Macro Ch. 17

True'False: In the long run, an increase in the money supply tends to have an effect on real variables but no effect on nominal variables.

False; the money supply tends to have an effect on nominal variables but not real variables

True/False: The shoeleather costs of inflation should be approximately the same for a medical doctor and for an unemployed worker.

False; the opportunity cost of trips to the bank are greater for a medical doctor

True/False: If the nominal interest rate is 7 percent and the inflation is 5 percent, the real interest rate is 12 percent.

False; the real interest rate is 2 percent because 7% - 5% = 2

True/False: If inflation turns out to be higher than people expected, wealth is redistributed to lenders from borrowers.

False; wealth is redistributed to borrowers from lenders

The one-to-one adjustment of the nominal interest rate to inflation

Fisher effect

An increase in the overall level of prices

Inflation

The practice of a government raising revenue by printing money a tax on people who hold money

Inflation tax

Extraordinarily high inflation

Hyperinflation

The costs associated with the changing prices

Menu costs

The poverty that changes in the money supply affect nominal variables but not real variables

Monetary neutrality

Interest rate uncorrected for inflation

Nominal interest rate

Variables measured in monetary units

Nominal variables

M x V = P x Y

Quantity of equation

The theory that the quantity of money determines prices and the growth rate of money determines inflation

Quantity theory of money

Interest rate corrected for inflation

Real interest rate

Variables measured in physical units

Real variables

Resources wasted when inflation causes people to economize on money hidings

Shoeleather costs

If the nominal interest rate is 6 percent and the inflation rate is 3 percent, the real interest rate is a) 3 percent b) 6 percent c) 9 percent d) 18 percent e) none of the above

a) 3 percent

Suppose that, because of inflation, people in Brazil economize on currency needs. This is an example of a) shoeleather costs b) menu costs c) costs due to inflation-induced tax distortions d) costs due to inflation-induced relative price variability, which misallocates resources e) costs due to confusion and inconvenience

a) shoeleather costs

Velocity is a) the annual rate of turnover of the money supply b) the annual rate of turnover of output c) the annual rate o turnover of business inventories d) highly unstable e) impossible to measure

a) the annual rate of turnover of the money supply

In the long run, the demand for money is most dependent upon a) the level of prices b) the availability of credit cards c) the availability of baking outlets d) the interest rate

a) the level of prices

If the real interest rate is 4 percent, the inflation rate is 6 percent, and the tax rate is 20 percent, what is the after-tax real interest rate? a) 1 percent b) 2 percent c) 3 percent d) 4 percent e) 5 percent

b) 2 percent

The quantity theory of money concludes that an increase in the money supply causes a) a proportional increase in velocity b) a proportional increase in prices c) a proportional increase in real output d) a proportional decrease in velocity e) a proportional decrease in prices

b) a proportional increase in prices

An inflation tax is a) an explicit tax paid quarterly by businesses based on the amount of increase in the prices of their products b) a tax on people who hold money c) a tax on people who hold interest-bearing savings accounts d) usually employed by governments with balanced budgets e) none of the above

b) a tax on people who hold money

When prices rise at an extraordinary high rate, it is called a) inflation b) hyperinflation c) deflation d) hypoinflation e) disinflation

b) hyperinflation

If the money supply grows 5 percent and real output grows 2 percent, prices should rise by a) 5 percent b) less than 5 percent c) more than 5 percent d) none of the above

b) less than 5 percent

Suppose that, because of inflation, a business in Russia must calculate, print, and mail a new price list to its customers each month. This is an example of a) shoeleather costs b) menu costs c) costs due to inflation-induced tax distortions d) arbitrary redistributions of wealth e) the Friedman rule

b) menu costs

An example of a real variable is a) the nominal interest rate b) the ratio of the value of wages to the price of soda c) the price of corn d) the dollar wage e) none of the above

b) the ratio of the value of wages to the price of soda

If actual inflation turns out to be greater than people had expected then a) wealth was redistributed to lenders from borrowers b) wealth was redistributed to borrowers from lenders c) no redistribution occurred d) the real interest rate is unaffected

