### In the long run, inflation is caused by

governments that print too much money.

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.

11 percent.

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, 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.

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.

True

False

True

False

True

True

True

False

False

True

False

False

True

False

False

True

True

False

True

True

fell 23 percent.

### Which country is correctly matched with its 2007 inflation rate?

0.7 percent inflation in Japan

2.5 percent

3.

\$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 price level.

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.

2.2 percent

3 percent

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.

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.

Example: