 for the year. If the money market is in equilibrium, then how many times per year is the typical dollar bill used to pay for a newly produced good or service? a. 4 b. 6 c. 8 d. 12 ANS: D DIF: 3 REF: 30-1 TOP: Velocity of money 76. Refer to Figure At the end of 2007 the relevant money-demand curve was the one labeled MD 2. At the end of 2008 the relevant money-demand curve was the one labeled MD 1. Assuming the economy is always in equilibrium, what was the economy s approximate inflation rate for 2008? a. -43 percent b. -57 percent c. 57 percent d. 75 percent ANS: D DIF: 3 REF: 30-1 TOP: Inflation rate

26 Chapter 30 /Money Growth and Inflation 2039 Figure On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. MS MS MD 10,000 15, Refer to Figure What quantity is measured along the vertical axis? a. the price level b. the velocity of money c. the value of money d. the quantity of money ANS: C DIF: 1 REF: 30-1 TOP: Money market 78. Refer to Figure If the relevant money-supply curve is the one labeled MS 1, then the equilibrium price level is a. 0.5 and the equilibrium value of money is 2. b. 2 and the equilibrium value of money is 0.5. c. 0.5 and the equilibrium value of money cannot be determined from the graph. d. 2 and the equilibrium value of money cannot be determined from the graph. TOP: Money market Price level 79. Refer to Figure If the relevant money-supply curve is the one labeled MS 2, then a. when the money market is in equilibrium, one dollar purchases about one-third of a basket of goods and services. b. when the money market is in equilibrium, one unit of goods and services sells for 33 cents. c. there is an excess demand for money if the value of money in terms of goods and services is 0.5. d. All of the above are correct. ANS: A DIF: 2 REF: 30-1 TOP: Money market Price level

27 2040 Chapter 30 /Money Growth and Inflation 80. Refer to Figure Which of the following events could explain a shift of the money-supply curve from MS 1 to MS 2? a. an increase in the value of money b. a decrease in the price level c. an open-market purchase of bonds by the Federal Reserve d. None of the above is correct. ANS: C DIF: 2 REF: 30-1 TOP: Money demand 81. Refer to Figure Suppose the relevant money-supply curve is the one labeled MS 2 ; also suppose the economy s real GDP is 45,000 for the year. If the money market is in equilibrium, then the velocity of money is approximately a. 4.5 b. 6.0 c. 9.0 d ANS: C DIF: 3 REF: 30-1 TOP: Velocity of money 82. Refer to Figure At the end of 2007 the relevant money-supply curve was the one labeled MS 1. At the end of 2008 the relevant money-supply curve was the one labeled MS 2. Assuming the economy is always in equilibrium, what was the economy s approximate inflation rate for 2008? a. -33 percent b. 17 percent c. 50 percent d. 67 percent ANS: C DIF: 3 REF: 30-1 TOP: Inflation rate 83. Economic variables whose values are measured in monetary units are called a. dichotomous variables. b. nominal variables. c. classical variables. d. real variables. TOP: Nominal variables 84. Economic variables whose values are measured in goods are called a. dichotomous variables. b. nominal variables. c. classical variables. d. real variables. ANS: D DIF: 1 REF: 30-1 TOP: Nominal variables 85. On a given morning, Franco sold 40 pairs of shoes for a total of $80 at his shoe store. a. The $80 is a real variable. The quantity of shoes is a nominal variable. b. The $80 is a nominal variable. The quantity of shoes is a real variable. c. Both the $80 and the quantity of shoes are nominal variables. d. Both the $80 and the quantity of shoes are real variables. TOP: Nominal variables Real variables

28 Chapter 30 /Money Growth and Inflation Nominal GDP measures a. the total quantity of final goods and services produced. b. the dollar value of the economy's output of final goods and services. c. the total income received from producing final goods and services measured in constant dollars. d. None of the above is correct. TOP: Nominal GDP 87. The price level is a a. relative variable. b. dichotomous variable c. real variable. d. nominal variable. ANS: D DIF: 1 REF: 30-1 TOP: Price level 88. The price of a Honda Accord a. and the price of a Honda Accord divided by the price of a Honda Civic are both real variables. b. and the price of a Honda Accord divided by the price of Honda Civic are both nominal variables. c. is a real variable, and the price of a Honda Accord divided by a Honda Civic is a nominal variable. d. is a nominal variable and the price of a Honda Accord divided by the price of a Honda Civic is a real variable. ANS: D DIF: 1 REF: 30-1 TOP: Nominal variables Real variables 89. When shopping you notice that a pair of jeans costs $20 and that a tee-shirt costs $10. You compute the price of jeans relative to tee-shirts. a. The dollar price of jeans and the relative price of jeans are both nominal variables. b. The dollar price of jeans and the relative price of jeans are both real variables. c. The dollar price of jeans is a nominal variable; the relative price of jeans is a real variable. d. The dollar price of jeans is a real variable; the relative price of jeans is a nominal variable. ANS: C DIF: 2 REF: 30-1 TOP: Real versus nominal variables 90. An associate professor of physics gets a $200 a month raise. She figures that with her new monthly salary she can buy more goods and services than she could buy last year. a. Her real and nominal salary have risen. b. Her real and nominal salary have fallen. c. Her real salary has risen and her nominal salary has fallen. d. Her real salary has fallen and her nominal salary has risen. ANS: A DIF: 1 REF: 30-1 TOP: Nominal variables Real variables 91. An assistant manager at a restaurant gets a $100 a month raise. He figures that with his new monthly salary he cannot buy as many goods and services as he could buy last year. a. His real and nominal salary have risen. b. His real and nominal salary have fallen. c. His real salary has risen and his nominal salary has fallen. d. His real salary has fallen and his nominal salary has risen. ANS: D DIF: 1 REF: 30-1 TOP: Nominal variables Real variables

29 2042 Chapter 30 /Money Growth and Inflation 92. Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay makes a. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased. b. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage decreased. c. your real wage increase. If your real wage rose by a greater percentage than the price level, then your nominal wage also increased. d. your real wage decrease. If your real wage rose by a greater percentage than the price level, then your nominal wage decreased. ANS: A DIF: 2 REF: 30-1 TOP: Nominal variables Real variables 93. Suppose the price level rises, but the number of dollars you are paid per hour stays the same. This means that your a. nominal wage is higher. b. nominal wage is lower. c. real wage is higher. d. real wage is lower. ANS: D DIF: 1 REF: 30-1 TOP: Nominal variables Real variables 94. Suppose each good costs $5 per unit and Megan holds $40. What is the real value of the money she holds? a. $40. If the price of goods rises, to maintain the real value of her money holdings she need to hold more dollars. b. 8 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars. c. $40. If the price of goods rises, to maintain the real value of her money holdings she need to hold fewer dollars. d. 8 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold fewer dollars. ANS: B DIF: 2 REF: 30-1 TOP: Real versus nominal values 95. On its Website, your bank posts the interest rates it is paying on savings accounts. Those posted rates a. and a price index are both real variables. b. and a price index are both nominal variables. c. are real variables, and a price index is a nominal variable. d. are nominal variables, and a price index is a real variable TOP: Nominal variables Real variables 96. Interest rates adjusted for the effects of inflation a. and inflation are nominal variables. b. and inflation are real variables. c. are real variables; inflation is a nominal variable. d. are nominal variables; inflation is a real variable. ANS: C DIF: 1 REF: 30-1 TOP: Nominal variables Real variables

