Economics

Which of the following is NOT one of the possible causes of price changes, as revealed through the quantity theory of money?

A change in interest rates

The consumer price index (CPI) measures the average price that a typical _____ faces for a basket of goods and services.

American consumer

Changes to both the money supply and the velocity of money induce changes in aggregate demand. However, the long-run impacts of changes in these variables are different. How are the effects of an increase in the velocity of money and the effects of an increase in the money supply different?

Changes in the money supply can lead to permanent changes in aggregate demand, but changes in the velocity of money tend to have temporary changes in aggregate demand.

Which situation is NOT a consequence of price signals being difficult to interpret because of inflation?

Consumers respond to real prices instead of to nominal prices. -leads to money illusion

Which growth rate is NOT necessarily the same as the others?

Correct-the real growth rate(GDP) the potential growth rate the long-run trend growth rate the Solow growth rate

Which of the following factors impacts the velocity of money in the economy?

How long it takes for a check to clear

Which country had the largest episode of hyperinflation on record?

Hungary

True statement pt8

If the rate of spending growth is 10% and the Solow growth rate is 4%, then the rate of inflation must be 6%. This is correct: 10% = 4% + 6%.

What impact does an increase in the expected inflation rate have on the SRAS curve?

It shifts the SRAS curve up and to the left.

What feature of the economy's output does gross domestic product measure?

Its market value

From the equation of exchange, 𝑀𝑉=𝑃𝑌MV=PY, we know that spending growth (𝑀−→+𝑣→)(M→+v→) equals inflation 𝜋+π+ Real growth. Recall from the chapter that in the long run (1) the inflation rate is found where the AD curve intersects the LRAS curve (reading off the vertical axis) and (2) the expected inflation rate is found where the short-run aggregate supply curve intersects the LRAS curve. With these things in mind, assume that the Solow growth rate is 3%. If spending growth equals 10%, what will 𝜋π equal in the long run? What will 𝐸𝜋Eπ equal?

M + V = 𝜋 + Real Growth Rate 10% = 3 10-3= 𝜋=7 𝐸𝜋=7

Equation of Exchange

M × v = P × YR M=money supply v= velocity of money p=price level

When the government is spending more than it collects in tax revenue, it goes into debt to finance the spending. If the government then pays off its debt by printing money, this is referred to as:

Monetizing the debt

If M × v = P × YR, then it must also be true that M+V =P +Yr

Money , velocity, percentage, and something else.

Is the value of the production of intermediate goods missing from GDP?

No, because the value of these goods is part of the value of some other finished goods.

Which rewritten version of the quantity theory of money does Professor Tabarrok use to discuss the causes of inflation?

P = Mv ÷ Y

Correct statement

Prices are signals, and inflation makes price signals harder to interpret.

True statement pt4

The Solow growth curve is vertical, because the potential growth rate does not depend on the rate of inflation.

Which of the following factors decreases aggregate demand?

decreased export growth

A negative AD shock:

decreases the real growth rate at first, but in the long run decreases only the rate of inflation.

Assume the average price level was 104 in 2016 and 101 in 2017. If the inflation rate was 3.96% in 2016, then the __________ rate in 2017 is _____________.

deflation; −2.88%

The velocity of money:

does not change enough to explain large, sustained changes in prices.

Producer price indexes (PPIs) measure the average price:

received by producers.

Suppose that for an imaginary economy, the velocity of money is equal to 6 and the money supply is $1.5 billion. If the price level in this economy is equal to 2, the real GDP in this economy is equal to:

($1.5 billion × 6) ÷ 2.00 = $9 billion ÷ 2.00 = $4.5 billion.

Positive Shocks (Increase AD) (= Higher Growth Rate of Spending)

-A faster money growth -Confidence -Increased wealth -Lower taxes Greater growth of government spending -Increased export growth -Decreased import growth

Negative Shocks (Decrease AD) (= Lower Growth Rate of Spending)

-A slower money growth -Fear -reduced wealth -Higher taxes -Lower growth of government spending -Decreased export growth -Increased import growth

Which of the following statements is TRUE?

-If the price level is 105 in 2016 and is 107 in 2017, then the inflation rate is 7%. -The GDP deflator is calculated as the ratio of real to nominal GDP multiplied by 100. -Real prices(nominal prices=CA) are not adjusted for inflation. -##The development of new goods and better-quality goods has led some economists to suggest that the CPI may actually overstate inflation.

