ECO 110 Ch 12 Quiz

In times when prices rise unexpectedly:

borrowers are made better off at the expense of lenders.

If the velocity of money and real GDP are fixed, then the quantity theory of money implies that the price level will:

increase at the same rate as the growth in the money supply.

Inflation hurts the economy because:

it affects the ability of market prices to send signals about the value of resources.

If the nominal interest rate is 8% while the inflation rate is 10%, then the real rate of return for lenders is:

-2%

When people suffer from money illusion, an increase in the money supply:

raises real GDP in the short run.

The "inflation parable" in the text refers to the fact that an unexpected change in the money supply affects:

real GDP only in the short run.

Negative real rates of interest tend to:

reduce economic growth.

In the long run, an increase in the money supply will cause real GDP to:

remain constant.

An assumption of the quantity theory of money is that real GDP growth:

remains relatively constant.

Inflation is painful to stop because stopping it:

requires decreasing the growth rate of the money supply, which typically leads to lower growth overall.

Inflation is:

an increase in the average level of prices.

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:

8.33%

A real price is:

a price that has been corrected for inflation.

According to Nobel laureate Milton Friedman, "inflation is _____."

always and everywhere a monetary phenomenon

Money illusion is:

mistaking changes in nominal prices for changes in real prices.