30 Chapter 30 /Money Growth and Inflation You put money in the bank. The increase in the dollar value of your savings a. and the change in the number of goods you can buy with your savings are both nominal variables. b. and the change in the number of goods you can buy with your savings are both real variables. c. is a nominal variable, but the change in the number of goods you can buy with your savings is a real variable. d. is a real variable, but the change in the number of goods you buy with your savings is a nominal variable. ANS: C DIF: 1 REF: 30-1 TOP: Nominal interest rate Real interest rate 98. The idea that nominal variables are heavily influenced by the quantity of money and that money is largely irrelevant for understanding the determinants of real variables is called the a. velocity concept. b. Fisher effect. c. classical dichotomy. d. Mankiw effect. ANS: C DIF: 1 REF: 30-1 TOP: Classical dichotomy 99. The classical dichotomy refers to the idea that the supply of money a. is irrelevant for understanding the determinants of nominal and real variables. b. determines nominal variables, but not real variables. c. determines real variables, but not nominal variables. d. is a determinant of both real and nominal variables. TOP: Classical dichotomy 100. The classical dichotomy argues that changes in the money supply a. affect both nominal and real variables. b. affect neither nominal nor real variables. c. affect nominal variables, but not real variables. d. do not affect nominal variables, but do affect real variables. ANS: C DIF: 1 REF: 30-1 TOP: Classical dichotomy 101. According to the classical dichotomy, which of the following increases when the money supply increases? a. the real interest rate b. real GDP c. the real wage d. None of the above increases. ANS: D DIF: 1 REF: 30-1 TOP: Classical dichotomy 102. According to the classical dichotomy, which of the following is influenced by monetary factors? a. real GDP b. unemployment c. nominal interest rates d. All of the above are correct. ANS: C DIF: 1 REF: 30-1 TOP: Classical dichotomy

31 2044 Chapter 30 /Money Growth and Inflation 103. According to the classical dichotomy, which of the following is influenced by monetary factors? a. the real wage b. the real interest rate c. the nominal wage d. All of the above are correct. ANS: C DIF: 1 REF: 30-1 TOP: Classical dichotomy 104. According to the classical dichotomy, which of the following is not influenced by monetary factors? a. the price level b. real GDP c. nominal interest rates d. All of the above are correct. TOP: Classical dichotomy 105. According to the classical dichotomy, which of the following is not influenced by monetary factors? a. nominal GDP and nominal interest rates b. real wages and real GDP c. the price level and nominal GDP d. None of the above is correct. TOP: Classical dichotomy 106. Changes in nominal variables are determined mostly by the quantity of money and the monetary system according to a. both the classical dichotomy and the quantity theory of money. b. the classical dichotomy, but not the quantity theory of money. c. the quantity theory of money, but not the classical dichotomy. d. neither the classical dichotomy nor the quantity theory of money. ANS: A DIF: 2 REF: 30-1 TOP: Classical dichotomy Quantity theory of money MSC: Definitional 107. According to the classical dichotomy, when the money supply doubles, which of the following also doubles? a. the price level and nominal wages b. the price level, but not the nominal wage c. the nominal wage, but not the price level d. neither the nominal wage nor the price level ANS: A DIF: 1 REF: 30-1 TOP: Classical dichotomy 108. According to the classical dichotomy, when the money supply doubles which of the following doubles? a. the price level and nominal GDP b. the price level and real GDP c. only real GDP d. only the price level ANS: A DIF: 1 REF: 30-1 TOP: Classical dichotomy

32 Chapter 30 /Money Growth and Inflation The principle of monetary neutrality implies that an increase in the money supply will a. increase real GDP and the price level. b. increase real GDP, but not the price level. c. increase the price level, but not real GDP. d. increase neither the price level nor real GDP. ANS: C DIF: 1 REF: 30-1 TOP: Monetary neutrality 110. According to the principle of monetary neutrality, a decrease in the money supply will not change a. nominal GDP. b. the price level. c. unemployment. d. All of the above are correct. ANS: C DIF: 1 REF: 30-1 TOP: Monetary neutrality 111. Monetary neutrality implies that an increase in the quantity of money will a. increase employment. b. increase the price level. c. increase the incentive to save. d. not increase any of the above. TOP: Monetary neutrality 112. Most economists believe the principle of monetary neutrality is a. relevant to both the short and long run. b. irrelevant to both the short and long run. c. mostly relevant to the short run. d. mostly relevant to the long run. ANS: D DIF: 1 REF: 30-1 TOP: Monetary neutrality 113. Most economists believe that monetary neutrality provides a. a good description of both the long run and the short run. b. a good description of neither the long run nor the short run. c. a good description of the short run, but not the long run. d. a good description of the long run, but not the short run. ANS: D DIF: 2 REF: 30-1 TOP: Monetary neutrality 114. According to the classical dichotomy, when the money supply doubles, which of the following also doubles? a. the price level b. nominal wages c. nominal GDP d. All of the above are correct. ANS: D DIF: 1 REF: 30-1 TOP: Classical dichotomy

33 2046 Chapter 30 /Money Growth and Inflation 115. Which of the following is correct? a. The classical dichotomy separates real and nominal variables. b. Monetary neutrality is the proposition that changes in the money supply do not change real variables. c. When studying long-run changes in the economy, the neutrality of money offers a good description of how the world works. d. All of the above are correct. ANS: D DIF: 1 REF: 30-1 TOP: Classical dichotomy Monetary neutrality 116. The velocity of money is a. the rate at which the Fed puts money into the economy. b. the same thing as the long-term growth rate of the money supply. c. the money supply divided by nominal GDP. d. the average number of times per year a dollar is spent. ANS: D DIF: 1 REF: 30-1 TOP: Velocity 117. Velocity is computed as a. (P Y)/M. b. (P M)/Y. c. (Y M)/P. d. (Y M)/V. ANS: A DIF: 1 REF: 30-1 TOP: Velocity 118. Based on the quantity equation, if M = 100, V = 3, and Y = 200, then P = a. 1. b c. 2. d. None of the above is correct. TOP: Velocity 119. Based on the quantity equation, if M = 150, V = 4, and Y = 200, then P = a. 1/3. b. 1/2. c. 2. d. 3. ANS: D DIF: 1 REF: 30-1 TOP: Quantity equation 120. According to the quantity equation, if P = 1.5, Y = 6,000, and M = 4,000, then V = a b c d. None of the above is correct. ANS: A DIF: 1 REF: 30-1 TOP: Quantity equation

