Chapter 31

Which of the following is an example of money illusion assuming that inflation is 5%? A. You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend. B. You do not receive a raise at your part-time job but cut out some expenses as you notice some prices rising. C. You receive a 10% raise at your part-time job and start spending extra money on entertainment every weekend. D. You receive a 5% raise at your part-time job but do not increase or decrease your spending.

A. You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend.

When disinflation arises unexpectedly, the real interest rate will _____ the equilibrium rate, which will benefit _____. A. exceed; lenders and harm borrowers B. fall short of; borrowers and harm lenders C. exceed; benefit borrowers and harm lenders D. fall short of; lenders and harm borrowers

A. exceed; lenders and harm borrowers

The quantity theory of money is a theory of: A. inflation. B. the growth of tax burdens. C. money growth in the United States. D. economic growth.

A. inflation.

Why could very high rates of inflation cause velocity to increase? A. The more people earn, the faster prices rise. B. The more money loses its value, the faster people try to spend it. C. The more inflation there is, the more there is to buy. D. The more people earn, the faster they spend it.

B. The more money loses its value, the faster people try to spend it.

Because of money illusion, inflation usually confuses: A. firms. B. consumers, workers, and firms. C. workers. D. consumers.

B. consumers, workers, and firms.

If people expect an inflation rate of 3% and later it turns out to be 5%, then the real rate of return will be: A. 5%. B. less than the equilibrium rate. C. 3%. D. greater than the equilibrium rate.

B. less than the equilibrium rate.

Why do we use the "real" prices of goods to measure how expensive things have become? A. to estimate the periods when hyperinflation has occurred B. to see whether there have been any changes in our purchasing power C. to find out what the current prices of goods and services are D. to find out what the inflation rate has been

B. to see whether there have been any changes in our purchasing power

Which of the following correctly represents deflation? A. Eπ > π B. π < 0 C. Eπ = π D. Eπ < π

B. π < 0

Jordan loaned Taylor $1,200 on March 15, 2009. Taylor returned $1,260 on March 14, 2010. Inflation was 2% over the 1-year period. What is the real interest rate that Taylor paid? A. 2% B. 5% C. 3% D. 7%

C. 3%

If the money supply in a country is $200 million, the velocity of money is 5, and real GDP is 250 million, the price level of the country must be: A. 8.00. B. 6.25. C. 4.00. D. 1.25.

C. 4.00.

The argument that "inflation is always and everywhere a monetary phenomenon" is consistent with: A. the Fisher effect. B. the theory of money illusion. C. the quantity theory of money. D. the theory of price confusion.

C. the quantity theory of money

For a tax system in which higher income earners pay a larger share of their incomes in taxes, a higher inflation rate: A. raises the tax burden of taxpayers. B. does not affect the tax burden of taxpayers. C. can raise or lower the tax burden of taxpayers, depending on their income levels. D. lowers the tax burden of taxpayers.

A. raises the tax burden of taxpayers.

To compare the $1-an-hour your grandfather earned in 1950 with the $8-an-hour you earn today, you would need to: A. calculate your grandfather's nominal wage in 1950 and compare it to your wage today. B. calculate real wages in both 1950 and today. C. simply compare $1-an-hour to $8-an-hour. D. add the inflation rates in each year since 1950 until today and add this to your grandfather's wage.

B. calculate real wages in both 1950 and today.

If you earned $10-an-hour in 2005 when the CPI was 100, and you earn $11-an-hour today when the CPI is 120, then your real wage rate has _____ since 2005. A. increased 10% B. decreased C. remained the same D. increased 20%

B. decreased

High and volatile inflation: A. causes the price of goods and services to deviate from the market price. B. destroys the ability of market prices to send signals about the value of resources and opportunities. C. increases the purchasing power of money and income. D. creates high supply of goods and services.

B. destroys the ability of market prices to send signals about the value of resources and opportunities.

If the CPI was 100 in 2000 and 120 in 2010 and the price of a gallon of milk was $4.00 in 2000 and $4.80 in 2010, then in relative terms the real of price milk between 2000 and 2010: A. cannot be determined without knowing the base year. B. remained the same. C. decreased by 20%. D. increased by 20%.

B. remained the same.

The case of hyperinflation in Zimbabwe in the late 2000s was an example of the effects of: A. amplification mechanisms. B. the government monetizing its debt. C. large rainfall shocks. D. a lack of foreign aid.

B. the government monetizing its debt.

The quantity theory of money predicts that the main cause of inflation is increases in: A. prices. B. the money supply. C. consumption. D. real output.

B. the money supply.

Which of the following statements highlights the difference between the CPI (consumer price index) and the GDP deflator? A. The CPI measures the average prices of inputs in the production process, whereas the GDP deflator measures the average prices of goods and services purchased by consumers. B. The CPI measures the average prices of all final goods and services purchased by consumers, whereas the GDP deflator measures the average prices of all inputs used in the economy. C. The CPI measures the average prices of goods and services consumed by typical consumers, whereas the GDP deflator measures the average prices of all goods and services in the economy. D. The CPI measures the average prices of retail goods and services, whereas the GDP deflator measures the average prices of wholesale goods.

