ECON 309:Chapter 5 practice questions

Empirical data shows that countries with high money growth tend to have _____ inflation.

high

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ______ percent.

1

If the quantity of real money balances is kY, where k is a constant, then velocity is:

1/k.

An economy produces 50 widgets, which sell for $4 each, and has a money supply of $100. What is the velocity of money?

2

An economy with constant velocity of money has real GDP growth of 3%, money growth of 7%, and a real interest rate of 2%. The nominal interest rate is

6 percent.

All of the following are costs of fully expected inflation except that expected inflation: A) causes lower real wages. B) leads to shoeleather costs. C) increases menu costs. D) leads to taxing of nominal capital gains that are not real

causes lower real wages.

According to the Fisher effect, the nominal interest rate moves one-for-one with changes in the:

expected inflation rate

According to the classical theory of money, inflation does not make workers poorer because wages increase:

in proportion to the increase in the overall price level.

Inflation ______ the variability of relative prices and ______ allocative efficiency

increases; decreases

The real interest rate is equal to the:

nominal interest rate minus the inflation rate.

The rate of inflation is the:

percentage change in the level of prices.

The definition of the transactions velocity of money is:

prices multiplied by transactions divided by money.

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the:

real interest rate is constant.

The costs of unexpected inflation, but not of expected inflation, are:

the arbitrary redistribution of wealth between debtors and creditors.

Which of the following would most likely be called a hyperinflation? Price increases averaged 300 percent per year. B) The inflation rate was 10 percent per year. C) Real GDP grew at a rate of 12 percent over a year. D) A stock market index rose by 1,000 points over a year

Price increases averaged 300 percent per year.

Maria lives in an economy with hyperinflation. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value. Select the cost of inflation that best describes this scenario.

Shoeleather costs

1. A variable rate of inflation is undesirable because:

variable inflation leads to greater uncertainty and risk than under constant inflation.