34 121. According to the quantity equation, if P = 2, Y = 6,000, and M = 3,000, then V = a. 1/2. b. 1. c. 4. d. None of the above is correct. Chapter 30 /Money Growth and Inflation 2047 ANS: C DIF: 1 REF: 30-1 TOP: Quantity equation 122. According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also a. either a rise in output or a rise in velocity. b. either a rise in output or a fall in velocity. c. either a fall in output or a rise in velocity. d. either a fall in output or a fall in velocity. ANS: B DIF: 3 REF: 30-1 TOP: Quantity equation 123. According to the assumptions of the quantity theory of money, if the money supply increases by 5 percent, then a. nominal and real GDP would rise by 5 percent. b. nominal GDP would rise by 5 percent; real GDP would be unchanged. c. nominal GDP would be unchanged; real GDP would rise by 5 percent. d. neither nominal GDP nor real GDP would change. ANS: B DIF: 2 REF: 30-1 TOP: Quantity theory of money 124. According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then a. both the price level and real GDP would rise by 5 percent. b. the price level would rise by 5 percent and real GDP would be unchanged. c. the price level would be unchanged and real GDP would rise by 5 percent. d. both the price level and real GDP would be unchanged. ANS: B DIF: 2 REF: 30-1 TOP: Quantity theory of money 125. Last year, Tealandia produced 50,000 bags of green tea, and tea was the only good Tealandia produced. Each bag sold at 4 units each of Tealandia's currency the Leaf. Tealandia's money supply was 40,000. What was the velocity of money in Tealandia? a. 20 b. 5 c. 1/20 d. 1/5 ANS: B DIF: 2 REF: 30-1 TOP: Velocity 126. According to the quantity equation, if P = 4 and Y = 450, then which of the following pairs of values are possible? a. M = 800, V = 4 b. M = 600, V =3 c. M = 400, V =2 d. M = 200, V =1 ANS: B DIF: 2 REF: 30-1 TOP: Velocity

35 2048 Chapter 30 /Money Growth and Inflation 127. Velocity is a. Y/(M x P) and increases if dollars are exchanged less frequently. b. Y/(M x P) and increases if dollars are exchanged more frequently. c. (P x Y)/M and increases if dollars are exchanged less frequently. d. (P x Y)/M and increases if dollars are exchanged more frequently. ANS: D DIF: 2 REF: 30-1 TOP: Velocity 128. If Y and V are constant, and M doubles, the quantity equation implies that the price level a. more than doubles. b. changes but less than doubles. c. doubles. d. does not change ANS: C DIF: 1 REF: 30-1 TOP: Quantity equation 129. If Y and M are constant, and V doubles, the quantity equation implies that the price level a. falls to half it s original level. b. doubles. c. more than doubles. d. does not change. TOP: Quantity equation 130. If V and M are constant, and Y doubles, the quantity equation implies that the price level a. falls to half its original level. b. does not change. c. doubles. d. more than doubles. ANS: A DIF: 1 REF: 30-1 TOP: Quantity equation 131. If velocity and output were nearly constant, then a. the inflation rate would be much higher than the money supply growth rate. b. the inflation rate would be about the same as the money supply growth rate. c. the inflation rate would be much lower than the money supply growth rate. d. any of the above would be possible. TOP: Quantity equation Inflation 132. Suppose that velocity rises while the money supply stays the same. It follows that a. P x Y must rise. b. P x Y must fall. c. P x Y must be unchanged. d. the effects on P x Y are uncertain. ANS: A DIF: 2 REF: 30-1 TOP: Velocity

36 Chapter 30 /Money Growth and Inflation The money supply in Muckland is $100 billion. Nominal GDP is $800 billion and real GDP is $400 billion. What are the price level and velocity in Muckland? a. The price level and velocity are both 8. b. The price level is 2 and velocity is 8. c. The price level and velocity are both 4. d. The price level is 4 and velocity is 8. ANS: B DIF: 2 REF: 30-1 TOP: Quantity equation 134. Suppose the money supply tripled, but at the same time velocity fell by half and real GDP was unchanged. According to the quantity equation the price level a. is 1.5 times its old value. b. is 3 times its old value. c. is 6 times its old value. d. is the same as its old value. ANS: A DIF: 2 REF: 30-1 TOP: Quantity equation 135. Suppose over some period of time the money supply tripled, velocity fell by half, and real GDP doubled. According to the quantity equation the price level is now a. 6 times its old value. b. 3 times its old value. c. 1.5 times its old value. d times its old value. ANS: D DIF: 2 REF: 30-1 TOP: Quantity equation 136. Suppose over some period of time the money supply tripled, velocity was unchanged, and real GDP doubled. According to the quantity equation the price level is now a. 6 times its old value. b. 3 times its old value. c. 1.5 times its old value. d times its old value ANS: C DIF: 2 REF: 30-1 TOP: Quantity equation 137. If real output in an economy is 1,000 goods per year, the money supply is $300, and each dollar is spent an average of 3 times per year, then according to the quantity equation, the average price level is a. $0.90. b. $1.00. c. $1.11. d. $1.33. ANS: A DIF: 1 REF: 30-1 TOP: Quantity equation 138. Suppose monetary neutrality holds and velocity is constant. A 5 percent increase in the money supply a. increases the price level by more than 5 percent. b. increases the price level by 5 percent. c. increases the price level by 5 percent. d. does not change the price level. TOP: Quantity equation

37 2050 Chapter 30 /Money Growth and Inflation 139. Suppose that when the money supply changes, real output and velocity do not change. Then a 2 percent increase in the money supply a. decreases the price level by 2 percent. b. decreases the price level by less than 2 percent. c. increases the price level by less than 2 percent. d. increases the price level by 2 percent. ANS: D DIF: 1 REF: 30-1 NAT: Analytic LOC: Unemployment and inflation TOP: Quantity theory of money 140. Which of the following is not implied by the quantity equation? a. If velocity is stable, an increase in the money supply creates a proportional increase in nominal output. b. If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in the price level. c. With constant money supply and output, an increase in velocity creates an increase in the price level. d. With constant money supply and velocity, an increase in output creates a proportional increase in the price level. ANS: D DIF: 2 REF: 30-1 TOP: Quantity equation 141. If money is neutral and velocity is stable, an increase in the money supply creates a proportional increase in a. real output only. b. nominal output only. c. the price level only. d. both the price level and nominal output. ANS: D DIF: 2 REF: 30-1 TOP: Velocity Monetary neutrality 142. Which of the following is consistent with the idea that high money supply growth leads to high inflation? a. the quantity theory and evidence from four hyperinflations during the 1920 s b. the quantity theory but not evidence from four hyperinflations during the 1920 s c. evidence from four hyperinflations during the 1920 s but not the quantity theory d. neither the quantity theory nor evidence from four hyperinflation during the 1920 s ANS: A DIF: 1 REF: 30-1 NAT: Analytic LOC: Unemployment and inflation TOP: Quantity theory of money Hyperinflation 143. The evidence from hyperinflations indicates that money growth and inflation a. are positively related, which is consistent with the quantity theory of money. b. are positively related, which is not consistent with the quantity theory of money. c. are not related in a discernible fashion, which is consistent with the quantity theory of money. d. are not related in a discernible fashion, which is not consistent with the quantity theory of money. ANS: A DIF: 1 REF: 30-1 TOP: Hyperinflation Quantity theory of money 144. When the money supply and the price level in countries that experienced hyperinflation are plotted on a graph against time, we see that a. the price level grew at about the same rate as the money supply. b. the price level grew at a much faster rate than the money supply. c. the price level grew at a much slower rate than the money supply. d. the inflation rate and the money supply growth rate do not appear to be related. ANS: A DIF: 1 REF: 30-1 TOP: Hyperinflation

