econ2

9. With the value of money on the vertical axis, the money supply curve is a. upward-sloping. b. downward-sloping. c. horizontal. d. vertical.

D

11. Money demand depends on a. the price level and the interest rate. b. the price level but not the interest rate. c. the interest rate but not the price level. d. neither the price level nor the interest rate.

A

15. If the Fed increases the money supply, then 1/P a. falls, so the value of money falls. b. falls, so the value of money rises. c. rises, so the value of money falls. d. rises, so the value of money rises

A

18. Refer to Figure 30-1. If the current money supply is MS1, then a. equilibrium exists when the value of money is 2. b. equilibrium exists when the equilibrium is at point D. c. equilibrium exists when the value of money is 1. d. there is excess demand if the value of money is 2.

A

26. Velocity is computed as the a. price level times real GDP divided by the money supply. b. price level times the money supply divided by real GDP. c. real GDP times the money supply divided by the price level. d. real GDP times the money supply divided by the rate at which money changes hands.

A

30. During the 2008 financial crisis velocity decreased. This means that the rate at which money changed hands a. decreased. Other things the same, a decrease in velocity decreases the price level. b. decreased. Other things the same, a decrease in velocity increases the price level. c. increased. Other things the same, an increase in velocity decreases the price level. d. increased. Other things the same, an increase in velocity increases the price level.

A

32. The evidence from hyperinflations indicates that money growth and inflation a. are positively related, which is consistent with the quantity theory of money. b. are positively related, which is not consistent with the quantity theory of money. c. are not related in a discernible fashion, which is consistent with the quantity theory of money. d. are not related in a discernible fashion, which is not consistent with the quantity theory of money.

A

35. If the nominal interest rate is 5 percent and there is a deflation rate of 3 percent, what is the real interest rate? a. 8 percent b. 2 percent c. 15 percent d. 1.7 percent

A

36. From the early 1980's through the 1990's, the nominal interest rate a. fell because the Fed got inflation under control. b. fell because the Fed let inflation get out of control. c. rose because the Fed got inflation under control. d. rose because the Fed let inflation get out of control.

A

45. Given a nominal interest rate of 6 percent, in which of the following cases would you earn the lowest after-tax real rate of interest? a. Inflation is 4 percent; the tax rate is 5 percent. b. Inflation is 3 percent; the tax rate is 20 percent. c. Inflation is 2 percent; the tax rate is 30 percent. d. The after-tax real interest rate is the same for all of the above.

A

50. Which of the following is an example of the menu costs of inflation? a. Tito's Restaurant has to print new menus to update its prices compared to other prices in the economy b. Beto sells stocks and earns a real capital gain of $50, but is taxed for the nominal capital gain of $75 c. During Bolivia's hyperinflation, workers rushed to immediately convert their wages from pesos to black-market dollars d. The after-tax real interest rate is lower when inflation is higher

A

8. If P denotes the price of goods and services measured in terms of money, then a. 1/P represents the value of money measured in terms of goods and services. b. P can be interpreted as the inflation rate. c. the supply of money influences the value of P, but the demand for money does not. d. All of the above are correct.

A

1. Inflation can be measured by the a. change in the consumer price index. b. percentage change in the consumer price index. c. percentage change in the price of a specific commodity. d. change in the price of a specific commodity.

B

12. When the money market is drawn with the value of money on the vertical axis, as the price level decreases the quantity of money a. demanded increases. b. demanded decreases. c. supplied increases. d. supplied decreases.

B

16. When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve buys bonds, then the money supply curve a. shifts rightward, causing the value of money measured in terms of goods and services to rise. b. shifts rightward, causing the value of money measured in terms of goods and services to fall. c. shifts leftward, causing the value of money measured in terms of goods and services to rise. d. shifts leftward, causing the value of money measured in terms of goods and services to fall.

B

2. In which of the following cases was the inflation rate 10 percent over the last year? a. One year ago the price index had a value of 110 and now it has a value of 120. b. One year ago the price index had a value of 120 and now it has a value of 132. c. One year ago the price index had a value of 134 and now it has a value of 150. d. One year ago the price index had a value of 145 and now it has a value of 163.

