Chapter 17 Money Growth and Inflation 1.The classical theory of inflation A.is a
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Question
Chapter 17 Money Growth and Inflation
1.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.
2.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.
3.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
4.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.
6.Economic variables whose values are measured in monetary units are called
A.dichotomous variables.
B.nominal variables.
C.classical variables.
D.real variables.
7.Economic variables whose values are measured in goods are called
A.dichotomous variables.
B.nominal variables.
C.classical variables.
D.real variables.
7.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.
8.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.
9.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.
10.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.
11.If M = 4,000, P = 1.5, and Y= 6,000, what is velocity?
A.2.25
B.3.00
C.6.50
D.None of the above is correct.
12.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.
13.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.
14.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.
15.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.
16.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
17.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.
18.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.
19.Which of the following is an example of menu costs?
A.deciding on new prices
B.printing new price lists
C.advertising new prices
D.All of the above are examples of menu costs.
20.Which of the following are U.S. taxpayers allowed to adjust for inflation for the purpose of income taxes?
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.
21.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.
22.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.
23.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.
Explanation / Answer
1. D.All of the above are correct.
2. A.quantity theory of money.
3. B.increases, and so the value of money falls.
4. C.the Federal Reserve System.
5. B.nominal variables.
6. D.real variables.
7. B.determines nominal variables, but not real variables.
8. D.All of the above are correct.
9. B.increase the price level.
10. D.the average number of times per year a dollar is spent.
11. A.2.25 (MV = PY. So, V= PY/M)
12.B.nominal GDP would rise by 5 percent; real GDP would be unchanged.
13. A.the revenue a government creates by printing money.
14. B.those who hold a lot of currency but accounts for a small share of U.S. government revenue.
15. C.Fisher Effect.
16. D.1 percent
17. B.Nominal incomes tend to rise at the same time that the price level is rising.
18. C.the waste of resources used to maintain lower money holdings.
19. D.All of the above are examples of menu costs.
20. D.neither interest income nor capital gains.
21. B.2.8 percent (Explanation: Real interest rate of 4% with 2% inflation = 6% nominal interest. 20% tax leaves you with 80% of 6% = 4.8% nominal. 4.8% nominal - 2% inflation = 2.8% real interest.)
22. B.reduces the purchasing power of the average consumer.
23. C.unexpectedly high.
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