Macro Chapter 31 calhoun

A bank lends money for a year at an interest rate of 9% and the inflation rate for that year turns out to be 5%. What is the bank's real rate of return for that year? A. 14% B. 4% C. 6% D. 2%

B. 4%

If the average price level rises from 120 in year 1 to 130 in year 2, the inflation rate between years 1 and 2 will be: A. 8.33%. B. 10%. C. 7.69%. D. 9.23%.

A. 8.33%.

For a given nominal interest rate, an increase in deflation will cause the real rate of interest to: A. increase. B. decrease. C. remain relatively constant. D. become unpredictable.

A. Increase.

Inflation refers to an increase in the: A. average level of prices. B. standard of living. C. relative prices of some goods as compared to other goods. D. average level of nominal output.

A. average level of prices.

When disinflation arises unexpectedly, the real interest rate will ?the equilibrium rate, which will benefit ? A. exceed- lenders and harm borrowers B. fall short of- borrowers and harm lenders C. exceed- benefit borrowers and harm lenders D. fall short of- lenders and harm borrowers

A. exceed- lenders and harm borrowers

The quantity theory of money is a theory of: A. inflation. B. money growth in the United States. C. the growth of tax burdens. D. economic growth.

A. inflation.

The quantity theory of money implies that the money supply times the velocity of money equals: A. nominal GDP. B. the quantity of goods and services. C. real GDP. D. the price level.

A. nominal GDP.

If the CPI was 100 in 2000 and 120 in 2010 and the price of a gallon of milk was $4.00 in 2000 and $4.80 in 2010, then in relative terms the real of price milk between 2000 and 2010: A. remained the same. B. cannot be determined without knowing the base year. C. decreased by 20%. D. increased by 20%.

A. remained the same.

In the quantity theory of money, growth of ? is the cause of inflation. A. the money supply B. velocity C. the CPI D. real GDP

A. the money supply

The argument that "inflation is always and everywhere a monetary phenomenon" is consistent with: A. the quantity theory of money. B. the theory of money illusion. C. the Fisher effect. D. the theory of price confusion.

A. the quantity theory of money.

Which of the following correctly represents deflation? A. π < 0 B. Eπ = π C. Eπ > π D. Eπ < π

A. π < 0

(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 one year. Which year did lenders gain relative to borrowers? A. 2002 B. 2003 C. 2000 D. 2004

B. 2003

If the money supply in a country is $200 million, the velocity of money is 5, and real GDP is 250 million, the price level of the country must be: A. 1.25. B. 4.00. C. 6.25. D. 8.00.

B. 4.00.

How might changes in the money supply be non-neutral in the short run? A. When money supply changes in the short run, it will affect nominal, but not real, variables in the short run. B. As the amount of money circulating in the economy changes before prices respond, the purchases of consumers change accordingly, which leads producers to change production levels. C. If producers expect inflation to increase, they will increase supply in order to sell before the arrival of inflation. D. As money growth increases at a faster rate, it will cause real GDP to grow at an even faster rate.

B. As the amount of money circulating in the economy changes before prices respond, the purchases of consumers change accordingly, which leads producers to change production levels.

Suppose the average level of prices increased from 100 to 110 between 2007 and 2008, and from 110 to 115 between 2008 and 2009. Between 2008 and 2009, there was: A. inflation in the real price of everything. B. disinflation. C. hyperinflation. D. deflation.

B. Disinflation

Which of the following is a problem with deflation? A. Stopping it will cause a recession. B. It raises the real cost of debt repayment. C. There is no problem with deflation- falling prices are good for the economy. D. It causes people to pay more taxes.

B. It raises the real cost of debt repayment.

Which of the following statements highlights the difference between the CPI (consumer price index) and the GDP deflator? A. The CPI measures the average prices of inputs in the production process, whereas the GDP deflator measures the average prices of goods and services purchased by consumers. B. The CPI measures the average prices of goods and services consumed by typical consumers, whereas the GDP deflator measures the average prices of all goods and services in the economy. C. The CPI measures the average prices of all final goods and services purchased by consumers, whereas the GDP deflator measures the average prices of all inputs used in the economy. D. The CPI measures the average prices of retail goods and services, whereas the GDP deflator measures the average prices of wholesale goods.

B. The CPI measures the average prices of goods and services consumed by typical consumers, whereas the GDP deflator measures the average prices of all goods and services in the economy.

Which of the following is an example of money illusion assuming that inflation is 5%? A. You do not receive a raise at your part-time job but cut out some expenses as you notice some prices rising. B. You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend. C. You receive a 10% raise at your part-time job and start spending extra money on entertainment every weekend. D. You receive a 5% raise at your part-time job but do not increase or decrease your spending.

B. You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend.

(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 disinflation? A. neither 2007 nor 2009 B. both 2007 and 2009 C. 2009 only D. 2007 only

B. both 2007 and 2009

Because of money illusion, inflation usually confuses: A. firms. B. consumers, workers, and firms. C. consumers. D. workers.

B. consumers, workers, and firms.

High and volatile inflation: A. creates high supply of goods and services. B. destroys the ability of market prices to send signals about the value of resources and opportunities. C. causes the price of goods and services to deviate from the market price. D. increases the purchasing power of money and income.