Which condition is mentioned in the textbook as a real shock that contributed to the Great Depression?

-economic policy mistakes A tariff, for example, pushes capital and labor into lower-productivity sectors, thereby reducing total output.

Unexpected inflation always:

...turns into expected inflation.

If for a certain economy the growth rate of the money supply is 5%, the growth rate of the velocity of money is _____, the rate of inflation is 3%, and the real growth rate is 2%, then the quantity theory of money holds.

0%

If for a certain economy the growth rate of the money supply is 4%, the growth rate of the velocity of money is 0%, the rate of inflation is 3.2%, and the real growth rate is ______, then the quantity theory of money holds.

0.8% This is because 4 + 0 = 3.2 + 0.8.

Suppose that for an imaginary economy, the velocity of money is equal to 6 and the money supply is $1.8 billion. The nominal GDP of this economy is:

10.8 million Nominal GDP is $1.8 billion × 6 = $10.8 billion. Real GDP is nominal GDP divided by the price level.

According to the AD curve, if M is 4%, V is 2%, and the real growth rate is 3%, what must be the rate of inflation?

3% 4+2=3+?

From the equation of exchange, 𝑀𝑉=𝑃𝑌MV=PY, we know that spending growth (𝑀−→+𝑣→)(M→+v→) equals inflation 𝜋+π+ Real growth. Recall from the chapter that in the long run (1) the inflation rate is found where the AD curve intersects the LRAS curve (reading off the vertical axis) and (2) the expected inflation rate is found where the short-run aggregate supply curve intersects the LRAS curve. With these things in mind, assume that the Solow growth rate is 3%. If spending growth equals 4%, what will 𝜋π equal in the long run? What will 𝐸𝜋Eπ equal?

4-3 𝜋=1 𝐸𝜋=1

According to the AD curve, if V is 0, the rate of inflation is 2%, and the rate of real growth is 3%, then what M must be?

5%

Which of the examples provides the best evidence that inflation has occurred?

A person whose salary has increased is able to purchase fewer goods and services.

The dynamic aggregate demand (AD) curve is modeled as a downward-sloping line. Which of the statements is the best explanation for why the dynamic AD has this shape?

A proportional increase in inflation for every decrease in the growth rate is required to keep the growth in spending constant.

What is a real price?

A real price refers to a price that has been adjusted to account for inflation.

Dynamic aggregate demand (AD) can be derived using the quantity theory of money. Suppose that the velocity of money is stable, 4% real economic growth is occurring, the rate of inflation is 4%, unemployment is 5.3%, and the marginal propensity to save is 3%. By how much is the money supply growing? Enter your answer as a percentage.

Equation: Growth in the money supply + growth in velocity = inflation + real economic growth 3%=4%+4% 8%

In the equation describing the Fisher effect, what represents the expected inflation rate?

EΠ

Which of the following is NOT necessary for a good to be counted in U.S. GDP for 2017?

The good needs to be sold within the United States.

True statement pt7

The long-run aggregate supply curve is vertical at the Solow growth rate.

At the Solow growth rate, what is the shape of the long-run aggregate supply curve?

The long-run aggregate supply curve is vertical.

Which of the following statements is TRUE? pt5

The producer price index measures the average price received by producers.

In a macroeconomic context, choose the best definition for the term velocity.

The rate at which money circulates through an economy.

If individuals choose to hold onto their money, afraid to spend it, what impact would this have on the velocity of money?

The velocity of money will decrease.

What impact will an increase in the money supply have on the AD curve?

There is not enough information to determine the impact on aggregate demand. (An increase in the growth of the money supply will increase aggregate demand, but no information about the growth rate has been given; this question says only that the variable itself (not its growth rate) increases.)

What impact will a reduction in wealth have on the AD curve?

There will be a decrease in aggregate demand.

What impact will a slower money growth rate have on the AD curve?

There will be a decrease in aggregate demand.

What impact will an increase in export growth have on the AD curve?

There will be an increase in aggregate demand.

A decrease in velocity, ceteris paribus, will shift the AD curve down and to the left.

True statement

Which of the following statements is TRUE? pt7

True- In the short run, an increase in spending growth is split between increases in inflation and increases in real growth. When unexpected inflation becomes expected inflation, it causes no change in the SRAS curve. A spending increase creates a permanent increase in growth. Prices move instantly to their new long-run equilibrium, thus preventing any increase in growth brought about by a spending increase.

