CHAPTER 16 QUIZ and SB
Which of the following correctly states what would happen to the Phillips curve if people's expectations of inflation didn't change:
The economy will stay on the same short-run Phillips curve.
Along the long-run Philips curve, which of the following remains constant?
Unemployment
What three assumptions turn the equation of exchange into the quantity theory of money?
Velocity is constant. Real income is independent of the money supply. The direction of causation is from money to prices.
What are the distributional effects of asset inflation caused by an increase in the money supply?
Wealth is distributed from more cautious to less cautious individuals.
What is asset price inflation? Why does asset price inflation matter?
When the prices of assets rise more than their "real" value. It can indicate whether an economy has exceeded its potential output when goods inflation is held down by globalization. It can lead to asset deflation, which will hurt the economy.
An example of extrapolative expectations are expectations that
a trend will accelerate
Assume the money supply is $800, the velocity of money is 8, and the price level is 2. Using the quantity theory of money: a. Determine the level of real output. b. Determine the level of nominal output. c. Assuming velocity remains constant, what will happen if the money supply rises 20 percent? d. If the government established price controls and also raised the money supply 20 percent, within the quantity theory framework, what would happen?
a. (800*8)/2=3200 b. 2*3200=6400 c. 800+(800*20/100)=960 960*8=7680 d. real output will increase The velocity of money would decrease.
According to the quantity theory of money, if the money supply goes down 2 percent,
inflation will be -2%.
What are three costs of inflation that economists focus on?
institutional costs distributional costs informational costs
Banks will be hurt by an inflation if they
lend in fixed nominal contracts.
One of the problems with the quantity theory of money is that
money and goods inflation are no longer closely connected.
Inflation allows central banks to run more expansionary monetary policy because it allows them to achieve
negative real interest rates so that monetary policy can be more expansive than it otherwise could be.
A rule of thumb is that inflationary pressure will rise if
nominal wages increase by more than productivity growth.
The velocity of money equals
the amount of income per year generated by a dollar.
Policy makers have changed their focus from keeping inflation from getting too high to keeping inflation from getting too low because
the central bank's ability to stimulate the economy by lowering interest rates is compromised. deflation undermines the financial health of firms, it can quickly turn into a financial crisis that brings the economy to a standstill.
Benefits of small amounts of inflation include
the placebo effect. the facilitation of relative prices changes. more expansionary monetary policy.
According to the quantity theory of money, changes in the money supply cause changes in
the price level.
Asset inflation cannot continue forever because
the separation between real and nominal values will become unsustainable.
One of the problems with the quantity theory of money is that
the velocity of money is not predictable.
Along the long-run Philips curve,
there is no relationship between inflation and unemployment.
Hyperinflation is best defined as
triple-digit inflation.
Along the short-run Phillips curve, as
unemployment rises, inflation falls.
As one moves from left to right along a short-run Phillips curve,
unemployment rises, inflation falls.
The number of times per year, an average dollar gets spent on goods and services is known as the _____.
velocity of money
True or false: When there is global competition, increases in the money supply tend to lead to increases in asset prices rather than goods prices.
T
Which of the following correctly states the equation of exchange?
(quantity of money) × (velocity of money) = (price level) × (quantity of real goods sold)
Which of the following distinguishes the short-run from the long-run Phillips curve?
Along the short-run Phillips curve, inflation expectations are constant, while along the long-run Phillips curve they change.
True or false: In unconventional monetary policy, the inflation target is a precise target, and inflation could be too high or too low.
T
True or false: Inflation provides a way around the zero interest rate lower bound.
T
If nominal GDP is 2,000 and the money supply is 100, what is the velocity of money?
20
If nominal GDP is 20,000 and the money supply is 2,000, what is the velocity of money?
20000/2000=10
Which graph is the short-run Phillips curve? What relationship does the short-run Phillips curve show?
A That inflation and unemployment are inversely related.
True or false: On average, inflation makes a society neither richer nor poorer.
T
Which graph is the long-run Phillips curve? What relationship does the long-run Phillips curve show?
B That inflation is independent of unemployment.
Why do lenders tend to lose out in an unexpected inflation?
Because the money that is repaid to lenders is worth less.
If you base your expectations of inflation on what has happened in the past, what kind of expectations are you demonstrating?
Extrapolative expectations Adaptive expectations
True or false: A major reason policymakers like low amounts of inflation is that it eliminates money illusion.
F
True or false: Asset inflation allocates resources more efficiently by increasing asset prices.
F
True or false: Asset inflation can misallocate resources toward safer investments as cautious borrowers are crowded out of the loan market.
F
True or false: Because the cost of living rises, inflation makes a society poorer.
F
True or false: Global competition can make the Phillips curve essentially vertical.
F
True or false: In conventional monetary policy, the inflation target was a precise target, and inflation could be too high or too low.
F
True or false: The higher the level of inflation, the higher the real interest rate is relative to the nominal interest rate.
F
True or false: When asset prices fall, goods prices must also fall.
F
True or false: When the price of assets rises because their real value has increased, there will be asset inflation.
F
True or false: In unconventional monetary policy, the inflation target is an upper bound for inflation.