38 145. The source of hyperinflations is primarily a. lower output growth. b. continuing declines in velocity. c. increases in money-supply growth. d. continuing increases in money demand. Chapter 30 /Money Growth and Inflation 2051 ANS: C DIF: 1 REF: 30-1 TOP: Hyperinflation 146. Based on past experience, if a country is experiencing hyperinflation, then which of the following would be a reasonable guess? a. The country has high money supply growth. b. Inflation is acting like a tax on everyone who holds money. c. The government is printing money to finance its expenditures. d. All of the above are correct. ANS: D DIF: 1 REF: 30-1 NAT: Analytic LOC: Unemployment and inflation TOP: Hyperinflation Inflation tax 147. The inflation tax a. is an alternative to income taxes and government borrowing. b. taxes most those who hold the most money. c. is the revenue created when the government prints money. d. All of the above are correct. ANS: D DIF: 1 REF: 30-1 TOP: Inflation tax 148. Governments may prefer an inflation tax to some other type of tax because the inflation tax a. is easier to impose. b. reduces inflation. c. falls mainly on high-income individuals. d. reduces the real cost of government expenditure. ANS: A DIF: 1 REF: 30-1 TOP: Inflation tax 149. The inflation tax falls mostly heavily on a. those who hold a lot of currency and accounts for a large share of U.S. government revenue. b. those who hold a lot of currency but accounts for a small share of U.S. government revenue. c. those who hold little currency and accounts for a large share of U.S. government revenue. d. those who hold little currency but accounts for a small share of U.S. government revenue. TOP: Inflation tax 150. Printing money to finance government expenditures a. causes the value of money to rise. b. imposes a tax on everyone who holds money. c. is the principal method by which the U.S. government finances its expenditures. d. None of the above is correct. TOP: Inflation tax

39 2052 Chapter 30 /Money Growth and Inflation 151. Which of the following is correct? a. The Continental Congress used the inflation tax to help finance the American Revolution. b. The inflation is today a principal source of revenue for the U.S. government. c. There is no way a person can avoid the inflation tax. d. None of the above is correct. ANS: A DIF: 1 REF: 30-1 TOP: Inflation tax 152. Suppose the United States unexpectedly decided to pay off its debt by printing new money. Which of the following would happen? a. People who held money would feel poorer. b. Prices would rise. c. People who had lent money at a fixed interest rate would feel poorer. d. All of the above are correct. ANS: D DIF: 1 REF: 30-1 TOP: Inflation costs 153. The claim that increases in the growth rate of the money supply increase nominal interest rates but not real interest rates is known as the a. Friedman Effect. b. Hume Effect. c. Fisher Effect. d. None of the above is correct. ANS: C DIF: 1 REF: 30-1 TOP: Fisher effect 154. The nominal interest rate is 3 percent and the inflation rate is 2 percent. What is the real interest rate? a. 6 percent b. 5 percent c. 1.5 percent d. 1 percent ANS: D DIF: 1 REF: 30-1 TOP: Nominal interest rate Real interest rate 155. The nominal interest rate is 4.5 percent and the inflation rate is 0.9 percent. What is the real interest rate? a. 5.4 percent b. 5 percent c. 4.1 percent d. 3.6 percent ANS: D DIF: 1 REF: 30-1 TOP: Nominal interest rate Real interest rate 156. The nominal interest rate is 3.5 percent and the inflation rate is 2 percent. What is the real interest rate? a. 7 percent b. 5.5 percent c percent d. 1.5 percent ANS: D DIF: 1 REF: 30-1 TOP: Nominal interest rate Real interest rate

40 Chapter 30 /Money Growth and Inflation The nominal interest rate is 6 percent and the real interest rate is 2 percent. What is the inflation rate? a. 3 percent. b. 4 percent. c. 8 percent. d. 12 percent. TOP: Nominal interest rate Real interest rate 158. The nominal interest rate is 5 percent and the real interest rate is 2 percent. What is the inflation rate? a. 10 percent b. 7 percent c. 3 percent d. 2.5 percent ANS: C DIF: 1 REF: 30-1 TOP: Nominal interest rate Real interest rate 159. If the nominal interest rate is 5 percent and there is a deflation rate of 2 percent, what is the real interest rate? a. 7 percent b. 5 percent c. 3 percent d. 3/5 percent ANS: A DIF: 2 REF: 30-1 TOP: Nominal interest rate Real interest rate Deflation 160. If the real interest rate is 6 percent and the price level is falling at a rate of 2 percent, what is the nominal interest rate? a. 4 percent b. 6 percent c. 8 percent d. 10 percent ANS: A DIF: 2 REF: 30-1 TOP: Nominal interest rate Real interest rate Deflation 161. The real interest rate is 8 percent and the nominal interest rate is 10.5 percent. Is there inflation or deflation? What is the inflation or deflation rate? a. deflation; 2.5 percent b. deflation; 20.5 percent c. inflation; 2.5 percent d. inflation; 20.5 percent ANS: C DIF: 2 REF: 30-1 TOP: Nominal interest rate Real interest rate 162. If the nominal interest rate is 5 percent and the inflation rate is 2 percent, then what is the real interest rate? a. 10 percent b. 7 percent c. 3 percent d. 2.5 percent ANS: C DIF: 1 REF: 30-1 NAT: Analytic LOC: Unemployment and inflation TOP: Real and nominal interest rates