True statement pt2

When unexpected inflation becomes expected inflation, it causes the SRAS curve to shift.

Which of the following statements is FALSE?

X-If the money supply is $4,000, velocity is stable at 12, and the average price level is 80, then real GDP is $600. C-Nominal GDP in the long run is determined by capital, labor, and technology, none of which is affected by the price level. X-If velocity is stable at 9 and nominal GDP is $18,000, then the money supply must equal $2,000. X-If the money supply is $6,000, the average price level is 90, and real GDP is $900, then velocity is 13.5.

Which of the following statements is TRUE? pT2

X-The investment rate is the percentage change in the average level of prices, as measured by a price index, over a specific period. X-Inventory is an increase in the average level of prices. X-The producer price index measures the average price of a basket of goods and services bought by a typical American consumer. C-A real price has been corrected for inflation.

If a company purchases a vehicle or large piece of equipment to use in production, this is considered:

a capital good, which is a finished good that is used to produce other goods.

Which condition is mentioned in the textbook as an aggregate demand shock that contributed to the Great Depression?

a decrease in wealth due to bank failures

Select the correct definition of inflation.

a general and ongoing rise in the average level of prices in an economy

Which of the following factors would NOT shift the AD curve to the right?

an increase in import growth

According to the quantity theory of money, the only thing that can cause large, sustained increases in prices is:

an increase in the money supply, since real GDP and the velocity of money are relatively stable.

What is inflation?

an increase in the overall price level

Economies:

are continually hit by many small shocks. In a typical year, the good shocks outweigh the bad shocks, and the economy grows.

Polar bears:

are not counted in GDP because there is no market price for polar bears.

In a manufacturing economy, when the oil supply is reduced:

capital and labor become less productive.

Inflation confuses:

consumers, workers, firms, and entrepreneurs.

Gross domestic product is a measure of the value of

finished goods and services

In interest rate equations used in the chapter, what represents the nominal interest rate?

i

A shock that increases or decreases the potential growth rate is called a(n):

real shock

Assume the average price level was 101 in 2016 and 105 in 2017. The __________ rate is _____________.

inflation; 3.96% The inflation rate is [(105 − 101) ÷ 101] ×100 = 3.96%.

If the federal government decides to increase spending to stimulate the economy, then the growth rate of government spending will:

initially rise and then return to its normal growth rate. (If the growth rate of government spending were permanently increased, government spending would eventually be greater than GDP, which is not possible.)

Suppose that for an imaginary economy, the velocity of money is equal to 8 and the money supply is $1.2 billion. The real GDP of this economy is:

less than $9.6 billion if the price level is greater than 1. Nominal GDP is $1.2 billion × 8 = $9.6 billion. Real GDP is nominal GDP divided by the price level.

One of the reasons that the government is not likely to resort to monetizing its debt is that:

many bondholders are also voters, who would be angry if high inflation reduced the rate of return on their bonds.

The producer price index

measures the average price received by producers.

Professor Tabarrok summarizes the outcome of the quantity theory of money by saying that when _______, prices must _______.

more money chases the same amount of goods and services; rise

Which of the following is a potential explanation for the stickiness of prices and wages in the short run?

nominal wage confusion

Changes in real GDP (Y) are:

not likely the cause of large sustained changes in P, since Y is relatively stable.

In an economy with a large manufacturing sector, a reduction in _____ is like a reduction in rainfall in an agricultural economy.

oil supply

Gross domestic product measures the value of what is

produced in a country in a year

For any product to be counted in U.S. GDP for 2017 it must be:

produced within the borders of the United States.

A price that has been corrected for inflation is referred to as a:

real price

When inflation occurs, it is usually the case that in the short run:

some prices have gone up and others have fallen. At any one point in time, some prices are going up and some are going down.

The "inflation rate" is:

the percentage change in the average level of prices over a specific period. The formula for the inflation rate is (P2 − P1) ÷ P1.

If an old car is sold in the used car market in 2017, the value of this used car:

will not be counted in the 2017 GDP for any country since the market value of the car was counted in the year it was produced.

A finished good or service is one that:

will not be sold again as part of some other product

Which of the following statements is TRUE? Pt3

x-Money illusion is mistaking changes in real(nominal is CA) prices for changes in nominal prices. x-Prices are signals, and inflation makes price signals easier to interpret. c-The nominal rate of return is the rate of return that does not account for inflation. x-The Fisher effect is the tendency of real interest rates to rise with expected inflation rates.