B

27. If M = 9,000, P = 6, and Y = 1,500, what is velocity? a. 0.167. b. 1. c. 4. d. 36.

B

29. According to the assumptions of the quantity theory of money, if the money supply increases by 5 percent, then a. nominal and real GDP would rise by 5 percent. b. nominal GDP would rise by 5 percent; real GDP would be unchanged. c. nominal GDP would be unchanged; real GDP would rise by 5 percent. d. neither nominal GDP nor real GDP would change.

B

3. If the price level increased from 200 to 250, then what was the inflation rate? a. 50 percent b. 25 percent c. 20 percent d. None of the above is correct.

B

33. The inflation tax falls mostly heavily on a. those who hold a lot of currency and accounts for a large share of U.S. government revenue. b. those who hold a lot of currency but accounts for a small share of U.S. government revenue. c. those who hold little currency and accounts for a large share of U.S. government revenue. d. those who hold little currency but accounts for a small share of U.S. government revenue

B

37. The Fisher effect a. says the government can generate revenue by printing money. b. says there is a one for one adjustment of the nominal interest rate to the inflation rate. c. explains how higher money supply growth leads to higher inflation. d. explains how prices adjust to obtain equilibrium in the money market.

B

4. When prices are falling, economists say that there is a. disinflation. b. deflation. c. a contraction. d. an inverted inflation.

B

42. Relative-price variability a. rises with inflation, leading to an improved allocation of resources. b. rises with inflation, leading to a misallocation of resources. c. falls with inflation, leading to an improved allocation of resources. d. falls with inflation, leading to a misallocation of resources.

B

43. You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the price level. Before taxes, you experienced a. both a nominal gain and a real gain, and you paid taxes on the nominal gain. b. both a nominal gain and a real gain, and you paid taxes only on the real gain. c. a nominal gain, but no real gain, and you paid taxes on the nominal gain. d. a nominal gain, but no real gain, and you paid no taxes on the transaction.

B

46. Steve purchases some land for $30,000. He maintains it, but makes no improvements to it. One year later he sells it for $32,000. Stephanie puts $30,000 in a savings account that pays 6% interest. Steve has to pay the 50% capital gains tax, Stephanie is in the 35% tax bracket. The inflation rate was 2%. Who had the higher before-tax real gain and who had the higher after-tax real gain? a. Steve had both the higher before-tax real gain and the higher after-tax real gain. b. Steve had the higher before-tax real gain but Stephanie had the higher after-tax real gain. c. Stephanie had the higher before-tax real gain but Steve had the higher after-tax real gain. d. Stephanie had both the higher before-tax real gain and the higher after-tax real gain.

B

7. When there is inflation, the number of dollars needed to buy a representative basket of goods a. increases, and so the value of money rises. b. increases, and so the value of money falls. c. decreases, and so the value of money rises. d. decreases, and so the value of money falls

B

10. The supply of money increases when a. the price level falls. b. the interest rate increases. c. the Fed makes open-market purchases. d. money demand increases.

C

14. When the money market is drawn with the value of money on the vertical axis, if the price level is below the equilibrium level, there is an a. excess demand for money, so the price level will rise. b. excess demand for money, so the price level will fall. c. excess supply of money, so the price level will rise. d. excess supply of money, so the price level will fall.

C

21. Refer to Figure 30-3. At the end of 2009 the relevant money-supply curve was the one labeled MS1. At the end of 2010 the relevant money-supply curve was the one labeled MS2. Assuming the economy is always in equilibrium, what was the economy's approximate inflation rate for 2010? a. -33 percent b. 17 percent c. 50 percent d. 67 percent

C

41. Which of the following is an example of menu costs? a. deciding on new prices b. printing new price lists c. advertising new prices d. All of the above are examples of menu costs.

D

47. Wealth is redistributed from debtors to creditors when inflation is a. high, whether it is expected or not. b. low, whether it is expected or not. c. unexpectedly high. d. unexpectedly low.