41 2054 Chapter 30 /Money Growth and Inflation 163. Whitney puts money in a savings account at her bank earning 3.5 percent. One year later she takes her money out and notes that while her money was earning interest, prices rose 1.5 percent. Whitney earned a nominal interest rate of a. 3.5 percent and a real interest rate of 5 percent. b. 3.5 percent and a real interest rate of 2 percent. c. 5 percent and a real interest rate of 3.5 percent d. 5 percent and a real interest rate of 2 percent TOP: Nominal interest rate Real interest rate 164. Shawn puts money into an account. One year later he sees that he has 5 percent more dollars and that his money will buy 6 percent more goods. a. The nominal interest rate was 11 percent and the inflation rate was 5 percent. b. The nominal interest rate was 6 percent and the inflation rate was 5 percent. c. The nominal interest rate was 5 percent and the inflation rate was -1 percent. d. None of the above is correct. ANS: C DIF: 2 REF: 30-1 TOP: Nominal interest rate Real interest rate 165. Katarina puts money into an account. One year later she sees that she has 6 percent more dollars and that her money will buy 2 percent more goods. a. The nominal interest rate was 8 percent and the inflation rate was 6 percent. b. The nominal interest rate was 6 percent and the inflation rate was 4 percent. c. The nominal interest rate was 4 percent and the inflation rate was 2 percent. d. None of the above is correct. ANS: B DIF: 2 REF: 30-1 TOP: Nominal interest rate Real interest rate 166. Banks advertise a. the real interest rate, which is how fast the dollar value of savings grows. b. the real interest rate, which is how fast the purchasing power of savings grows. c. the nominal interest rate, which is how fast the dollar value of savings grows. d. the nominal interest rate, which is how fast the purchasing power of savings grows. ANS: C DIF: 1 REF: 30-1 NAT: Analytic LOC: Unemployment and inflation TOP: Real and nominal interest rates 167. If a country experienced deflation, then a. the nominal interest rate would be greater than the real interest rate. b. the real interest rate would be greater than the nominal interest rate. c. the real interest rate would equal the nominal interest rate. d. None of the above is necessarily correct. ANS: B DIF: 2 REF: 30-1 TOP: Nominal interest rate Real interest rate Inflation 168. In the U.S., from the early 1980s through the early 1990s, a. both inflation and nominal interest rates rose. b. both inflation and nominal interest rates fell. c. the inflation rate fell and the nominal interest rate rose. d. the inflation rate rose and the nominal interest rate fell. ANS: B DIF: 2 REF: 30-1 TOP: Nominal interest rate Inflation

42 Chapter 30 /Money Growth and Inflation The Fisher effect says that a. the nominal interest rate adjusts one for one with the inflation rate. b. the growth rate of the money supply is negatively related to the velocity of money. c. real variables are heavily influenced by the monetary system. d. All of the above are correct. ANS: A DIF: 1 REF: 30-1 TOP: Fisher effect 170. Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, then a. both the nominal and the real interest rate rise. b. neither the nominal nor the real interest rate rise. c. the nominal interest rate rises, but the real interest rate does not. d. the real interest rate rises, but the nominal interest rate does not. ANS: C DIF: 1 REF: 30-1 TOP: Fisher effect 171. Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate falls, then a. both the nominal and the real interest rate fall. b. neither the nominal nor the real interest rate fall. c. the nominal interest rate falls, but the real interest rate does not. d. the real interest rate falls, but the nominal interest rate does not. ANS: C DIF: 1 REF: 30-1 TOP: Fisher effect 172. 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 ANS: C DIF: 2 REF: 30-1 TOP: Monetary neutrality 173. 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. None of the above is correct. ANS: D DIF: 1 REF: 30-1 TOP: Monetary neutrality 174. Suppose that monetary neutrality and the Fisher effect both hold and the money supply growth rate has been the same for a long time. Other things the same a higher money supply growth would be associated with a. both higher inflation and higher nominal interest rates. b. a higher inflation rate, but not higher nominal interest rates. c. a higher nominal interest rate, but not higher inflation. d. neither a higher inflation rate nor a higher nominal interest rate. ANS: A DIF: 1 REF: 30-1 TOP: Quantity equation Fisher effect

43 2056 Chapter 30 /Money Growth and Inflation 175. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases a. the inflation rate and nominal interest rates. b. the inflation rate, but not nominal interest rates. c. nominal interest rates, but not the inflation rate. d. neither the inflation rate nor nominal interest rates. ANS: A DIF: 1 REF: 30-1 TOP: Quantity equation Fisher effect 176. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases a. the inflation rate and real interest rates. b. the inflation rate, but not real interest rates. c. real interest rates, but not the inflation rate. d. neither the inflation rate nor real interest rates. TOP: Quantity equation Fisher effect 177. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases a. the inflation rate and growth of real GDP. b. the inflation rate but not the growth rate of real GDP. c. the growth rate of real GDP, but not the inflation rate. d. neither the inflation rate nor the growth rate of real GDP. TOP: Quantity equation Fisher effect 178. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases a. the inflation rate and the nominal interest rate by the same number of percentage points. b. nominal interest rates but by less than the percentage point increase in the inflation rate. c. the inflation rate but not the nominal interest. d. neither the inflation rate nor the nominal interest rate. ANS: A DIF: 1 REF: 30-1 TOP: Quantity equation Fisher effect 179. According to monetary neutrality and the Fisher effect, an increase in the money supply growth rate eventually increases a. inflation, nominal interest rates, and real interest rates. b. inflation and nominal interest rates, but does not change real interest rates. c. inflation and real interest rates, but does not change nominal interest rates. d. neither inflation, nominal interest rates, or real interest rates. ANS: B DIF: 2 REF: 30-1 TOP: Quantity equation 180. The Fisher effect a. says the government can generate revenue by printing money. b. says there is a one for one adjustment of the nominal interest rate to the inflation rate. c. explains how higher money supply growth leads to higher inflation. d. explains how prices adjust to obtain equilibrium in the money market. NAT: Analytic LOC: Unemployment and inflation TOP: Fisher effect Real interest rate Nominal interest rate

44 Sec02 - Money Growth and Inflation - The Costs of Inflation MULTIPLE CHOICE 1. In the 1970s, the U.S. inflation rate reached about a. 7 percent per year. b. 10 percent per year. c. 14 percent per year. d. 20 percent per year. Chapter 30 /Money Growth and Inflation 2057 ANS: B DIF: 1 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate 2. Which of the following statements about inflation is correct? a. Evidence from studies indicates that, in U.S. newspapers, inflation is mentioned less frequently than other economic terms, such as unemployment and productivity. b. People believe the inflation fallacy because they tend to believe too strongly in the principle of monetary neutrality. c. Nominal incomes are determined by nominal factors; they are not affected by real factors. d. Inflation does not in itself reduce people s real purchasing power. ANS: D DIF: 2 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation 3. Which of the following helps to explain why the inflation fallacy is a fallacy? a. Increases in the price level can be created by increases in money demand. b. Nominal incomes tend to rise at the same time that the price level is rising. c. As the price level rises, the value of a dollar falls. d. Inflation only changes nominal variables. ANS: B DIF: 1 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation fallacy 4. The inflation tax a. transfers wealth from the government to households. b. is the increase in income taxes due to lack of indexation. c. is a tax on everyone who holds money. d. All of the above are correct. ANS: C DIF: 1 REF: 30-2 TOP: Inflation tax 5. People can reduce the inflation tax by a. reducing savings. b. increasing deductions on their income tax. c. reducing cash holdings. d. None of the above is correct. ANS: C DIF: 1 REF: 30-2 TOP: Inflation tax 6. Shoeleather costs arise when higher inflation rates induce people to a. spend more time looking for bargains. b. spend less time looking for bargains. c. hold more money. d. hold less money. ANS: D DIF: 1 REF: 30-1 NAT: Analytic LOC: Unemployment and inflation TOP: Shoeleather costs of inflation

