ECON 312 - Homework 7 (CH 5)

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate implied by the Fisher equation: (A) increases by 2 percent. (B) increases by 1 percent. (C) remains constant. (D) decreases by 1 percent.

(B) increases by 1 percent.

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real gross domestic product (GDP) must be _____ percent. (A) 3 (B) 4 (C) 9 (D) 11

(A) 3

In the case of an unanticipated increase in inflation: (A) creditors with an unindexed contract are hurt because they get less than they expected in real terms. (B) creditors with an indexed contract gain because they get more than they contracted for in nominal terms. (C) debtors with an unindexed contract do not gain because they pay exactly what they contracted for in nominal terms. (D) debtors with an indexed contract are hurt because they pay more than they contracted for in nominal terms.

(A) creditors with an unindexed contract are hurt because they get less than they expected in real terms.

The costs of reprinting catalogs and price lists because of inflation are called: (A) menu costs. (B) shoeleather costs. (C) variable yardstick costs. (D) fixed costs.

(A) menu costs.

Which of these statements about nominal interest rate is TRUE? (A) Nominal interest rate declines when the money growth rate rises. (B) Nominal interest rate increases when the money growth rate rises. (C) Nominal interest rate remains unchanged when the money growth rate rises. (D) Nominal interest rate rises less than 1 percent for each 1 percentage point rise in the money growth rate.

(B) Nominal interest rate increases when the money growth rate rises.

A rate of inflation that exceeds 50 percent per month is typically referred to as a: (A) conflagration. (B) hyperinflation. (C) deflation. (D) disinflation.

(B) hyperinflation.

The quantity theory of money assumes that: (A) income is constant. (B) velocity is constant. (C) prices are constant. (D) the money supply is constant.

(B) velocity is constant.

If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in: (A) inflation of 1 percent and the nominal interest rate of less than 1 percent. (B) inflation of 1 percent and the nominal interest rate of 1 percent. (C) inflation of 1 percent and the nominal interest rate of more than 1 percent. (D) both inflation and the nominal interest rate of less than 1 percent.

(B) inflation of 1 percent and the nominal interest rate of 1 percent.

Hyperinflations ultimately are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is frequently a government's: (A) desire to increase prices throughout the economy. (B) need to generate revenue to pay for spending. (C) responsibility to increase nominal interest rates by increasing expected inflation. (D) inability to buy government securities through open-market operations.

(B) need to generate revenue to pay for spending.

The demand for real money balances is generally assumed to: (A) be exogenous. (B) be constant. (C) increase as real income increases. (D) decrease as real income increases.

(C) increase as real income increases.

The ex ante real interest rate is equal to the nominal interest rate: (A) minus the inflation rate. (B) plus the inflation rate. (C) minus the expected inflation rate. (D) plus the expected inflation rate.

(C) minus the expected inflation rate.

The real interest rate is equal to the: (A) mount of interest that a lender actually receives when making a loan. (B) nominal interest rate plus the inflation rate. (C) nominal interest rate minus the inflation rate. (D) nominal interest rate.

(C) nominal interest rate minus the inflation rate.

If the Fed announces that it will raise the money supply in the future but does not change the money supply today, (A) both the nominal interest rate and the current price level will decrease. (B) the nominal interest rate will increase and the current price level will decrease. (C) the nominal interest rate will decrease and the current price level will increase. (D) both the nominal interest rate and the current price level will increase.

(D) both the nominal interest rate and the current price level will increase.

If income velocity is assumed to be constant, but no other assumptions are made, the level of _____ is determined by M. (A) prices (B) real gross domestic product (GDP) (C) transactions (D) nominal GDP

(D) nominal GDP