b) wealth was redistributed to borrowers from lenders

Suppose the nominal interest rate is 7 percent while the money supply is growing at a rate of 5 percent per year. Assuming real output remains fixed, if the government increases the growth rate of the money supply from 5 percent to 9 percent, the Fisher effect suggests that, in the long run, the nominal interest rate should become a) 4 percent b) 9 percent c) 11 percent d) 12 percent e) 16 percent

c) 11 percent

Countries that employ an inflation tax do so because a) the government doesn't understand the causes and consequences of inflation b) the government has a balanced budget c) government expenditures are high and the government has inadequate tax collections and difficulty borrowing d) an inflation tax is the most equitable of all taxes e) an inflation tax is the most progressive (paid by the rich) of all taxes

c) government expenditures are high and the government has inadequate tax collections and difficulty borrowing

In the long run, inflation is caused by a) banks that have given market power and refuse to lend money b) governments that raise taxes so high that it increases the cost of doing business and, hence, raises prices c) governments that print too much money d) increases in the price of inputs, such as labor and oil e) none of the above

c) governments that print too much money

The quantity equation states that a) money x price level = velocity x real output b) money x real output = velocity x price level c) money x velocity = price level x real output d) none of the above is true

c) money x velocity = price level x real output

Rate at which money circulates

Velocity of money

True/False: The quantity theory of money suggests that an increase in the money supply increases real output proportionately.

False; it increases price proportionately

Profits made from selling an asset for greater than the purchase price

Capital gains

The theoretical separation of nominal and real variables

Classical dichotomy

A decrease in the overall level of prices

Deflation

True/False: Inflation erodes the value of people's wages and reduces their standard of living.

False; inflation in income goes in hand with inflation in prices

True/False: Inflation tends to stimulate because it raises the after-tax real return to saving.

False; inflation tends to reduce the after-tax return to saving

True/False: Monetary neutrality means that a change in the money supply doesn't cause a change in anything at all.

False; it doesn't cause a change in real variables

True/False: An increase in the price level is the same as a decrease in the value of money.

True

True/False: An inflation tax is "paid" by those who hold money because inflation reduces the value of their money holdings.

True

True/False: Countries that spend more money than they can collect from taxing or borrowing tend to print too much money, which causes inflation.

True

True/False: If the money supply is $500, real output is 2,500 units, and the average rice of a unit of real output is $2, the velocity of money is 10.

True

True/False: If the price level were to double, the quantity of money demanded would double because people would need twice as much money to cover the same transactions.

True

True/False: Inflation reduces the relative price of goods whose prices have been temporarily held constant to avoid the costs associated with changing prices.

True

True/False: The fisher effect suggests that, in the long run, if the rate of inflation rises from 3 to 7 percent, the nominal interest rate should increase 4 percent points, and the real interest rate should remain unchanged.

True

If money is neutral, a) an increase in the money supply does nothing b) the money supply cannot be changed because it is tied to a commodity such as gold c) a change in the money supply only affects real variables such as real output d) a change in he money supply only affects nominal variables such as prices and dollar wages e) a change in the money supply reduces velocity proportionately; therefore, there is no effect on either prices or real output

d) a change in he money supply only affects nominal variables such as prices and dollar wages

Which of the following costs of inflation does not occur when inflation is constant and predictable? a) shoeleather costs b) menu costs c) costs due to inflation-induced tax distortions d) arbitrary redistributions of wealth e) costs due to confusion and inconvenience

d) arbitrary redistributions of wealth

Which of the following statements about inflation is not true? a) Unanticipated inflation redistributes wealth b) An increase in inflation increases nominal interest rates c) If there is inflation, taxing nominal interest income reduces the return to saving and reduces the rate of economic growth d) inflation reduce people's real purchasing power because it raises the cost of the things people buy

d) inflation reduce people's real purchasing power because it raises the cost of the things people buy

If the price level doubles, a) the quantity demanded of money falls by itself b) the money supply has been cut by half c) nominal income is unaffected d) the value of money has been cut by half e) none of the above is true

d) the value of money has been cut by half