45 2058 Chapter 30 /Money Growth and Inflation 7. The shoeleather cost of inflation refers to a. the redistributional effects of unexpected 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. ANS: C DIF: 1 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Shoeleather costs of inflation 8. Shoeleather cost refers 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 tendency to expend more effort searching for the lowest price when inflation is high. ANS: C DIF: 1 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Shoeleather costs of inflation 9. People go to the bank more frequently to reduce currency holdings when inflation is high. The sacrifice of time and convenience that is involved in doing that is referred to as a. inflation-induced tax distortion. b. relative-price-variability cost. c. shoeleather cost. d. menu cost. ANS: C DIF: 1 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Shoeleather costs of inflation 10. When inflation rises, people tend to go to the bank a. more often, giving rise to menu costs. b. more often, giving rise to shoeleather costs. c. less often, giving rise to redistribution costs. d. less often, thereby lessening the severity of the inflation tax. ANS: B DIF: 2 REF: 30-2 TOP: Shoeleather costs of inflation 11. When inflation rises, firms make a. more frequent price changes. This raises their menu costs. b. more frequent price changes. This reduces their menu costs. c. less frequent price changes. This raises their menu costs. d. less frequent price changes. This reduces their menu costs. ANS: A DIF: 1 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Menu costs of inflation 12. The costs of changing price tags and price listings are known as a. inflation-induced tax distortions. b. relative-price variability costs. c. shoeleather costs. d. menu costs. ANS: D DIF: 1 REF: 30-2 TOP: Menu costs of inflation

46 Chapter 30 /Money Growth and Inflation Menu costs refers to a. resources used by people to maintain lower money holdings when inflation is high. b. resources used to price shop during times of high 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. ANS: D DIF: 1 REF: 30-2 TOP: Menu costs of inflation 14. If there is inflation, then a firm that has kept its price fixed for some time will have a a. high relative price. Relative-price variability rises as the inflation rate rises. b. high relative price. Relative-price variability falls as the inflation rate rises. c. low relative price. Relative-price variability rises as the inflation rate rises. d. low relative price. Relative-price variability falls as the inflation rate rises. ANS: C DIF: 2 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation Relative prices 15. Relative-price variability a. rises with inflation, leading to an improved allocation of resources. b. rises with inflation, leading to a misallocation of resources. c. falls with inflation, leading to an improved allocation of resources. d. falls with inflation, leading to a misallocation of resources. ANS: B DIF: 1 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation Relative prices 16. Relative-price variability is automatic when a. firms change prices only once in a while. b. firms change prices often. c. people increase the frequency of their trips to the bank. d. people decrease the frequency of their trips to the bank. ANS: A DIF: 2 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation Relative prices 17. Higher inflation makes relative prices a. more variable, making it more likely that resources will be allocated to their best use. b. more variable, making it less likely that resources will be allocated to their best use. c. less variable, making it more likely that resources will be allocated to their best use. d. less variable, making it less likely that resources will be allocated to their best use. ANS: B DIF: 2 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Relative-price variability 18. When inflation causes relative-price variability, a. consumer decisions are distorted and the ability of markets to efficiently allocate factors of production is impaired. b. consumer decisions are distorted, but markets are still able to efficiently allocate factors of production. c. consumer decisions are not distorted, but the ability of markets to efficiently allocate factors of production is impaired. d. consumer decisions are not distorted and markets are still able to efficiently allocate factors of production. ANS: A DIF: 1 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation Relative prices

47 2060 Chapter 30 /Money Growth and Inflation 19. If the inflation rate falls, people are likely to a. change prices more frequently and go to the bank more frequently. b. change prices more frequently and go to the bank less frequently. c. change prices less frequently and go to the bank less frequently. d. change prices less frequently and go the bank more frequently. ANS: C DIF: 1 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Shoeleather costs of inflation Menu costs of inflation 20. When inflation rises, people a. make less frequent trips to the bank and firms make less frequent price changes. b. make less frequent trips to the bank while firms make more frequent price changes. c. make more frequent trips to the bank while firms make less frequent price changes. d. make more frequent trips to the bank and firms make more frequent price changes. ANS: D DIF: 2 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Menu costs of inflation Shoeleather costs of inflation 21. When inflation rises, people will desire to hold a. less money and will go to the bank less frequently. b. less money and will go to the bank more frequently. c. more money and will go to the bank less frequently. d. more money and will go to the bank more frequently. ANS: B DIF: 2 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Shoeleather costs of inflation 22. U.S. tax laws allow taxpayers, in computing the amount of tax they owe, to use the real value, as opposed to the nominal value, of a. both interest income and capital gains. b. interest income but not capital gains. c. capital gains but not interest income. d. neither interest income nor capital gains. ANS: D DIF: 1 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Taxes Inflation 23. In the U.S., taxes on capital gains are computed using a. nominal gains. This is one way by which higher inflation discourages saving. b. nominal gains. This is one way by which higher inflation encourages saving. c. real gains. This is one way by which higher inflation discourages saving. d. real gains. This is one way by which higher inflation encourages saving. ANS: A DIF: 2 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Taxes Inflation Capital gains 24. In the U.S., people are required to pay taxes on a. nominal interest earnings, irrespective of their real interest earnings. b. real interest earnings, irrespective of their nominal interest earnings. c. real capital gains, irrespective of their nominal capital gains. d. All of the above are correct. ANS: A DIF: 1 REF: 30-2 TOP: Taxes Inflation

48 Chapter 30 /Money Growth and Inflation You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the price level. Before taxes, you experienced a. both a nominal gain and a real gain, and you paid taxes on the nominal gain. b. both a nominal gain and a real gain, and you paid taxes only on the real gain. c. a nominal gain, but no real gain, and you paid taxes on the nominal gain. d. a nominal gain, but no real gain, and you paid no taxes on the transaction. ANS: C DIF: 2 REF: 30-2 TOP: Taxes Inflation 26. You bought some shares of stock and, over the next year, the price per share increased by 5 percent and the price level increased by 8 percent. Before taxes, you experienced a. both a nominal gain and a real gain, and you paid taxes on the nominal gain. b. both a nominal gain and a real gain, and you paid taxes only on the real gain. c. a nominal gain and a real loss, and you paid taxes on the nominal gain. d. a nominal gain and a real loss, and you paid no taxes on the transaction. ANS: C DIF: 2 REF: 30-2 TOP: Taxes Inflation 27. When deciding how much to save, people care most about a. after-tax nominal interest rates. b. after-tax real interest rates. c. before-tax real interest rates. d. before-tax nominal interest rates. ANS: B DIF: 1 REF: 30-2 TOP: Taxes Inflation Real interest rate 28. For a given real interest rate, an increase in inflation makes the after-tax real interest rate a. decrease, which encourages savings. b. decrease, which discourages savings. c. increase, which encourages savings. d. increase, which discourages savings. ANS: B DIF: 2 REF: 30-2 TOP: Taxes Inflation Real interest rate 29. Given a nominal interest rate of 8 percent, in which of the following cases would you earn the highest after-tax real interest rate? a. Inflation is 5 percent; the tax rate is 20 percent. b. Inflation is 4 percent; the tax rate is 30 percent. c. Inflation is 3 percent; the tax rate is 40 percent. d. The after-tax real interest rate is the same for all of the above. ANS: C DIF: 2 REF: 30-2 TOP: Taxes Inflation Real interest rate 30. Given a nominal interest rate of 6 percent, in which of the following cases would you earn the highest after-tax real rate of interest? a. Inflation is 2.5 percent; the tax rate is 25 percent. b. Inflation is 3 percent; the tax rate is 20 percent. c. Inflation is 2 percent; the tax rate is 30 percent. d. The after-tax real interest rate is the same for all of the above. ANS: C DIF: 2 REF: 30-2 TOP: Taxes Inflation Real interest rate