D

22. When shopping you notice that a pair of jeans costs $20 and that a tee-shirt costs $10. You compute the price of jeans relative to tee-shirts. a. The dollar price of jeans and the relative price of jeans are both nominal variables. b. The dollar price of jeans and the relative price of jeans are both real variables. c. The dollar price of jeans is a nominal variable; the relative price of jeans is a real variable. d. The dollar price of jeans is a real variable; the relative price of jeans is a nominal variable

C

25. The principle of monetary neutrality implies that an increase in the money supply will a. increase real GDP and the price level. b. increase real GDP, but not the price level. c. increase the price level, but not real GDP. d. increase neither the price level nor real GDP.

C

28. Based on the quantity equation, if M = 150, V = 4, and Y = 300, then P = a. 8. b. 0.5. c. 2. d. 3.

C

38. The idea that inflation by itself reduces people's purchasing power is called a. the inflation tax. b. menu costs. c. the inflation fallacy. d. shoeleather costs.

C

39. People can reduce the inflation tax by a. reducing savings. b. increasing deductions on their income tax. c. reducing cash holdings. d. None of the above is correct.

C

40. The shoeleather cost of inflation refers to a. the redistributional effects of unexpected inflation. b. the time spent searching for low prices when inflation rises. c. the waste of resources used to maintain lower money holdings. d. the increased cost to the government of printing more money.

C

44. You put money into an account and earn an after-tax real interest rate of 2.5 percent. If the nominal interest rate on the account is 8 percent and the inflation rate is 2 percent, then what is the tax rate? a. 28.00 percent b. 36.25 percent c. 43.75 percent d. 67.50 percent

C

48. High and unexpected inflation has a greater cost a. for those who borrow than for those who save. b. for those who hold a little money than for those who hold a lot of money. c. for those who have fixed nominal wages than for those who have nominal wages that adjust with inflation. d. All of the above are correct

C

49. Which of the following is an example of the shoeleather costs of inflation? a. Tito's Restaurant has to print new menus to update its prices compared to other prices in the economy b. Beto sells stocks and earns a real capital gain of $50, but is taxed for the nominal capital gain of $75 c. During Bolivia's hyperinflation, workers rushed to immediately convert their wages from pesos to black-market dollars d. The after-tax real interest rate is lower when inflation is higher

C

5. The term hyperinflation refers to a. the spread of inflation from one country to others. b. a decrease in the inflation rate. c. a period of very high inflation. d. inflation accompanied by a recession.

C

6. When the price level falls, the number of dollars needed to buy a representative basket of goods a. increases, so the value of money rises. b. increases, so the value of money falls. c. decreases, so the value of money rises. d. decreases, so the value of money falls.

C

13. When the money market is drawn with the value of money on the vertical axis, a. money demand slopes upward and money supply is horizontal. b. money demand slopes downward and money supply is horizontal. c. money demand slopes upward and money supply is vertical. d. money demand slopes downward and money supply is vertical

D

17. Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, then there is an excess a. demand for money that is represented by the distance between points A and C. b. demand for money that is represented by the distance between points A and B. c. supply of money that is represented by the distance between points A and C. d. supply of money that is represented by the distance between points A and B.

D

23. Suppose the price level rises, but the number of dollars you are paid per hour stays the same. This means that your a. nominal wage is higher. b. nominal wage is lower. c. real wage is higher. d. real wage is lower

D

24. Kelly puts money in a savings account. One year later she has two percent more dollars and can buy three percent more goods. Kelly earned a real interest rate of a. two percent and prices fell one percent. b. two percent and prices rose one percent. c. three percent and prices rose one percent. d. three percent and prices fell one percent.

D

31. If when the money supply changes, real output and velocity do not change, then a 2 percent increase in the money supply a. decreases the price level by 2 percent. b. decreases the price level by less than 2 percent. c. increases the price level by less than 2 percent. d. increases the price level by 2 percent.

D

34. Suppose the United States unexpectedly decided to pay off its debt by printing new money. Which of the following would happen? a. People who held money would feel poorer. b. Prices would rise. c. People who had lent money at a fixed interest rate would feel poorer. d. All of the above are correct.

D