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

a proportional increase in prices.

### 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.

### Countries that employ an inflation tax do so because

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

### 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.

### 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 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

### 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

### 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

### 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

### 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.

### 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.

### 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

### 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.

### 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.