49 2062 Chapter 30 /Money Growth and Inflation 31. Given a nominal interest rate of 6 percent, in which of the following cases would you earn the lowest after-tax real rate of interest? a. Inflation is 4 percent; the tax rate is 5 percent. b. Inflation is 3 percent; the tax rate is 20 percent. c. Inflation is 2 percent; the tax rate is 30 percent. d. The after-tax real interest rate is the same for all of the above. ANS: A DIF: 2 REF: 30-2 TOP: Taxes Inflation Real interest rate 32. Given a nominal interest rate of 5 percent, in which of the following cases would you earn the highest after-tax real rate of interest? a. Inflation is 3 percent; the tax rate is 20 percent. b. Inflation is 2 percent; the tax rate is 40 percent. c. Inflation is 1 percent; the tax rate is 60 percent. d. The after-tax real interest rate is the same for all of the above. ANS: D DIF: 2 REF: 30-2 TOP: Taxes Inflation Real interest rate 33. You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 3 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest? a. 3.4 percent b. 1.6 percent c. 1.0 percent d. None of the above is correct. ANS: C DIF: 2 REF: 30-2 TOP: Taxes Inflation Real interest rate 34. You put money into an account and earn a real interest rate of 4 percent. Inflation is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest? a. 1.2 percent b. 2.8 percent c. 4.8 percent d. None of the above is correct. ANS: B DIF: 3 REF: 30-2 TOP: Taxes Inflation Real interest rate 35. You put money into an account and earn a real interest rate of 6 percent. Inflation is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest? a. 4.8 percent b. 3.2 percent c. 2.8 percent d. None of the above is correct. ANS: D DIF: 3 REF: 30-2 TOP: Taxes Inflation Real interest rate 36. You put money into an account and earn an after-tax real interest rate of 2.5 percent. If the nominal interest rate on the account is 8 percent and the inflation rate is 2 percent, then what is the tax rate? a percent b percent c percent d percent ANS: C DIF: 3 REF: 30-2 TOP: Taxes Inflation Real interest rate

50 Chapter 30 /Money Growth and Inflation Suppose that in some tax year you earned a nominal interest rate of 4 percent. During the time you held these funds inflation was 1 percent. You compute that you made a real after-tax interest rate of 2 percent. What was your tax rate? a. 50 percent b percent c. 25 percent d. None of the above are correct. ANS: C DIF: 3 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Taxes Inflation Real interest rate 38. Suppose one year ago the price index was 120 and Mark purchased $20,000 worth of bonds. One year later the price index is 126. Mark redeems his bonds for $22,250 and is in a 40 percent tax bracket. What is Mark s real after-tax rate of interest to the nearest tenth of a percent? a. 4.3 percent b. 3.1 percent c. 1.8 percent d. 1.2 percent ANS: C DIF: 3 REF: 30-2 TOP: Taxes Inflation Capital gains 39. The country of Lessidinia has a tax system identical to that of the United States. Suppose someone in Lessidinia bought a parcel of land for 20,000 foci (the local currency) in 1960 when the price index equaled 100. In 2002, the person sold the land for 100,000 foci, and the price index equaled 600. The tax rate on nominal gains was 20 percent. Compute the taxes on the nominal gain and the change in the real value of the land in terms of 2002 prices to find the after-tax real rate of capital gain. a. -60 percent b. -30 percent c. 30 percent d. 60 percent ANS: B DIF: 3 REF: 30-2 TOP: Taxes Inflation Capital gains 40. The country of Veridian has a tax system identical to that of the United States. Suppose someone in Veridian bought a parcel of land for 10,000 deera (the local currency) in 1964 when the price index equaled 100. In 2005, the person sold the land for 100,000 deera, and the price index equaled 500. The tax rate on nominal capital gains was 20 percent. Compute the taxes the person paid on the nominal gain and the change in the real value of the land in terms of 2005 prices to find the after-tax real rate of capital gain. a. -20 percent b. 20 percent c. 42 percent d. 64 percent ANS: D DIF: 3 REF: 30-2 TOP: Taxes Inflation Capital gains 41. Kristi purchased one share of Genuine Co. stock for $200; one year later she sold that share for $400. The inflation rate over the year was 50 percent. The tax rate on nominal capital gains is 50 percent. What was the tax on Kristi s capital gain? a. $50 b. $75 c. $100 d. $200 ANS: C DIF: 2 REF: 30-2 TOP: Taxes Inflation Capital gains

51 2064 Chapter 30 /Money Growth and Inflation 42. Serena purchased 10 shares of GLC, Inc.stock for $200 per share; one year later she sold the 10 shares for $220 a share. Over the year, the price level increased from to The tax rate on capital gains is 50 percent. If the capital gains tax is on nominal gains, how much tax does Serena pay on her gain? a. $90 b. $95 c. $100 d. None of the above is correct. ANS: C DIF: 2 REF: 30-2 TOP: Taxes Capital gains 43. For a given real interest rate, a decrease in the inflation rate would a. decrease the after-tax real interest rate and so decrease saving. b. decrease the after-tax real interest rate and so increase saving. c. increase the after-tax real interest rate and so decrease saving. d. increase the after-tax real interest rate and so increase saving. ANS: D DIF: 2 REF: 30-2 TOP: Taxes Inflation Real interest rate 44. Which of the following costs of inflation can be significant even if actual inflation and expected inflation are the same? a. menu costs b. inflation tax c. shoeleather costs d. All of the above are correct. ANS: D DIF: 1 REF: 30-2 TOP: Inflation costs 45. Indexing the tax system to take into account the effects of inflation would by itself a. mean that only real interest earnings are taxed. b. mean an end to taxing capital gains. c. mean an increase in average tax rates. d. All of the above are correct. ANS: A DIF: 1 REF: 30-2 TOP: Indexation Inflation 46. Which of the following is correct? Inflation a. impedes financial markets in their role of allocating resources. b. reduces the purchasing power of the average consumer. c. generally increases after-tax real interest rates. d. is most costly when anticipated. ANS: A DIF: 2 REF: 30-2 TOP: Inflation costs 47. Wealth is redistributed from debtors to creditors when inflation was expected to be a. high and it turns out to be high. b. low and it turns out to be low. c. low and it turns out to be high. d. high and it turns out to be low. ANS: D DIF: 1 REF: 30-2 TOP: Wealth redistribution Inflation

