Economics Exam 3
A negative real shock leads to: A) an increase in the inflation rate but a decrease in the real GDP growth rate. B) an increase in both the inflation rate and the real GDP growth rate. C) a decrease in the inflation rate but an increase in the real GDP growth rate. D) a decrease in both the inflation rate and the real GDP growth rate.
a
A significant, widespread decline in real income and employment is called: A) a recession. B) a boom. C) an aggregate demand fluctuation. D) a business fluctuation.
a
According to the quantity theory of money, if money supply is $1,000 million, the overall price level is 200, and real GDP is 50 million, then the velocity of money is equal to: A) 10. B) 20. C) 50. D) 100.
a
The quantity theory of money: A) describes the general relationship between money, velocity, real output, and prices. B) presents the critical roles of money demand in regulating the level of prices. C) derives the optimal quantity of inflation. D) explains the equilibrium between money supply and money demand.
a
The velocity of money is: A) the average number of times a dollar is spent on final goods and services in a year. B) a price that has been corrected for inflation. C) when people mistake changes in nominal prices for changes in real prices. D) an increase in the average level of prices.
a
When an increase in the money supply is unexpected by firms and workers, real GDP: A) increases in the short run. B) decreases in the short run. C) increases in the long run. D) decreases in the long run.
a
Which of the following correctly represents unexpected disinflation? A) E > 3.14 B) E < 3.14 C) E = 3.14 D) E > i
a
In the equation Mv = PYR, P represents: A) average productivity. B) the average price level. C) inflation. D) corporate profits.
b
In the long run, the quantity theory of money says that the growth rate of the money supply will be approximately equal to the: A) velocity of money. B) inflation rate. C) price level. D) growth rate of real GDP.
b
In times of financial panic, we expect the velocity of money to: A) increase. B) decrease. C) remain relatively constant. D) first increase and then decrease.
b
If = 5%, = -3%, and = 2%, then must equal: A) -3% B) -2% C) 0% D) 2%
c
An increase in consumer pessimism will lead to increased inflation in: A) the short run only. B) the long run only. C) both the short run and the long run. D) neither the short run nor the long run.
d
From 2002 to 2007, Zimbabwe experienced average annual inflation of: A) 0%. B) 3%. C) 20%. D) 736%.
d
If a baker observes an increase in demand for bread, should the baker increase output or raise prices? A) increase output B) raise prices C) neither increase output nor raise prices D) It depends on whether the change in demand is driven by inflation or by a stronger preference for bread.
d
If the price level in 2016 is 140 and it falls to 133 in 2017, what has the economy experienced between 2016 and 2017? A) 5% inflation B) 7% inflation C) 7% deflation D) 5% deflation
d
(Figure: Aggregate Demand) Point B on this aggregate demand curve represents an inflation rate of: A) 3%. B) 4%. C) 5%. D) 7%.
b
A negative real shock causes the long-run aggregate supply curve to: A) shift outward. B) shift inward. C) become steeper. D) become flatter.
b
An increase in _____ will shift the SRAS curve. A) actual inflation, but not expected inflation B) expected inflation, but not actual inflation C) both actual inflation and expected inflation D) neither actual inflation nor expected inflation
b
Approximately how many prices of goods and services are measured by the CPI? A) 800,000 B) 80,000 C) 800 D) 80
b
Deflation can cause the economy's aggregate demand curve to shift inward because debt contracts are: A) adjusted for inflation. B) not adjusted for inflation. C) adjusted for changes in the interest rate. D) not adjusted for changes in the interest rate.
b
Deflation is a decrease in the: A) exchange rate. B) average level of prices. C) inflation rate. D) velocity of money.
b
During the Great Depression, the long-run aggregate supply curve: A) shifted outward. B) shifted inward. C) did not shift at all. D) became flatter.
b
Even moderate inflation typically: A) increases real prices. B) increases the amount of taxes that people pay over time. C) decreases average household consumption. D) decreases the number of long-term contracts signed.
b
Holding everything else constant, an increase in the growth rate of the money supply will cause the aggregate demand curve to: A) shift inward. B) shift outward. C) not shift at all. D) shift randomly.
b
If the actual rate of inflation turns out to be higher than the expected rate of inflation, what happens to the growth rate of output before expectations are updated? A) The growth rate stays at the Solow growth rate. B) The growth rate is higher than the Solow growth rate. C) The growth rate is lower than the Solow growth rate. D) The growth rate could go up or down.
b
If the economy experiences unexpected inflation, then the real interest rate will be _____ than its equilibrium rate, and wealth will be distributed from _____. A) greater; lenders to borrowers B) less; lenders to borrowers C) greater; borrowers to lenders D) less; borrowers to lenders
b
If the price level in 2018 is 150 and it rises to 165 in 2019, what is the rate of inflation between 2018 and 2019? A) 9% B) 10% C) 15% D) 165%
b
If velocity is constant, the growth rate of the money supply is 2%, and inflation is 3%, then real output growth will be: A) -5%. B) -1%. C) 1%. D) 5%.