B. destroys the ability of market prices to send signals about the value of resources and opportunities.

Current forecasts say that mild inflation is expected next year. If, however, deflation occurs instead: A. borrowers on existing fixed rate loans will gain while lenders will lose. B. lenders on existing fixed rate loans will gain while borrowers will lose. C. both lenders and borrowers on existing fixed rate loans will lose. D. both lenders and borrowers on existing fixed rate loans will gain.

B. lenders on existing fixed rate loans will gain while borrowers will lose.

If the economy experiences unexpected inflation, then the real interest rate will be ? than its equilibrium rate, and wealth will be distributed from?. A. less- borrowers to lenders B. less- lenders to borrowers C. greater- borrowers to lenders D. greater- lenders to borrowers

B. less- lenders to borrowers

Money illusion is a condition in which people: A. expect the value of money will illusively surge. B. mistakenly confuse changes in nominal prices for changes in real prices. C. mistakenly confuse changes in nominal GDP for changes in real GDP. D. see money as an illusion for value.

B. mistakenly confuse changes in nominal prices for changes in real prices.

According to the quantity theory, what causes inflation in the long run? A. unexpected inflation B. money supply growth C. aggregate demand shocks D. unemployment

B. money supply growth

Why do we use the "real" prices of goods to measure how expensive things have become? A. to find out what the current prices of goods and services are B. to see whether there have been any changes in our purchasing power C. to estimate the periods when hyperinflation has occurred D. to find out what the inflation rate has been

B. to see whether there have been any changes in our purchasing power

Debt monetization means that a government pays off its debt by: A. lowering inflation. B. raising tax revenues. C. borrowing from foreigners. D. increasing the money supply.

D. increasing the money supply.

If you earned $10-an-hour in 2005 when the CPI was 100, and you earn $11-an-hour today when the CPI is 120, then your real wage rate has ? since 2005. A. increased 20% B. increased 10% C. decreased D. remained the same

C. Decreased

When we examine data from different countries, higher money growth has consistently been associated with: A. deflation. B. disinflation. C. higher inflation. D. hyperinflation.

C. higher inflation.

According to the quantity theory of money, an increase in the money supply will cause the price level to: A. remain relatively constant since money is neutral. B. increase by a greater percentage than the money supply. C. increase by about the same percentage as the money supply. D. increase by a smaller percentage than the money supply.

C. increase by about the same percentage as the money supply.

For a tax system in which higher income earners pay a larger share of their incomes in taxes, a higher inflation rate: A. can raise or lower the tax burden of taxpayers, depending on their income levels. B. does not affect the tax burden of taxpayers. C. raises the tax burden of taxpayers. D. lowers the tax burden of taxpayers.

C. raises the tax burden of taxpayers.

Money illusion occurs when people: A. correctly see changes in real prices. B. see changes in real prices and mistake them for changes in nominal prices. C. see changes in nominal prices and mistake them for changes in real prices. D. correctly see changes in nominal prices.

C. see changes in nominal prices and mistake them for changes in real prices.

The case of hyperinflation in Zimbabwe in the late 2000s was an example of the effects of: A. amplification mechanisms. B. a lack of foreign aid. C. the government monetizing its debt. D. large rainfall shocks.

C. the government monetizing its debt.

The text states, "inflation is a type of tax." This tax refers to ? when inflation occurs. A. a higher tax rate that the government must impose B. a higher nominal interest rate of a typical loan C. the lower purchasing power of money D. a special tax on taxpayers in order for the government to balance its budget

C. the lower purchasing power of money

The quantity theory of money predicts that the main cause of inflation is increases in: A. prices. B. real output. C. the money supply. D. consumption.

C. the money supply.

Why could very high rates of inflation cause velocity to increase? A. The more inflation there is, the more there is to buy. B. The more people earn, the faster prices rise. C. The more people earn, the faster they spend it. D. The more money loses its value, the faster people try to spend it.

D. The more money loses its value, the faster people try to spend it.

If the money supply, the velocity of money, and the price level are fixed, then increases in real GDP: A. cause the money supply, the velocity of money, and the price level to increase together. B. cause the money supply, the velocity of money, and the price level to decrease together. C. occur without changes in the other variables. D. are impossible because real GDP must also be fixed.

D. are impossible because real GDP must also be fixed.

To compare the $1-an-hour your grandfather earned in 1950 with the $8-an-hour you earn today, you would need to: A. simply compare $1-an-hour to $8-an-hour. B. add the inflation rates in each year since 1950 until today and add this to your grandfather's wage. C. calculate your grandfather's nominal wage in 1950 and compare it to your wage today. D. calculate real wages in both 1950 and today.

D. calculate real wages in both 1950 and today.

If people expect an inflation rate of 3% and later it turns out to be 5%, then the real rate of return will be: Selected Answer: A. 5%. B. 3%. C. greater than the equilibrium rate. D. less than the equilibrium rate.

D. less than the equilibrium rate.

When the expected rate of inflation is higher than the actual rate of inflation, wealth is: A. not redistributed at all. B. redistributed from lenders to borrowers. C. redistributed at random. D. redistributed from borrowers to lenders.

D. redistributed from borrowers to lenders.