Question 1

Which of the following is correct?

Accepted Answer

A)   A period of hyperinflation is a period of 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.E) B) and D)
F) All of the above

Question 2

For a given real interest rate, an increase in inflation makes the after-tax real interest rate

Accepted Answer

A)   decrease, which encourages savings.
B)   decrease, which discourages savings.
C)   increase, which encourages savings.
D)   increase, which discourages savings.E) B) and D)
F) B) and C)

Question 3

If a country experienced deflation, then

Accepted Answer

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.E) C) and D)
F) A) and D)

Question 4

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

Accepted Answer

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.E) A) and B)
F) C) and D)

Question 5

If the price level increased from 120 to 126, then what was the inflation rate?

Accepted Answer

A)   3 percent
B)   5 percent
C)   6 percent
D)   None of the above is correct.E) B) and C)
F) A) and B)

Question 6

Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 20 percent. Sam's after-tax real rate of interest

Accepted Answer

A)   will be 2 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent.
B)   will be 2 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent.
C)   will be 1.7 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent.
D)   will be 1.7 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent.E) A) and B)
F) A) and C)

Question 7

The inflation tax falls mostly heavily on

Accepted Answer

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.E) B) and D)
F) A) and B)

Question 8

The term hyperinflation refers to

Accepted Answer

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.E) A) and D)
F) C) and D)

Question 9

The classical dichotomy argues that changes in the money supply

Accepted Answer

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.E) C) and D)
F) B) and C)

Question 10

Inflation induces people to spend more resources maintaining lower money holdings. The costs of doing this are called shoeleather costs.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is correct?

Accepted Answer

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.E) C) and D)
F) B) and D)

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

The supply of money increases when

Accepted Answer

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.E) None of the above
F) B) and D)

Question 14

In which of the following cases was the inflation rate 10 percent over the last year?

Accepted Answer

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.E) A) and B)
F) None of the above

Question 15

If V and M are constant and Y doubles, the quantity equation implies that the price level

Accepted Answer

A)   falls to half its original level.
B)   does not change.
C)   doubles.
D)   more than doubles.E) All of the above
F) C) and D)

Question 16

When the money market is drawn with the value of money on the vertical axis, if the money supply rises

Accepted Answer

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.E) A) and B)
F) C) and D)

Question 17

Economic variables whose values are measured in goods are called

Accepted Answer

A)   dichotomous variables.
B)   nominal variables.
C)   classical variables.
D)   real variables.E) A) and C)
F) A) and D)

Question 18

The price level falls. This might be because the Federal Reserve

Accepted Answer

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.E) B) and C)
F) A) and D)

Question 19

Suppose an economy produces only ice cream cones. If the price level rises, the value of currency

Accepted Answer

A)   rises, because one unit of currency buys more ice cream cones.
B)   rises, because one unit of currency buys fewer ice cream cones.
C)   falls, because one unit of currency buys more ice cream cones.
D)   falls, because one unit of currency buys fewer ice cream cones.E) A) and D)
F) A) and B)

Question 20

If the Fed conducts open market sales, the equilibrium value of money decreases and the equilibrium price level increases.

Accepted Answer

A) True 
 B)False

Exam 12: Money Growth and Inflation

The supply of money increases when

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For a given real interest rate, an increase in inflation makes the after-tax real interest rate

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Which of the following is correct?

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

Correct AnswerverifiedShow Answer

When the money market is drawn with the value of money on the vertical axis, if the money supply rises

Correct AnswerverifiedShow Answer

If V and M are constant and Y doubles, the quantity equation implies that the price level

Correct AnswerverifiedShow Answer

Economic variables whose values are measured in goods are called

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Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 20 percent. Sam's after-tax real rate of interest

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following is correct?

Correct AnswerverifiedShow Answer

In which of the following cases was the inflation rate 10 percent over the last year?

Correct AnswerverifiedShow Answer

The term hyperinflation refers to

Correct AnswerverifiedShow Answer

The classical dichotomy argues that changes in the money supply

Correct AnswerverifiedShow Answer

If the Fed conducts open market sales, the equilibrium value of money decreases and the equilibrium price level increases.

Correct AnswerverifiedShow Answer

The inflation tax falls mostly heavily on

Correct AnswerverifiedShow Answer

Suppose an economy produces only ice cream cones. If the price level rises, the value of currency

Correct AnswerverifiedShow Answer

If the price level increased from 120 to 126, then what was the inflation rate?

Correct AnswerverifiedShow Answer

The price level falls. This might be because the Federal Reserve

Correct AnswerverifiedShow Answer

If a country experienced deflation, then

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Inflation induces people to spend more resources maintaining lower money holdings. The costs of doing this are called shoeleather costs.

Correct AnswerverifiedShow Answer

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