b
If you had to predict the U.S. inflation rate for next year and decided that a good way to make that prediction would be to simply use the average inflation rate over the past 10 years, what would be your prediction for U.S. inflation next year? A) 1.1% B) 2.4% C) 4.0% D) 5.2%
b
In the basic model that includes the AD and LRAS curves only, increased spending growth causes: A) a lower inflation rate, but no change in the real growth rate. B) a higher inflation rate, but no change in the real growth rate. C) a lower real growth rate, but no change in the inflation rate. D) a higher real growth rate, but no change in the inflation rate.
b
In the basic model with an AD and LRAS curve only, if spending growth is 10% and the Solow growth rate falls from 5% to 3%, then inflation will: A) decrease from 7% to 5%. B) increase from 5% to 7%. C) decrease from 13% to 8%. D) increase from 8% to 13%.
b
The Fisher effect indicates that an increase in the expected inflation rate will cause the nominal rate of interest to: A) remain relatively constant. B) increase by the same amount. C) decrease by the same amount. D) become unpredictable.
b
The Solow growth rate is the economy's: A) actual growth rate. B) potential growth rate. C) expansionary growth rate. D) recessionary growth rate.
b
The aggregate demand curve is: A) upward sloping. B) downward sloping. C) a vertical line. D) a horizontal line.
b
The argument that "inflation is always and everywhere a monetary phenomenon" is consistent with: A) the theory of price confusion. B) the quantity theory of money. C) the theory of money illusion. D) the Fisher effect.
b
The economy's aggregate demand curve shows all combinations of _____ that are consistent with a specified rate of spending growth. A) inflation and the unemployment rate B) inflation and real GDP growth C) economic growth and the unemployment rate D) the price level and real GDP
b
The increase in oil prices that took place during the mid-2000s was driven mainly by: A) decreases in supply. B) increases in demand. C) increases in both supply and demand. D) increases in supply and decreases in demand.
b
The long-run aggregate supply curve shows that long-run economic growth: A) depends on the rate of inflation. B) does not depend on the rate of inflation. C) is neutral. D) does not depend on factors such as capital, labor, and ideas.
b
The price level at the end of 2011 minus the price level at the end of 2010 is the _____ for the year 2011. A) inflation rate B) change in the price level C) change in gross national product D) consumer price index
b
The quantity theory of money is a theory of: A) money growth in the United States. B) inflation. C) economic growth. D) the growth of tax burdens.
b
Which of the following causes a shift of the AD curve to the right? A) an increase in income taxes B) an increase in consumer confidence C) an increase in import growth D) an increase in interest rates
b
Which of the following explains why the inflation rate is slow to adjust over time? A) People can perfectly predict the inflation rate. B) There are high menu costs of changing prices. C) Workers respond to nominal wages instead of real wages. D) Too many shocks exist in an economy.
b
Which of the following scenarios could result in a recession? A) Aggregate demand decreases, and wages are flexible. B) Aggregate demand decreases, and wages are sticky. C) Aggregate demand increases, and wages are flexible. D) Aggregate demand increases, and wages are sticky.
b
Year CPI (End-of-Year Value) 2005 195.3 2006 201.6 2007 207.3 2008 215.3 2009 214.5 2010 218.1 (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 deflation? A) 2007 only B) 2009 only C) both 2007 and 2009 D) neither 2007 nor 2009
b
A 1% increase in real growth, ceteris paribus, _____ inflation by _____. A) increases; 1% B) increases; 2% C) decreases; 1% D) decreases; 2%
c
In India, shocks to the weather: A) do not affect economic output. B) shift the AD curve. C) change the rate of growth in the money supply. D) are becoming less economically important over time.
d
In the equation , what does M + v= P + Yr stand for? A) production B) growth in production C) prices D) inflation
d
The AD-AS model is most useful for explaining what causes: A) the economy's long-run growth rate. B) inflation. C) stock market fluctuations. D) fluctuations in GDP growth around its trend rate.
d
The velocity of money is: A) how fast the price level is rising. B) how fast the inflation rate is rising. C) the rate at which money can be printed. D) the average number of times a dollar is spent on final goods and services.
d
Volatile hyperinflation causes financial intermediation to: A) become more efficient. B) favor long-term lending. C) favor first-time borrowers. D) break down.
d
What do we call an increase in the average level of prices in an economy? A) recession B) disinflation C) deflation D) inflation
d
What happened to the price level between 1929 and 1932? A) It did not change. B) Inflation reached 20%. C) Inflation hovered around 5%. D) Deflation reached 10%.