C. The CPI measures the average prices of goods and services consumed by typical consumers, whereas the GDP deflator measures the average prices of all goods and services in the economy.

Table: Consumer Price Index 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 disinflation? A. 2009 only B. neither 2007 nor 2009 C. both 2007 and 2009 D. 2007 only

C. both 2007 and 2009

When we examine data from different countries, higher money growth has consistently been associated with: A. hyperinflation. B. disinflation. C. higher inflation. D. deflation.

C. higher inflation.

Current forecasts say that mild inflation is expected next year. If, however, deflation occurs instead: A. both lenders and borrowers on existing fixed rate loans will gain. B. both lenders and borrowers on existing fixed rate loans will lose. C. lenders on existing fixed rate loans will gain while borrowers will lose. D. borrowers on existing fixed rate loans will gain while lenders will lose.

C. lenders on existing fixed rate loans will gain while borrowers will lose.

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; borrowers to lenders B. greater; lenders to borrowers C. less; lenders to borrowers D. less; borrowers to lenders

C. less; lenders to borrowers

Money illusion is a condition in which people: A. expect the value of money will illusively surge. B. mistakenly confuse changes in nominal GDP for changes in real GDP. C. mistakenly confuse changes in nominal prices for changes in real prices. D. see money as an illusion for value.

C. mistakenly confuse changes in nominal prices for changes in real prices.

Money illusion occurs when people: A. see changes in real prices and mistake them for changes in nominal prices. B. correctly see changes in real prices. C. see changes in nominal prices and mistake them for changes in real prices. D. correctly see changes in nominal prices.

C. see changes in nominal prices and mistake them for changes in real prices.

The text states, "inflation is a type of tax." This tax refers to _____ when inflation occurs. A. a special tax on taxpayers in order for the government to balance its budget B. a higher nominal interest rate of a typical loan C. the lower purchasing power of money D. a higher tax rate that the government must impose

C. the lower purchasing power of money

In the quantity theory of money, growth of _____ is the cause of inflation. A. real GDP B. the CPI C. the money supply D. velocity

C. the money supply

(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 one year. Which year did lenders gain relative to borrowers? A. 2004 B. 2002 C. 2000 D. 2003

D. 2003

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: A. 7.69%. B. 9.23%. C. 10%. D. 8.33%.

D. 8.33%.

How might changes in the money supply be non-neutral in the short run? A. As money growth increases at a faster rate, it will cause real GDP to grow at an even faster rate. B. If producers expect inflation to increase, they will increase supply in order to sell before the arrival of inflation. C. When money supply changes in the short run, it will affect nominal, but not real, variables in the short run. D. As the amount of money circulating in the economy changes before prices respond, the purchases of consumers change accordingly, which leads producers to change production levels.

D. As the amount of money circulating in the economy changes before prices respond, the purchases of consumers change accordingly, which leads producers to change production levels.

Which of the following is a problem with deflation? A. It causes people to pay more taxes. B. Stopping it will cause a recession. C. There is no problem with deflation; falling prices are good for the economy. D. It raises the real cost of debt repayment.

D. It raises the real cost of debt repayment.

If the money supply, the velocity of money, and the price level are fixed, then increases in real GDP: A. cause the money supply, the velocity of money, and the price level to decrease together. B. cause the money supply, the velocity of money, and the price level to increase together. C. occur without changes in the other variables. D. are impossible because real GDP must also be fixed.

D. are impossible because real GDP must also be fixed.

Inflation refers to an increase in the: A. average level of nominal output. B. relative prices of some goods as compared to other goods. C. standard of living. D. average level of prices.

D. average level of prices.

Suppose the average level of prices increased from 100 to 110 between 2007 and 2008, and from 110 to 115 between 2008 and 2009. Between 2008 and 2009, there was: A. inflation in the real price of everything. B. hyperinflation. C. deflation. D. disinflation.

D. disinflation.

According to the quantity theory of money, an increase in the money supply will cause the price level to: A. increase by a greater percentage than the money supply. B. remain relatively constant since money is neutral. C. increase by a smaller percentage than the money supply. D. increase by about the same percentage as the money supply.

D. increase by about the same percentage as the money supply.

For a given nominal interest rate, an increase in deflation will cause the real rate of interest to: A. remain relatively constant. B. decrease. C. become unpredictable. D. increase.

D. increase.

Debt monetization means that a government pays off its debt by: A. borrowing from foreigners. B. lowering inflation. C. raising tax revenues. D. increasing the money supply.

D. increasing the money supply.

According to the quantity theory, what causes inflation in the long run? A. unemployment B. aggregate demand shocks C. unexpected inflation D. money supply growth

D. money supply growth

The quantity theory of money implies that the money supply times the velocity of money equals A. the quantity of goods and services. B. the price level. C. real GDP. D. nominal GDP.

D. nominal GDP.

When the expected rate of inflation is higher than the actual rate of inflation, wealth is: A. not redistributed at all. B. redistributed from lenders to borrowers. C. redistributed at random. D. redistributed from borrowers to lenders.

D. redistributed from borrowers to lenders.