Chapter 16

Suppose you have $100 to invest for a year and the nominal interest rate is 7 percent. If the inflation rate during the year is 4 percent, at the end of the year your real gain from the investment is approximately A) $3. B) $4. C) $7. D) $11.

$3

Consider an economy where the growth rate of money supply is 2% and the inflation rate is 2%. If the quantity theory of money holds, the growth rate of real GDP in the economy will be: A) 4%. B) 0%. C) 2%. D) 1%.

0%

You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. The CPI over that year rises from 200 to 210. What is the real interest rate you are paying? A) 5% B) -5% C) -1.5% D) 0% E) 1.5%

0%

Suppose the money growth rate is 3 percent, velocity is constant, and real GDP is growing at 2 percent. What is the inflation rate? A) 3 percent B) 1 percent C) 6 percent D) 5 percent

1 percent

You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. The CPI over that year rises from 150 to 155. What is the approximate real interest rate you are paying? A) -10% B) 0% C) 10% D) 1.67% E) -3.3%

1.67%

If the real interest rate is 6 percent and the inflation rate is 4 percent, then the nominal interest rate is A) 2 percent. B) 10 percent. C) 5 percent. D) None of the above answers are correct.

10 percent

You want to make a 10% real return on a loan that you are planning to make, and the expected inflation rate during the period of the loan is 4%. You should charge a nominal interest rate of A) -6%. B) 6%. C) 10%. D) 14%.

14%

Assume you have a credit card balance of $2,000 at 15 percent and the inflation rate is 3 percent. What are the nominal and real interest rates? A) 15 percent nominal and 12 percent real B) 15 percent nominal and 18 percent real C) 3 percent nominal and 12 percent real D) 15 percent nominal and 3 percent real

15 percent nominal and 12 percent real

Ms. Bankson has saved $100,000 for her retirement. She earned 6 percent interest on that money during the year 2001. If the rate of inflation was 4 percent in 2001, what was Ms. Banksonʹs real interest rate? A) 10 percent B) $4,000 C) $6,000 D) 2 percent

2 percent

Suppose that potential GDP grows by 3 percent a year and money growth is 5 percent a year. In the long run, what will be the inflation rate? A) 3 percent B) 8 percent C) 5/2 percent D) 2 percent E) 5 percent

2 percent

Consider an economy where the growth rate of real GDP is 6% and the growth rate of the money supply is 8%. If the quantity theory of money holds, the inflation rate in the economy will be: A) 2%. B) 6%. C) 14%. D) 8%.

2%

Sticky wages reduce the ability of free-market forces to help the economy recover from a recession. Which of the following inflation rates would make real wages less sticky, and thus allow for a quicker adjustment process? A) 2% B) 0% C) -2%

2%

According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be A) 4%. B) 6%. C) 8%. D) 6/2% or 3% E) 2%.

4%

Bank of America charges a 9.5 percent interest rate on all new car loans. If the inflation rate is 4 percent, Bank of America receives a real interest rate of A) 5.5 percent. B) 9.5 percent. C) 4.0 percent. D) 13.5 percent

5.5 percent.

Suppose that lenders want to receive a real rate of interest of 5 percent and that they expect inflation to remain steady at 2 percent in the coming years. Based on this, lenders should charge a nominal interest rate of: A) 5 percent. B) 7 percent. C) 2 percent. D) 3 percent.

7 percent

Suppose that for a given year money growth is 12 percent, real GDP growth is 4 percent, and velocity is constant. According to the growth version of the quantity equation, the inflation rate would be A) 0.67 percent. B) 3 percent. C) 8 percent. D) 16 percent

8 percent

According to the quantity theory of money, if the money supply grows at 10%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be A) 5% B) 12%. C) 10%. D) 2%. E) 8%.

8%

Most economists agree that modest inflation is desirable over zero inflation because: A) it allows a margin of error for those deciding on the money supply. B) it helps firms to more easily adjust real wages. C) it allows the Fed to more easily engage in expansionary monetary policy. D) All of these statements are true.

All of these statements are true.

