Ch. 17 Questions

According to the quantity theory of money and the Fisher effect, if the central bank increases the rate of money growth, then a. inflation and the nominal interest rate both increase. b. inflation, the real interest rate, and the nominal interest rate all increase. c. the nominal interest rate and the real interest rate both increase. d. inflation and the real interest rate both increase.

a

According to the quantity theory of money, which variable in the quantity equation is most stable over long periods of time? a. velocity b. price level c. money d. output

a

Because most loans are written in ________ terms, an unexpected increase in inflation hurts ________. a. nominal, creditors b. real, creditors c. real, debtors d. nominal, debtors

a

If an economy always has inflation of 10 percent per year, which of the following costs of inflation will it NOT suffer? a. arbitrary redistributions between debtors and creditors b. menu costs from more frequent price adjustment c. distortions from the taxation of nominal capital gains d. shoeleather costs from reduced holdings of money

a

If money is neutral, a. a change in the money supply only affects nominal variables such as prices and dollar wages. b. a change in the money supply only affects real variables such as real output. c. an increase in the money supply does nothing. d. the money supply cannot be changed because it is tied to a commodity such as gold. e. a change in the money supply reduces velocity proportionately; therefore, there is no effect on either prices or real output.

a

If the nominal interest rate is 6 percent and the inflation rate is 3 percent, the real interest rate is a. 3 percent. b. 6 percent. c. 9 percent. d. 18 percent. e. none of the above.

a

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? a. 2 percent b. 5 percent c. 3 percent d. 4 percent e. 1 percent

a

The classical principle of monetary neutrality states that changes in the money supply do not influence ________ variables, and it is thought most applicable in the ________ run. a. real, long b. real, short c. nominal, long d. nominal, short

a

When prices rise at an extraordinarily high rate, it is called a. hyperinflation. b. deflation. c. disinflation. d. hypoinflation. e. inflation.

a

Which of the following statements about inflation is not true? a. An increase in inflation increases nominal interest rates. b. Inflation reduces people's real purchasing power because it raises the cost of the things people buy. c. Unanticipated inflation redistributes wealth. d. If there is inflation, taxing nominal interest income reduces the return to saving and reduces the rate of economic growth.

b

An example of a real variable is a. the nominal interest rate. b. the ratio of the value of wages to the price of soda. c. the price of corn. d. the dollar wage. e. none of the above.

b

An inflation tax is a. an explicit tax paid quarterly by businesses based on the amount of increase in the prices of their products. b. a tax on people who hold money. c. a tax on people who hold interest-bearing savings accounts. d. usually employed by governments with balanced budgets. e. none of the above.

b

Hyperinflation occurs when the government runs a large budget ________, which the central bank finances with a substantial monetary ________. a. surplus, expansion b. deficit, expansion c. surplus, contraction d. deficit, contraction

b

If actual inflation turns out to be greater than people had expected, then a. no redistribution occurred. b. wealth was redistributed to borrowers from lenders. c. wealth was redistributed to lenders from borrowers. d. the real interest rate is unaffected.

b

If nominal GDP is $400, real GDP is $200, and the money supply is $100, then a. the price level is ½, and velocity is 2. b. the price level is 2, and velocity is 4. c. the price level is 2, and velocity is 2. d. the price level is ½, and velocity is 4.

b

If the money supply grows 5 percent, and real output grows 2 percent, prices should rise by a. 5 percent. b. less than 5 percent. c. more than 5 percent. d. none of the above.

b

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 a. costs due to inflation-induced tax distortions. b. menu costs. c. shoeleather costs. d. arbitrary redistributions of wealth. e. the Friedman rule.

b

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 a. 9 percent. b. 11 percent. c. 16 percent. d. 12 percent. e. 4 percent.

b

Which of the following costs of inflation does not occur when inflation is constant and predictable? a. shoeleather costs b. arbitrary redistributions of wealth c. menu costs d. costs due to inflation-induced tax distortions e. costs due to confusion and inconvenience

b

Countries that employ an inflation tax do so because a. the government has a balanced budget. b. an inflation tax is the most equitable of all taxes. c. government expenditures are high and the government has inadequate tax collections and difficulty borrowing. d. an inflation tax is the most progressive (paid by the rich) of all taxes. e. the government doesn't understand the causes and consequences of inflation.

c

The quantity equation states that a. money × price level = velocity × real output. b. money × real output = velocity × price level. c. money × velocity = price level × real output. d. none of the above is true

c

In the long run, inflation is caused by a. banks that have market power and refuse to lend money. b. governments that raise taxes so high that it increases the cost of doing business and, hence, raises prices. c. governments that print too much money. d. increases in the price of inputs, such as labor and oil. e. none of the above.

c

If the price level doubles, a. the quantity demanded of money falls by half. b. the money supply has been cut by half. c. nominal income is unaffected. d. the value of money has been cut by half. e. none of the above is true.

d

In the long run, the demand for money is most dependent upon a. the availability of banking outlets. b. the availability of credit cards. c. the interest rate. d. the level of prices.

d

Ongoing inflation does not automatically reduce most people's incomes because a. higher inflation lowers real interest rates. b. the tax code is fully indexed for inflation. c. people respond to inflation by holding less money. d. wage inflation goes together with price inflation.

d

The quantity theory of money concludes that an increase in the money supply causes a. a proportional decrease in velocity. b. a proportional decrease in prices. c. a proportional increase in real output. d. a proportional increase in prices. e. a proportional increase in velocity.

d

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 a. costs due to inflation-induced relative price variability, which misallocates resources. b. costs due to inflation-induced tax distortions. c. costs due to confusion and inconvenience. d. menu costs. e. shoeleather costs

e

Velocity is a. the annual rate of turnover of business inventories. b. impossible to measure. c. the annual rate of turnover of output. d. highly unstable. e. the annual rate of turnover of the money supply.

e