Econ Exam 3 study guide

Suppose a nation's CPI is 150 in Year 1 and 180 in Year 2. What is the rate of inflation?

20%

(Table: Anticipating Inflation) Using the inflation data in the table above, assume that all loan contracts have fixed nominal interest rates of 10% and mature after 1 year. In which year did lenders receive exactly the amount of real interest they expected?

2000

(Table: CPI) According to the table, in which of the following years did this country experience disinflation?

2001 only

(Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. What was the approximate inflation rate over the period 2007 to 2008?

3.86%

If the price level in 2016 is 140 and it falls to 133 in 2017, what has the economy experienced between 2016 and 2017?

5% deflation

Approximately how many prices of goods and services are measured by the CPI?

80,000

Which of the following scenarios could result in a recession?

Aggregate demand decreases, and wages are sticky.

In the equation Mv = PYR, P represents

the average price level

The short-run aggregate supply curve is upward-sloping because

wages and prices are sticky in the short run.

By 1932, the real growth rate of the U.S. economy was

-13%

What happened to the price level between 1929 and 1932

Deflation reached 10%.

Which of the following correctly represents unexpected disinflation

En>n

The long-run aggregate supply curve shows that long-run economic growth

The long-run aggregate supply curve shows that long-run economic growth

A negative real shock leads to:

an increase in the inflation rate but a decrease in the real GDP growth rate.

In India, shocks to the weather

are becoming less economically important overtime

Deflation is a decrease in the

average level of prices

In times of financial panic, we expect the velocity of money to:

decrease

An increase in _____ will shift the SRAS curve

expected inflation, but not actual inflation

The AD-AS model is most useful for explaining what causes

fluctuations in GDP growth around its trend rate

A negative real shock causes the long-run aggregate supply curve to

shift inward

Holding everything else constant, an increase in the growth rate of the money supply will cause the aggregate demand curve to

shift outward

During the Great Depression, the long-run aggregate supply curve

shifted outward

The increase in oil prices that took place during the mid-2000s was driven mainly by

increases in demand

When an increase in the money supply is unexpected by firms and workers, real GDP

increases in the short run

Volatile hyperinflation causes financial intermediation to

break down

An increase in the rate of spending growth must flow into either higher inflation or

higher growth

In the equation M v P Y R , what does P stand for

inflation

The quantity theory of money is a theory of

inflation

What do we call an increase in the average level of prices in an economy?

inflation

As a result of a positive shock to C

inflation and output growth increase in the short run, but in the long run they return to the rates before the shock.

The economy's aggregate demand curve shows all combinations of _____ that are consistent with a specified rate of spending growth

inflation and real GDP growth

When an economy experiences volatile and unpredictable hyperinflation

it causes a breakdown of financial intermediation

If M = 5%, v = -3%, and P = 2%, then Y R must equal

0%

If velocity is stable, then v equals

0%

According to the quantity theory of money, if money supply is $1,000 million, the overall price level is 200, and real GDP is 50 million, then the velocity of money is equal to:

10

If the price level in 2018 is 150 and it rises to 165 in 2019, what is the rate of inflation between 2018 and 2019?

10%

If the money supply is $1 million, the velocity of money is 10, and the price level is 100, what is real GDP?

10,000

From 2002 to 2007, Zimbabwe experienced average annual inflation of:

736%

If the CPI was 125 last year and is now 135, then the inflation rate last year was

8%

The price level at the end of 2011 minus the price level at the end of 2010 is the _____ for the year 2011.

change in the price level

Which measure of the average price level most closely corresponds to a student's daily economic activities?

consumer price index

Menu costs are the costs associated with changing

prices

A measure of the average price received by suppliers is the

producer price index

If a baker observes an increase in demand for bread, should the baker increase output or raise prices

raise prices

What two components of the quantity theory of money are assumed to be stable over time

real GDP and the velocity of money

According to the quantity theory of money, a change in the money supply affects:

real GDP in the short run but not in the long run.

Using a graph of the AD and long-run aggregate supply curves, the Internet revolution of the 1990s caused

real growth to increase and inflation to decrease

Which of the following is NOT consistent with points along the long-run aggregate supply curve?

real output growth is negatively

The economy's potential or "Solow" growth rate fluctuates over time because of

real shocks

If the price of gasoline increased 100% during a period of time when inflation was 100%, then the relative real price of gasoline would

remain constant

What effect did reducing U.S. inflation from 13.5% in 1980 to 3% in 1983 have?

the country experienced a recession

The case of hyperinflation in Zimbabwe in the late 2000s was an example of the effects of:

the government monetizing its debt

If the actual rate of inflation turns out to be higher than the expected rate of inflation, what happens to the growth rate of output before expectations are updated?