Unexpectedly low inflation causes which of the following? A) Lenders receive a lower real interest rate than they expected. B) Neither borrowers nor lenders lose. C) Both lenders and borrowers gain. D) Borrowers pay a higher real interest rate than they expected. E) More than one of the above is correct.

Borrowers pay a higher real interest rate than they expected.

Gabriela deposits $1,000 in a saving account that pays an annual interest rate of 6 percent. Over the course of a year the inflation rate is 2 percent. At the end of the year Gabriela has A) $80 more in her account, and her purchasing power has increased about $60. B) $40 more in her account, and her purchasing power has increased about $60. C) $40 more in her account, and her purchasing power has increased about $40. D) $60 more in her account and her purchasing power has increased about $40. E) $60 more in her account and her purchasing power has increased about $20

$60 more in her account and her purchasing power has increased about $40.

Suppose you have $100 to invest for a year and the nominal interest rate is 7 percent. If the inflation rate during the year is 4 percent, at the end of the year your nominal gain from the investment is A) $3. B) $4. C) $7. D) $11.

$7

Mary has $1,000 and is considering purchasing a $1,000 bond that pays 7 percent interest per year. Mary decides not to buy the bond and holds the $1,000 as cash. If the inflation rate is 4 percent, the opportunity cost of holding the $1,000 as money is A) $30.00. B) $110.00. C) $40.00. D) $70.00.

$70.00

Unexpected high inflation redistributes wealth from: A) those who borrow to those who save. B) banks to those who save. C) those who borrow to banks. D) those who save to those who borrow

those who save to those who borrow

The ʺshoe-leather costsʺ of inflation are the costs from A) the government taking a higher percentage of interest income. B) time spent trying to spend money quickly. C) confusion as people lose track of real costs and benefits. D) higher prices for all goods, including necessities such as shoes

time spent trying to spend money quickly.

Most economists agree that the best rate of inflation for a stable economy would be around: A) two to three percent. B) zero. C) five to six percent. D) seven percent.

two to three percent.

Hyperinflation is defined as A) very high inflation rates. B) declining inflation rates. C) rising but low inflation rates. D) very low inflation rates

very high inflation rates.

Which of the following can cause inflation? A) Increases in short-run aggregate supply B) Decreases in short-run aggregate supply C) Increases in long-run aggregate supply D) Decreases in aggregate demand

Decreases in short-run aggregate supply

When a central bank aggressively tries to contain inflation via contractionary monetary policy, which condition is most likely to occur? A) Underinflation B) Deflation C) Disinflation D) Inflation

Disinflation

Suppose that this economy begins at E1 and the central bank engages in expansionary monetary policy. According to the classical theory of inflation, in the long run, the economy will move to ______ and price level will be ______. A) E3 ; P3 B) E1 ; P1 C) E4 ; P2 D) E2 ; P3

E3 ; P3

In class we maintained that the biggest problem with inflation in the long run is that it means that the paychecks of typical people will have less buying power, and thus people become poorer in real terms. A) TRUE B) FALSE

FALSE

Oil prices increased significantly in 2008. According to the Keynesian model, this increase in oil prices should have caused which of the following to occur? A) cost-pull inflation B) demand-pull inflation C) cost-push inflation D) demand-push inflation

cost-push inflation

Inflation that is caused by an increase in aggregate demand which is not matched by an increase in aggregate supply is called A) demand-pull inflation. B) demand-push inflation. C) cost-push inflation. D) cost-pull inflation.

demand-pull inflation

A period when overall inflation rates are positive but falling is called: A) inflation. B) zero price level. C) disinflation. D) deflation

disinflation

To stop hyperinflations, a nation must A) increase spending. B) increase the budget deficit. C) decrease taxes. D) eliminate the budget deficit.

eliminate the budget deficit.

In the absence of inflation, the nominal interest rate is A) less than the real interest rate. B) equal to the real interest rate. C) equal to the inflation rate. D) greater than the real interest rate.

equal to the real interest rate.

During hyperinflations, the value of money A) falls rapidly. B) rises rapidly. C) falls slowly. D) does not change.

falls rapidly.

Suppose the nominal interest rate is 7 percent annually, and you deposit $1,000. Inflation in the economy throughout the year is 7 percent. At the end of the year, you have earned: A) no increase in your savings. B) an increase in your purchasing power. C) no increase in your purchasing power. D) a decrease in your purchasing power

no increase in your purchasing power.