F Reason: Inflation targets are now seen as a rate of inflation to aim for, not a target to stay under.
True or false? Inflation, on average, makes people neither richer nor poorer. Therefore, it has no cost. Explain.
False, because prices no longer carry as useful information and there are redistributional effects.
True or false: One of the costs of inflation is institutional costs.
T
True or false: One reason asset price deflation causes serious problems for an economy is that it occurs suddenly.
T
True or false: The distributional costs of inflation depend on normative judgments one makes about winners and losers in an inflation.
T
Congratulations. You've just been appointed finance minister of Inflationland. Inflation has been ongoing for the past five years at 5 percent. The target rate of unemployment, 5 percent, is also the actual rate.
If policy makers choose to cut the unemployment rate, what would you recommend? Increase the money supply, which would move the economy from point A to point B in the accompanying graph. In the long run, the economy will end up at point C and return to 5 percent unemployment but higher inflation.
Which of the following correctly states the relationship between inflation, nominal wage increases, and productivity growth?
Inflation = nominal wage increase - productivity growth
Which of the following best summarizes the quantity theory of money?
Inflation is always and everywhere a monetary phenomenon.
What does the quantity theory predict will happen to inflation if the money supply rises 10 percent?
Inflation will RISE by 10%
What are the benefits of a small amount of inflation?
It gives society the illusion that it is richer, which encourages people to invest and start new businesses. It allows for banks to get around the lower zero bound. It provides beneficial placebo effects.
Which of the following converts the equation of exchange to the quantity theory of money?
Real output is independent of the money supply. Causation goes from money to prices. The velocity of money remains constant.
How would the SAS curve in the graph shown be expected to change if nominal wages rise by 3% and productivity increases by 1%?
Shift from SAS1 to SAS2
How would the SAS curve in the graph shown be expected to change if nominal wages rise by 3% and productivity increases by 5%?
Shift from SAS2 to SAS1
Why would policy makers change from an inflation target being an upper bound to a target to aim for? This policy would fail to produce the expected result if
Small amounts of inflation reduce the cost of borrowing and spur investment. an increase in inflation became built into expectations. It would lead to other price increases and result in accelerating inflation.
True or false: A benefit of small amounts of inflation is that it can facilitate relative price changes.
T
True or false: A major concern about inflation is that it will become built into people's expectations, creating accelerating inflation.
T
True or false: A major reason policymakers like low amounts of inflation is that it lets them take advantage of money illusion.
T
True or false: Along the long-run Phillips curve, inflation expectations equal actual inflation.
T
True or false: Asset price increases can be the result of an increase in the real value of assets as well as just increases in their prices.
T
True or false: Asset price inflation is based on the illusion that the real value of assets has risen, when in fact it has not.
T
True or false: In conventional monetary policy, the inflation target is an upper bound for inflation.
T
"Inflation is always and everywhere a monetary phenomenon" summarizes which theory?
The quantity theory of money
If productivity growth is 3 percent and wage increases are 5 percent, what would you predict the rate of inflation or deflation to be?
The rate of INFLATION would be 2%.
What are two reasons why the quantity theory of money is problematic?
The relationship between the money supply and inflation does not always hold. The velocity of money is not constant.
European Community Bank (ECB) governing council member Erkki Liikanen was quoted as saying, "The stronger we get the productivity growth . . . the more room we will get in monetary policy (to keep interest rates low)." a. Demonstrate his argument using the AS/AD model. b. Demonstrate his argument using the Phillips curve model.
a. Increases in productivity shift the long-run aggregate supply curve to the RIGHT. This allows policy makers to INCREASE aggregate demand, perhaps through EXPANSIONARY policy, which would keep interest rates LOW, as desired, without INCREASING the price level. b. Increases in productivity shift the long-run Philips curve to the LEFT because it allows a LOWER unemployment rate at every rate of inflation. Policy makers, therefore, are able to INCREASE aggregate demand, shifting the short-run Phillips curve to the LEFT, resulting in LOWER unemployment and the same inflation rate.
Adaptive expectations are best defined as expectations that
are based on the past.
Homeowners can benefit from an inflation if they
borrowed at fixed nominal interest rates.
The winners in an inflation are those who
can raise their prices and still sell their goods.
The losers in an inflationary period are those who
can't raise their prices.
An asset price inflation tends to redistributes wealth from
cautious individuals to risky individuals.
An asset price inflation redistributes wealth from
cautious savers to risky savers.
A zero interest rate lower bound is associated with
conventional monetary policy, in which policymakers cannot make the interest rate go below zero.
MV = PQ is known as the _____.
equation of exchange
Institutionally focused economists believe increases in prices
force government to increase the money supply.
If inflation hits levels of 1,000 percent or more per year, the economy is experiencing _____.
hyperinflation
Institutionally focused economists believe that firms
increase prices without considering their decisions on the price level.
The placebo effect of inflation refers to The placebo effect is a tool of
increased value of assets that creates the illusion that society is richer which encourages more investment and growth. unconventional monetary policy, because this type of policy emphasizes the benefits of experiencing some low levels of inflation.
If inflation increases become built into expectations, it would lead to price _____ resulting in accelerating inflation.
increases