Chapter 30 Quizzes

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In the long run, inflation is caused by

governments that print too much money.

When prices rise at an extraordinarily high rate, it is called

hyperinflation.

If the price level doubles,

the value of money has been cut by half.

In the long run, the demand for money is most dependent upon

the level of prices.

The quantity theory of money concludes that an increase in the money supply causes

a proportional increase in prices.

An example of a real variable is

the ratio of the value of wages to the price of soda.

The quantity equation states that

money x velocity = price level x real output

If money is neutral,

a change in the money supply only affects nominal variables such as prices and dollar wages.

If the money supply grows 5 percent, and real output grows 2 percent, prices should rise by

less than 5 percent.

Velocity is

the annual rate of turnover of the money supply.

Countries that employ an inflation tax do so because

government expenditures are high and the government has inadequate tax collections and difficulty borrowing.

An inflation tax is

a tax on people who hold money.

Suppose the nominal interest rate is 7 percent while the money supply is growing at a rate of 5 percent per year. Assuming real output remains fixed, if the government increases the growth rate of the money supply from 5 percent to 9 percent, the Fisher effect suggests that, in the long run, the nominal interest rate should become

11 percent.

If the nominal interest rate is 6 percent and the inflation rate is 3 percent, the real interest rate is

3 percent.

If actual inflation turns out to be greater than people had expected, then

wealth was redistributed to borrowers from lenders.

Which of the following costs of inflation doesnot occur when inflation is constant and predictable?

arbitrary redistributions of wealth

Suppose that, because of inflation, a business in Russia must calculate, print, and mail a new price list to its customers each month. This is an example of

menu costs.

Suppose that, because of inflation, people in Brazil economize on currency and go to the bank each day to withdraw their daily currency needs. This is an example of

shoeleather costs.

If the real interest rate is 4 percent, the inflation rate is 6 percent, and the tax rate is 20 percent, what is the after-tax real interest rate?

2 percent

Which of the following statements about inflation is not true?

Inflation reduces people's real purchasing power because it raises the cost of the things people buy.

An increase in the price level is the same as a decrease in the value of money.

True

The quantity theory of money suggests that an increase in the money supply increases real output proportionately.

False

If the price level were to double, the quantity of money demanded would double because people would need twice as much money to cover the same transactions.

True

In the long run, an increase in the money supply tends to have an effect on real variables but no effect on nominal variables.

False

If the money supply is $500, real output is 2,500 units, and the average price of a unit of real output is $2, the velocity of money is 1.

True

The Fisher effect suggests that, in the long run, if the rate of inflation rises from 3 percent to 7 percent, the nominal interest rate should increase 4 percentage points, and the real interest rate should remain unchanged.

True

An inflation tax is "paid" by those that hold money because inflation reduces the value of their money holdings.

True

Monetary neutrality means that a change in the money supply doesn't cause a change in anything at all.

False

Inflation erodes the value of people's wages and reduces their standard of living.

False

Inflation reduces the relative price of goods whose prices have been temporarily held constant to avoid the costs associated with changing prices.

True

The shoeleather costs of inflation should be approximately the same for a medical doctor and for an unemployed worker.

False

Inflation tends to stimulate saving because it raises the after-tax real return to saving.

False

Countries that spend more money than they can collect from taxing or borrowing tend to print too much money, which causes inflation.

True

If inflation turns out to be higher than people expected, wealth is redistributed to lenders from borrowers.

False

If the nominal interest rate is 7 percent and the inflation rate is 5 percent, the real interest rate is 12 percent.

False

In United States history there were long periods when most prices fell.

True

Hyperinflation is generally defined as inflation that exceeds 50 percent per month.

True

One study found that unemployment is the economic term mentioned most often in U.S. newspapers.

False

The story The Wizard of Oz can be interpreted as an allegory about U.S. monetary policy in the late 19th century.

True

Changes in monetary policy will have disruptive effects on production and employment in the short run.

True

Between 1880 and 1896 the average level of prices in the U.S. economy.

fell 23 percent.

Which country is correctly matched with its 2007 inflation rate?

0.7 percent inflation in Japan

If the nominal interest rate is 7 percent and expected inflation is 4.5 percent, then what is the expected real interest rate?

2.5 percent

Based on the quantity equation, if M = 3,000, P = 2, and Y = 4,500, then V =

3.

Based on the quantity equation, if Y = 3,000, P = 4, and V = 3, then M =

$4,000.

According to the assumptions of the quantity theory of money, if the money supply decreases by 7 percent, then

nominal GDP would fall by 7 percent; real GDP would be unchanged.

Darla puts her money into a bank account that earns interest. One year later she sees that the account has 6 percent more dollars and that her money will buy 7.5 percent more goods.

The nominal interest rate was 6 percent and the inflation rate was -1.5 percent.

The Fisher effect is crucial for understanding changes over time in

the nominal interest rate.

Other things the same, a decrease in velocity means that

the rate at which money changes hands falls, so the price level falls.

According to the 2007 New York Times article,

in Zimbabwe most commodities are now available only on the black market.

The economy of Mainland uses gold as its money. If the government discovers a large reserve of gold on their land

the supply of money increases and the value of money falls.

If a bank posts a nominal interest rate of 11 percent, and inflation is expected to be 4 percent, then

the expected real interest rate is 7 percent.

The data on hyperinflation show a clear link between the quantity of money and

the price level.

Studies have found which of the following economic terms mentioned most often in U.S. newspapers?

Inflation

The statement "inflation does not in itself reduce people's real purchasing power" is an idea also called

the inflation fallacy.

Given a nominal interest rate of 8 percent, in which of the following cases would you earn the highest after-tax real rate of interest?

Inflation is 3 percent; the tax rate is 25 percent.

You put money into an account and earn a real interest rate of 5 percent. Inflation is 2 percent, and your marginal tax rate is 40 percent. What is your after-tax real rate of interest?

2.2 percent

You put money into an account that earns a 8 percent nominal interest rate. The inflation rate is 3 percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of interest?

3 percent

Which movie is an allegory about late 19th century monetary policy?

The Wizard of Oz

You bought some shares of stock and, over the next year, the price per share decreased by 7 percent and the price level decreased by 9 percent. Before taxes, you experienced

a nominal loss and a real gain.

Market economies rely on which of the following to allocate scarce resources?

relative prices

Which of the following is not an example of menu costs?

All of the Above: deciding on new prices, printing new price lists, and advertising new prices

Jennifer took out a fixed-interest-rate loan when the CPI was 100. She expected the CPI to increase to 103 but it actually increased to 105. The real interest rate she paid is

lower then she had expected, and the real value of the loan is lower than she had expected.

James took out a fixed-interest-rate loan when the CPI was 200. He expected the CPI to increase to 206 but it actually increased to 204. The real interest rate he paid is

higher than he had expected, and the real value of the loan is higher than he had expected.

Which of the following is correct?

Inflation impedes financial markets in their role of allocating savings to alternative investments.

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