Tax distortions happen because tax laws take into consideration only: A) real income. B) real output. C) nominal income. D) nominal output.

nominal income.

Which of the following increases the real interest rate? A) a decrease in both the nominal interest rate and the inflation rate by the same percentage points B) an increase in both the nominal interest rate and the inflation rate by the same percentage points C) a decrease in the nominal interest rate, holding the inflation rate constant D) a decrease in the inflation rate, holding the nominal interest rate constant

a decrease in the inflation rate, holding the nominal interest rate constant

Eliza wants to borrow $100 from Sandy. Sandy wants to make 4% real return on his money, so they both agree on a 4% interest rate paid next year. Eliza and Sandy did not anticipate any inflation, yet the actual inflation turned out to be -5% next year. In this case, A) Sandy is better off. B) Eliza will pay a 4% nominal interest rate. C) Eliza will pay an 9% real interest rate. D) all of the above

all of the above

Which of the following is likely to occur if there is 10% inflation over the next year and it is perfectly anticipated? A) there will not be any ʺmenu costsʺ B) real interest rates will increase by 10% C) wealth will be redistributed from borrowers to lenders D) nominal wages will increase by 10% E) More than one of the above is correct

nominal wages will increase by 10%

In the early 1920s, Germany experienced hyperinflation because Germanyʹs A) quantity of money was growing too rapidly. B) economy was growing too rapidly. C) real GDP was growing faster than nominal GDP. D) population was growing too rapidly

quantity of money was growing too rapidly.

If inflation is higher than expected, then lenders will _______________ and borrowers will _______________. A) benefit ; benefit B) be harmed ; be harmed C) be harmed ; benefit D) benefit ; be harmed

be harmed ; benefit

When real rates of interest are negative, borrowers: A) benefit, because the value of their debt increases. B) suffer, because the value of their debt increases. C) suffer, because the value of their debt declines. D) benefit, because the value of their debt declines.

benefit, because the value of their debt declines.

When real rates of interest are positive, it is better to be a: A) borrower than a saver, because the value of savings and debts are decreasing. B) saver than a borrower, because the value of savings and debts are decreasing. C) saver than a borrower, because the value of savings and debts are increasing. D) borrower than a saver, because the value of savings and debts are increasing

saver than a borrower, because the value of savings and debts are increasing.

The idea that aggregate price levels do not affect real outcomes in the economy is called the: A) real output theory. B) neutrality of money. C) neutrality of prices. D) aggregate price theory

neutrality of money.

Kim is paid $50,000 per year, and pays an annual income tax of 10 percent. Due to an inflation rate of 10 percent, her pay increases to $55,000, which puts her in a higher tax bracket where she must pay 20 percent. Which of the following can be said of Kim? A) Inflation caused her to be taxed more heavily and increased her purchasing power. B) Inflation caused her to be taxed more but didnʹt change her purchasing power. C) Her raise reflects the inflation rate, and therefore her purchasing power is unchanged. D) Inflation caused her to be taxed more heavily and decreased her purchasing power.

Inflation caused her to be taxed more heavily and decreased her purchasing power.

Which of the following is NOT a problem with deflation? A) It reduces the value of savings that savers have accumulated over time. B) It makes consumers reluctant to purchases goods because they expect that prices will fall further in the future. C) It increases the real burden of debt and makes it difficult for borrowers to pay back their loans. D) It reduces aggregate demand, thus causing even more deflation

It reduces the value of savings that savers have accumulated over time.

Why is deflation such a problem for consumption and investment? A) It slows investment while simultaneously increases consumption. B) It causes firms and households to spend more. C) It slows both. D) It increases the rate of both.

It slows both.

Unexpectedly high inflation causes which of the following? A) Lenders receive a lower real interest rate than they expected. B) Borrowers pay a higher real interest rate than they expected. C) Neither borrowers nor lenders lose. D) Both lenders and borrowers gain. E) More than one of the above is correct

Lenders receive a lower real interest rate than they expected.

