PrQ31: Practice Quiz - Ch. 31: Inflation and the Quantity Theory of Money

In a small economy, the money supply is $400,000, and the velocity of money is 3. The current average price level in the economy is 1. What is the level of real GDP in this economy?

$1.2 million

Table: Anticipating Inflation Year Predicted Inflation Rate Actual Inflation Rate 2000 3% 3% 2001 3 2 2002 7 9 2003 5 4 2004 4 7 Using the inflation data in the table, assume that all loan contracts have fixed nominal interest rates of 10% and mature after 1 year. In which year did lenders gain relative to borrowers?

2003

Inflation occurs when the growth in _____ exceeds the growth in _____.

the money supply; output

Which of the following correctly represents deflation?

π < 0

(Table: Consumer Price Index) Year CPI (end-of-year value) 2005 195.3 2006 201.6 2007 207.3 2008 215.3 2009 214.5 2010 218.1 Refer to the CPI values in the table for the years 2005 to 2010. What was the approximate inflation rate over the period 2009 to 2010?

1.68%

A bank lends money for a year at an interest rate of 7%, and the inflation rate for that year turns out to be 5%. What is the bank's real rate of return for that year?

2.0%

Suppose that the CPI in 2013 was 250 and the CPI in 2014 was 260. What is the rate of inflation in this economy?

4.0%

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

Deflation; disinflation

The ratio of the nominal value of economic output to the real value of economic output multiplied by 100 is the:

GDP deflator.

Suppose the inflation rate is 3% when a 15-year mortgage loan is given at a fixed rate of 4.5%. Five years later the inflation rate rises to 4%. What impact does this change have on the nominal interest rate and the real interest rate on the mortgage loan?

The nominal interest rate remains the same and the real rate interest decreases.

According to the Fisher effect, a 5% decrease in the expected inflation rate results in:

a 5% decrease in the nominal interest rate.

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.

decreased

High and volatile inflation:

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

In 2008, the rate of inflation was 2%, which then rose to 3% in 2009 before falling back to 2% in 2010. Between 2008 and 2009, the economy experienced _____ and between 2009 and 2010, the economy experienced _____.

inflation; disinflation

Inflation:

is an increase in the average price level.

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

less; lenders to borrowers

Two of the challenging factors faced by the U.S. Bureau of Labor Statistics when computing the consumer price index are:

new goods and better-quality goods.