Quiz #7

There is strong link between changes in the money supply and inflation

In the long run, but not in the short run.

Which of the following is one of the most important benefits of money in an economy?

Money makes exchange easier, leading to more specialization and higher productivity.

According to the quantity theory of money, deflation will occur if the

Money supply grows at a slower rate than real GDP.

According to the quantity theory of money, inflation is caused by

The money supply growing faster than real GDP

If a person takes $100 from his/her piggy bank at home and puts it in his/her savings account, then M1 will ___ and M2 will ____.

decrease, not change

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.

4%

Your roommate argues that he can think of no better situation than living in a deflationary economy, as prices of goods and services would continuously fall. You disagree and argue that during a deflation, people can be made worse off because

Borrowers will have to pay increasing amounts in real terms over time.

One of the main reasons for hyperinflation episodes is____

Larger government budget deficits

Fiat money has

Little to no intrinsic value and is authorized by the central bank or government body.

The quantity theory of money was derived from the quantity equation by asserting that

The velocity of money was fixed