According to money neutrality, if the money supply increases, then (in the long run), A) Nominal GDP will increase B) Real GDP will increase C) Real incomes will increase D) The actual amount of things produced in the economy will increase. E) None of the above

Nominal GDP will increase

Which of the following is cost of anticipated inflation? A) There will be tax distortions B) Wealth is redistributed from lenders to borrowers C) The buying power of the nationʹs income falls due to the higher prices D) More than one of the above is correct

There will be tax distortions

If inflation is completely anticipated, A) firms lose because they incur menu costs. B) no one loses in the economy. C) lenders lose in the economy. D) borrowers lose in the economy.

firms lose because they incur menu costs.

The reduction in aggregate demand caused by deflation: A) will decrease production and increase prices, causing inflation to adjust the price level. B) further reduces prices, causing a deflationary spiral. C) further reduces prices, causing aggregate supply to shift left back to long-run equilibrium. D) will decrease production and increase prices, causing a deflationary trap.

further reduces prices, causing a deflationary spiral.

Unpredictable inflation can cause businesses to: A) have a hard time planning future production. B) increase production due to expecting future price level changes. C) cease production until they know how to adjust for inflation. D) restrict output and stockpile inventory.

have a hard time planning future production.

Based on the quantity theory of money, hyperinflations are most likely caused by a rapid A) decrease in the price level. B) decrease in the money supply. C) increase in real GDP. D) increase in the growth of the money supply

increase in the growth of the money supply

Cost-push inflation is A) inflation caused by decreases in aggregate supply that are not matched by decreases in aggregate demand. B) inflation caused by decreases in aggregate supply that generate an even larger decrease in aggregate demand. C) inflation caused by increases in aggregate demand that are not matched by increases in aggregate supply. D) inflation caused by increases in aggregate demand that generate an even larger increase in aggregate supply.

inflation caused by decreases in aggregate supply that are not matched by decreases in aggregate demand.

The difference between the nominal interest rate and the real interest rate is the A) unemployment rate. B) GDP growth rate. C) inflation rate. D) money growth rate minus the growth rate of real GDP.

inflation rate

One of the costs not associated with predictable inflation is: A) labor costs. B) tax distortions. C) menu costs. D) shoe-leather costs.

labor costs.

The quantity theory of money predicts that in the ________, a 10 percent increase in the quantity of money leads to a 10 percent increase in ________. A) long run; real GDP B) long run; velocity C) short run; velocity D) long run; price level

long run; price level

The quantity theory of money addresses the A) long-run effect the quantity of money has on the price level. B) determinants of the equilibrium unemployment rate. C) short-run effect the quantity of money has on GDP. D) determinants of potential GDP.

long-run effect the quantity of money has on the price level.

When L.L. Bean decides to increase its prices due to general inflation, they must reprint the millions of catalogs they produce and distribute. The costs associated with doing so in response to inflation are called: A) tax distortions. B) shoe-leather costs. C) menu costs. D) printing costs.

menu costs.

The velocity of money is A) the speed of the conversion of reserves to money. B) the changes in the purchasing power of money over a given time period. C) the rate of change of the GDP deflator. D) the average number of times a dollar of money is used in a year to buy goods and services in GDP.

the average number of times a dollar of money is used in a year to buy goods and services in GDP.

Assume the inflation rate falls from 4 percent to 2 percent. This means that A) the economy is experiencing deflation. B) the price level has fallen. C) real GDP is decreasing. D) the economy is experiencing disinflation

the economy is experiencing disinflation

Menu costs refer to: A) the money, time, and opportunity used to change prices to keep pace with inflation. B) labor costs associated with inflation. C) the time, money, and effort one has to spend managing cash in the face of inflation. D) being penalized via taxes for making more money in dollars, even though real purchasing power hasnʹt changed.

the money, time, and opportunity used to change prices to keep pace with inflation.

According to the quantity theory of money, if there are fewer dollars available to spend on the same number of goods and services, then: A) output will increase. B) the price level will fall. C) output will decrease. D) the price level will rise.

the price level will fall.

The quantity theory of money asserts that inflation is the result of growth in A) the quantity of money. B) the natural rate of unemployment. C) money wage rates. D) potential GDP.

the quantity of money.