d
When an economy experiences volatile and unpredictable hyperinflation: A) people will decrease their borrowing. B) people will increase their lending. C) borrowing and lending won't be affected. D) it causes a breakdown of financial intermediation.
d
According to the quantity theory of money, a change in the money supply affects: A) real GDP in the short run but not in the long run. B) real GDP in the long run but not in the short run. C) nominal GDP in the short run but not in the long run. D) nominal GDP in the long run but not in the short run.
a
According to the quantity theory, which of the following could cause the price level to decrease? A) The population spends less money. B) The population spends money faster. C) Nominal GDP rises. D) The government spends more.
a
As a result of a positive shock to : A) inflation and output growth increase in the short run, but in the long run they return to the rates before the shock. B) inflation and output growth decrease in the short run, but in the long run they return to the rates before the shock. C) inflation increases and output growth decreases in the short run, but in the long run they return to the rates before the shock. D) inflation and output growth increase in both the short run and the long run.
a
By 1932, the real growth rate of the U.S. economy was: A) -13%. B) -3%. C) 2%. D) 4%.
a
Figure: Real Shocks From Point X in the accompanying graph, an increase in the supply of oil could cause the economy to move to Point: A) W. B) X. C) Y. D) Z.
a
If the growth rate of the money supply decreases from 10% to 5%, which of the following is a prediction of the quantity theory of money? A) disinflation B) deflation C) hyperinflation D) money illusion
a
If the inflation rate falls from 4% in 2005 to 2% in 2006, then: A) disinflation has occurred. B) deflation has occurred. C) the average price level has declined. D) the value of money has increased.
a
If velocity is stable, then equals: A) 0%. B) 1%. C) 10%. D) 100%.
a
In 2011, the major earthquake and tsunami in Japan destroyed much of the capital infrastructure in Japan. Those natural disasters were examples of a: A) negative shock to the long-run aggregate supply curve. B) positive shock to the long-run aggregate supply curve. C) negative shock to the AD curve. D) positive shock to the AD curve.
a
In the equation , what does stand for? A) real GDP B) nominal GDP C) growth in real GDP growth D) growth in nominal GDP growth
a
In the quantity theory of money, growth of _____ is the cause of inflation. A) the money supply B) velocity C) real GDP D) the CPI
a
The aggregate demand curve indicates that at a given spending growth rate, a higher inflation is related to a: A) lower real GDP growth rate. B) higher money supply growth rate. C) lower velocity growth rate. D) higher unemployment rate.
a
The case of hyperinflation in Zimbabwe in the late 2000s was an example of the effects of: A) the government monetizing its debt. B) large rainfall shocks. C) amplification mechanisms. D) a lack of foreign aid.
a
The economy's potential or "Solow" growth rate fluctuates over time because of: A) real shocks. B) changes in the rate of inflation. C) monetary shocks. D) demand shocks.
a
Which measure of the average price level most closely corresponds to a student's daily economic activities? A) consumer price index B) producer price index C) GDP deflator D) household price index
a
Which of the following is NOT an example of a real shock? A) an increase in sales tax revenues due to population growth B) a major decline in the price of oil due to the discovery of new oil reserves in Alaska C) a drought in California that reduces the supply of crops D) a strike in the airline industry
a
Which of the following is an explanation for why prices may be sticky in the short run? A) menu costs B) price expectations C) a vertical long-run aggregate supply curve D) money illusion
a
Which statement best describes one of the profound effects of the 1973 oil crisis on the U.S. economy? A) Consumer preferences moved away from big cars and toward smaller cars. B) Employment in car manufacturing firms increased significantly. C) Gasoline prices fell significantly. D) Real GDP growth increased.
a
Year Predicted Inflation Rate Actual Inflation Rate 2000 3% 3% 2001 3% 2% 2002 7% 9% 2003 5% 4% 2004 4% 7% (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 1 year. In which year did lenders receive exactly the amount of real interest they expected? A) 2000 B) 2002 C) 2003 D) 2004
a
_____ is a decrease in the average level of prices, whereas _____ is a reduction in the inflation rate. A) Deflation; disinflation B) Disinflation; deflation C) Stagflation; disinflation D) Deflation; stagflation
a
A major problem with inflation is that after it starts: A) it always stops quickly because the economy always corrects itself naturally. B) it is easy to stop as long as it is fully expected. C) it is difficult to stop without experiencing high unemployment. D) it can never be stopped with any government policy.
c
A measure of the average price received by suppliers is the: A) consumer price index. B) GDP deflator. C) producer price index. D) exchange rate.
c
An increase in the rate of spending growth must flow into either higher inflation or: A) higher deflation. B) lower inflation. C) higher growth. D) lower growth.