52 Chapter 30 /Money Growth and Inflation Wealth is redistributed from creditors to debtors when inflation was expected to be a. high and it turns out to be high. b. low and it turns out to be low. c. low and it turns out to be high. d. high and it turns out to be low. ANS: C DIF: 2 REF: 30-2 TOP: Wealth redistribution Inflation 49. Wealth is redistributed from creditors to debtors when inflation is a. high, whether it is expected or not. b. low, whether it is expected or not. c. unexpectedly high. d. unexpectedly low. ANS: C DIF: 1 REF: 30-2 TOP: Wealth redistribution Inflation 50. During the last tax year you lent money at a nominal rate of 6 percent. Actual inflation was 1 percent, but people had been expecting 1.5 percent. This difference between actual and expected inflation a. transferred wealth from the borrower to you and caused your after-tax real interest rate to be 0.5 percentage points higher than what you had expected. b. transferred wealth from the borrower to you and caused your after-tax real interest rate to be more than 0.5 percentage points higher than what you had expected. c. transferred wealth from you to the borrower and caused your after-tax real interest rate to be 0.5 percentage points lower than what you had expected. d. transferred wealth from you to the borrower and caused your after-tax real interest rate to be more than 0.5 percentage points lower than what you had expected. ANS: A DIF: 3 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation Real interest rate Wealth redistribution 51. If the economy unexpectedly went from inflation to deflation, a. both debtors and creditors would have reduced real wealth. b. both debtors and creditors would have increased real wealth. c. debtors would gain at the expense of creditors. d. creditors would gain at the expense of debtors. ANS: D DIF: 2 REF: 30-2 TOP: Wealth redistribution Inflation 52. If inflation is higher than what was expected, a. creditors receive a lower real interest rate than they had anticipated. b. creditors pay a lower real interest rate than they had anticipated. c. debtors receive a higher real interest rate than they had anticipated. d. debtors pay a higher real interest rate than they had anticipated. ANS: A DIF: 2 REF: 30-2 TOP: Wealth redistribution Inflation 53. Yvonne takes out a fixed-interest-rate loan and then inflation turns out to be higher than she had expected it to be. The real interest rate she pays is a. higher than she had expected, and the real value of the loan is higher than she had expected. b. higher than she had expected, and the real value of the loan is lower than she had expected. c. lower than she had expected, and the real value of the loan is higher than she had expected. d. lower then she had expected, and the real value of the loan is lower than she had expected. ANS: D DIF: 2 REF: 30-2 TOP: Wealth redistribution Inflation

53 2066 Chapter 30 /Money Growth and Inflation 54. Marta lends money at a fixed interest rate and then inflation turns out to be higher than she had expected it to be. The real interest rate she earns is a. higher than she had expected, and the real value of the loan is higher than she had expected. b. higher than she had expected, and the real value of the loan is lower than she had expected. c. lower than she had expected, and the real value of the loan is higher than she had expected. d. lower then she had expected, and the real value of the loan is lower than she had expected. ANS: D DIF: 1 REF: 30-2 TOP: Wealth redistribution Inflation 55. Tara deposits money into an account with a nominal interest rate of 6 percent. She expects inflation to be 2 percent. Her tax rate is 20 percent. Tara s after-tax real rate of interest a. will be 2.8 percent if inflation turns out to be 2 percent; it will be higher if inflation turns out to be higher than 2 percent. b. will be 2.8 percent if inflation turns out to be 2 percent; it will be lower if inflation turns out to be higher than 2 percent. c. will be 3.2 percent if inflation turns out to be 2 percent; it will be higher if inflation turns out to be higher than 2 percent. d. will be 3.2 percent if inflation turns out to be 2 percent; it will be lower if inflation turns out to be higher than 2 percent. ANS: B DIF: 3 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Taxes Inflation Real interest rate 56. If people had been expecting prices to rise but in fact prices fell, then who among the following would benefit? a. lenders and people holding a lot of currency b. lenders but not people holding a lot of currency c. people holding a lot of currency but not lenders d. neither lenders nor people holding a lot of currency ANS: A DIF: 2 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Wealth redistribution Inflation Inflation tax 57. High and unexpected inflation entails a greater cost a. for those who borrow than for those who save. b. for those who hold a little money than for those who hold a lot of money. c. for those whose wages increase by as much as inflation, than for those who are paid a fixed nominal wage. d. for savers in high income tax brackets than for savers in low income tax brackets. ANS: D DIF: 2 REF: 30-2 TOP: Wealth redistribution Inflation 58. High and unexpected inflation has a greater cost a. for those who save than for those who borrow. b. for those who hold a little money than for those who hold a lot of money. c. for those whose wages increase by as much as inflation, than those who are paid a fixed nominal wage. d. for savers in low income tax brackets than for savers in high income tax brackets. ANS: A DIF: 2 REF: 30-2 TOP: Wealth redistribution Inflation

54 59. Between 1880 and 1886, prices that were a. lower than expected transferred wealth from creditors to debtors. b. lower than expected transferred wealth from debtors to creditors. c. higher than expected transferred wealth from creditors to debtors. d. higher than expected transferred wealth from debtors to creditors. ANS: B DIF: 2 REF: 30-2 TOP: Wealth redistribution Inflation Chapter 30 /Money Growth and Inflation In 1898, prospectors on the Klondike River discovered gold. This discovery caused an unexpected price level a. decrease that benefited creditors at the expense of debtors. b. decrease that benefited debtors at the expense of creditors. c. increase that benefited creditors at the expense of debtors. d. increase that benefited debtors at the expense of creditors. ANS: D DIF: 1 REF: 30-2 TOP: Wealth redistribution Inflation Sec03 - Money Growth and Inflation - Conclusion MULTIPLE CHOICE 1. In order to maintain stable prices, a central bank must a. maintain low interest rates. b. keep unemployment low. c. tightly control the money supply. d. sell indexed bonds. ANS: C DIF: 1 REF: 30-3 TOP: Inflation 2. Which of the following is accurate? a. Monetary policy is neutral in both the short run and the long run. b. Though monetary policy is neutral in the long run, it may have effects on real variables in the short run. c. Monetary policy has profound effects on real variables in both the short run and the long run. d. Monetary policy has profound effects on real variables in the long run, but is neutral in the short run. ANS: B DIF: 2 REF: 30-3 TOP: Monetary policy Monetary neutrality