the growth rate is higher than the Solow growth rate

In the quantity theory of money, growth of _____ is the cause of inflation

the money supply

According to the quantity theory, which of the following could cause the price level to decrease?

the population spends less money

An increase in consumer pessimism will lead to increased inflation in

the price level and real GDP

The argument that "inflation is always and everywhere a monetary phenomenon" is consistent with:

the quantity theory of money

Which of the following explains why the inflation rate is slow to adjust over time?

there are high menu costs of changing prices

If velocity is constant, the growth rate of the money supply is 2%, and inflation is 3%, then real output growth will be

-1%

Which of the following is an example of a negative shock to an economy?

terrorist attacks

The velocity of money is

the average number of times a dollar is spent on final goods and services

The velocity of money is

the average number of times a dollar spent of final goods and services in a year

If you had to predict the U.S. inflation rate for next year and decided that a good way to make that prediction would be to simply use the average inflation rate over the past 10 years, what would be your prediction for U.S. inflation next year?

2.4%

(Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. In which year(s) did the country experience deflation?

2009 only

The average rate of inflation in the United States over the past 10 years has been around 2.4%. If this trend continues, prices in the United States will double in about

29

(Figure: Aggregate Demand) Point B on this aggregate demand curve represents an inflation rate of:

4%

The Fisher effect indicates that an increase in the expected inflation rate will cause the nominal rate of interest to

increase by the same amount

Which statement best describes one of the profound effects of the 1973 oil crisis on the U.S. economy?

Consumer preferences moved away from big cars and toward smaller cars.

is a decrease in the average level of prices, whereas _____ is a reduction in the inflation rate.

Deflation; disinflation

From Point X in the accompanying graph, an increase in the supply of oil could cause the economy to move to Point

W.

Deflation is

a decrease in the average level of prices

In the basic model that includes the AD and LRAS curves only, increased spending growth causes

a higher inflation rate, but no change in the real growth rate.

A significant, widespread decline in real income and employment is called

a recession

In a diagram with the inflation rate on the vertical axis and the real growth rate on the horizontal axis, the long-run aggregate supply curve is

a vertical line at the Solow growth rate fluc

Which one of the following is NOT a cost of inflation?

an automatic decrease in real wages throughout the period of inflation

Which of the following causes a shift of the AD curve to the right?

an increase in consumer confidence

Which of the following would cause the AD curve to shift to the right?

an increase in consumer wealth

Which of the following is NOT an example of a real shock?

an increase in sales tax revenues due to population growth

A 1% increase in real growth, ceteris paribus, _____ inflation by _____.

decreases; 1%

The quantity theory of money

describes the general relationship between money, velocity, real output, and prices.

If the growth rate of the money supply decreases from 10% to 5%, which of the following is a prediction of the quantity theory of money?

disinflation

If the inflation rate falls from 4% in 2005 to 2% in 2006, then

disinflation has occurred

The aggregate demand curve is:

downward sloping

In the equation M v P Y R , what does Y R stand for?

growth in real GDP growth

Politicians and especially the general public worry about recessions because of

high unemployment.

In the basic model with an AD and LRAS curve only, if spending growth is 10% and the Solow growth rate falls from 5% to 3%, then inflation will

increase from 5% to 7%.

Even moderate inflation typically

increases the amount of taxes that people pay over time.

In the long run, the quantity theory of money says that the growth rate of the money supply will be approximately equal to the

inflation rate

The Solow growth rate is the economy'

potential growth rate

A major problem with inflation is that after it starts

it is difficult to stop without experiencing high unemployment

If the economy experiences unexpected inflation, then the real interest rate will be _____ than its equilibrium rate, and wealth will be distributed from _____.If the economy experiences unexpected inflation, then the real interest rate will be _____ than its equilibrium rate, and wealth will be distributed from _____.

less; lenders to borrowers

Which of the following is NOT a positive aggregate demand shock

lower growth of government spending

The aggregate demand curve indicates that at a given spending growth rate, a higher inflation is related to a

lower real GDP growth rate

The GDP deflator

measures the average price of all final good and services produced

Which of the following is an explanation for why prices may be sticky in the short run

menu cost

When the velocity of money and real GDP are fixed, increases in the money supply

must cause increases in the price level

In recent years, negative oil price shocks have typically been accompanied by

negative productivity shocks.

In 2011, the major earthquake and tsunami in Japan destroyed much of the capital infrastructure in Japan. Those natural disasters were examples of a

negative shock to the long-run aggregate supply curve

The Fisher effect is the tendency of

nominal interest rates to rise with expected inflation rates.

Deflation can cause the economy's aggregate demand curve to shift inward because debt contracts are

not adjusted for inflation.