c
Deflation is: A) the average number of times a dollar is spent on final goods and services in a year. B) mistaking changes in nominal prices for changes in real prices. C) a decrease in the average level of prices. D) an increase in the average level of prices.
c
If the CPI was 125 last year and is now 135, then the inflation rate last year was: A) 6%. B) 7%. C) 8%. D) 10%.
c
If the money supply is $1 million, the velocity of money is 10, and the price level is 100, what is real GDP? A) $1,000 B) $10,000 C) $100,000 D) $1 million
c
If the price of gasoline increased 100% during a period of time when inflation was 100%, then the relative real price of gasoline would: A) increase. B) decrease. C) remain constant. D) increase or decrease, depending on whether income had changed or not.
c
In a diagram with the inflation rate on the vertical axis and the real growth rate on the horizontal axis, the long-run aggregate supply curve is: A) upward sloping. B) downward sloping. C) a vertical line at the Solow growth rate. D) a horizontal line at the expected inflation rate.
c
In recent years, negative oil price shocks have typically been accompanied by: A) no productivity shocks. B) negative productivity shocks. C) positive productivity shocks. D) both positive and negative productivity shocks.
c
Menu costs are the costs associated with changing: A) wages. B) jobs. C) prices. D) waiters.
c
Politicians and especially the general public worry about recessions because of: A) high interest rates. B) high inflation. C) high unemployment. D) lower wages.
c
Suppose a nation's CPI is 150 in Year 1 and 180 in Year 2. What is the rate of inflation? A) 17% B) 15% C) 20% D) 25%
c
The Fisher effect is the tendency of: A) real interest rates to rise with expected inflation rates. B) real interest rates to rise with unexpected inflation rates. C) nominal interest rates to rise with expected inflation rates. D) nominal interest rates to rise with unexpected inflation rates.
c
The GDP deflator: A) measures the average price for a basket of goods bought by an average consumer. B) measures the average price received by producers. C) measures the average price of all final goods and services produced. D) is the price index adjusted with changes in GDP.
c
The average rate of inflation in the United States over the past 10 years has been around 2.4%. If this trend continues, prices in the United States will double in about _____ years. A) 10 B) 18 C) 29 D) 39
c
The short-run aggregate supply curve is upward-sloping because: A) in the short run, an increase in spending leads to an increase in output. B) wages increase with an increase in output in the short run. C) wages and prices are sticky in the short run. D) an increase in spending only leads to an increase in prices.
c
Using a graph of the AD and long-run aggregate supply curves, the Internet revolution of the 1990s caused: A) both real growth and inflation to increase. B) both real growth and inflation to decrease. C) real growth to increase and inflation to decrease. D) real growth to decrease and inflation to increase.
c
What effect did reducing U.S. inflation from 13.5% in 1980 to 3% in 1983 have? A) Wealth was shifted from lenders to borrowers. B) The unemployment rate fell to 4%. C) The country experienced a recession. D) Per capita income increased by 18 % in 3 years.
c
What two components of the quantity theory of money are assumed to be stable over time? A) the velocity of money and the price level B) real GDP and price level C) real GDP and the velocity of money D) the money supply and the velocity of money
c
Which of the following is NOT a positive aggregate demand shock? A) a faster money growth B) decreased import growth C) lower growth of government spending D) increased wealth
c
Which of the following would cause the AD curve to shift to the right? A) a decrease in consumer confidence B) a decrease in the inflation rate C) an increase in consumer wealth D) an increase in the short-run aggregate supply curve
c
Year CPI (End-of- Year Value) 1999 110 2000 115 2001 117 2002 115 (Table: CPI) According to the table, in which of the following years did this country experience disinflation? A) 2001 only B) 2002 only C) both 2001 and 2002 D) neither 2001 nor 2002
c
Year CPI (End-of-Year Value) 2005 195.3 2006 201.6 2007 207.3 2008 215.3 2009 214.5 2010 218.1 (Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. What was the approximate inflation rate over the period 2007 to 2008? A) 8.00% B) 21.53% C) 3.86% D) 3.72%
c
When the velocity of money and real GDP are fixed, increases in the money supply: A) result in lower velocity. B) are impossible because the money supply must also be fixed. C) must cause decreases in the price level. D) must cause increases in the price level.
d
Which of the following is NOT consistent with points along the long-run aggregate supply curve? A) Real GDP is growing at its long-run potential growth rate. B) All prices are fully flexible. C) All real factors of production are being fully utilized. D) Real output growth is negatively related to inflation.
d
Which of the following is an example of a negative shock to an economy? A) decreases in oil prices B) tax cuts C) new technology D) terrorist attacks
d
Which one of the following is NOT a cost of inflation? A) wasted resources associated with price confusion B) higher tax burdens if tax brackets are not adjusted for inflation C) wealth redistribution from private citizens to the government D) an automatic decrease in real wages throughout the period of inflation.
d
