Question 1

The inflation tax alters people's behavior and creates a deadweight loss. Explain.

Accepted Answer

Higher inflation gives people ...

Question 2

Figure 30-2. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. 
-Refer to Figure 30-2. What quantity is measured along the horizontal axis?

Accepted Answer

A)   the price level
B)   the real interest rate
C)   the value of money
D)   the quantity of moneyE) A) and B)
F) A) and C)

Question 3

As the price level decreases, the value of money

Accepted Answer

A)   increases, so people must hold less money to purchase goods and services.
B)   increases, so people must hold more money to purchase goods and services.
C)   decreases, so people must hold more money to purchase goods and services.
D)   decreases, so people must hold less money to purchase goods and services.E) B) and C)
F) C) and D)

Question 4

When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve sells bonds, then the money supply curve

Accepted Answer

A)   shifts right, causing the price level to rise.
B)   shifts right, causing the price level to fall.
C)   shifts left, causing the price level to rise.
D)   shifts left, causing the price level to fall.E) A) and B)
F) A) and C)

Question 5

The price level is a

Accepted Answer

A)   relative variable.
B)   dichotomous variable
C)   real variable.
D)   nominal variable.E) A) and B)
F) B) and D) D

Question 6

When the price level falls, the number of dollars needed to buy a representative basket of goods

Accepted Answer

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.E) A) and D)
F) C) and D)

Question 7

According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then

Accepted Answer

A)   both the price level and real GDP would rise by 5 percent.
B)   the price level would rise by 5 percent and real GDP would be unchanged.
C)   the price level would be unchanged and real GDP would rise by 5 percent.
D)   both the price level and real GDP would be unchanged.E) B) and D)
F) A) and B)

Question 8

Suppose the money market, drawn with the value of money on the vertical axis, is in equilibrium. If the money supply increases, then at the old value of money there is an

Accepted Answer

A)   excess demand for money that will result in an increase in spending.
B)   excess demand for money that will result in a decrease in spending.
C)   excess supply of money that will result in an increase in spending.
D)   excess supply of money that will result in a decrease in spending.E) B) and C)
F) A) and D)

Question 9

Based on past experience, if a country is experiencing hyperinflation, then which of the following would be a reasonable guess?

Accepted Answer

A)   The country has high money supply growth.
B)   Inflation is acting like a tax on everyone who holds money.
C)   The government is printing money to finance its expenditures.
D)   All of the above are correct.E) C) and D)
F) B) and C)

Question 10

There is evidence that the rate at which money changed hands rose during the German hyperinflation. This means that

Accepted Answer

A)   velocity rose. If monetary neutrality holds the rise in velocity increased the ratio M/P.
B)   velocity rose. If monetary neutrality holds the rise in velocity decreased the ratio M/P.
C)   velocity fell. If monetary neutrality holds the fall in velocity increased the ratio M/P.
D)   velocity fell. If monetary neutrality holds the fall in velocity decreased the ratio M/P.E) A) and B)
F) A) and C)

Question 11

Which of the following are costs incurred by people trying to protect themselves from the effects of inflation?

Accepted Answer

A)   Menu costs and shoeleather costs
B)   menu costs but not shoeleather costs
C)   shoeleather costs but not menu costs.
D)   menu costs but not shoeleather costs,E) B) and C)
F) A) and B) A

Question 12

A reduction in the inflation rate would make relative prices

Accepted Answer

A)   less variable, making it more likely that resources will be allocated to their best use.
B)   less variable, making it less likely that resources will be allocated to their best use.
C)   more variable, making it more likely that resources will be allocated to their best use.
D)   more variable, making it less likely that resources will be allocated to their best use.E) A) and D)
F) B) and D)

Question 13

Over the last 80 years, the average annual U.S. inflation rate was about

Accepted Answer

A)   3.6 percent, implying that prices have increased 16-fold.
B)   4 percent, implying that prices have increased 17-fold.
C)   4 percent, implying that prices have increased 16-fold.
D)   3.6 percent, implying that prices increased about 17-fold.E) A) and B)
F) A) and C)

Question 14

Last year, Jane spent all of her income to purchase 200 units of corn at $5 per unit. This year, she spent all of her income to purchase 180 units of corn at $6 per unit.

Accepted Answer

A)   Jane's nominal income and real income decreased this year.
B)   Jane's nominal income decreased this year, but her real income increased.
C)   Jane's nominal income and real income increased this year.
D)   Jane's nominal income increased this year, but her real income decreased.E) A) and B)
F) A) and C)

Question 15

Based on the quantity equation, if M = 150, V = 4, and Y = 300, then P =

Accepted Answer

A)   8.
B)   0.5.
C)   2.
D)   3.E) A) and D)
F) B) and C)

Question 16

An excess supply of money is eliminated by a falling price level

Accepted Answer

A) True 
 B)False

Question 17

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?

Accepted Answer

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.E) All of the above
F) A) and D)

Question 18

The inflation tax

Accepted Answer

A)   is an alternative to income taxes and government borrowing.
B)   taxes most those who hold the most money.
C)   is the revenue created when the government prints money.
D)   All of the above are correct.E) A) and B)
F) B) and C) D

Question 19

U.S. prices rose at an average annual rate of about 3.6 percent over the last 80 years.

Accepted Answer

A) True 
 B)False

Question 20

When the Consumer Price Index increases from 100 to 120

Accepted Answer

A)   more money is needed to buy the same amount of goods, so the value of money falls.
B)   more money is needed to buy the same amount of goods, so the value of money rises.
C)   less money is needed to buy the same amount of goods, so the value of money falls.
D)   less money is needed to buy the same amount of goods, so the value of money rises.E) B) and D)
F) None of the above

Exam 17: Money Growth and Inflation

The inflation tax alters people's behavior and creates a deadweight loss. Explain.

Correct AnswerverifiedHigher inflation gives people ...View AnswerShow Answer

Figure 30-2. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. -Refer to Figure 30-2. What quantity is measured along the horizontal axis?

Correct AnswerverifiedShow Answer

As the price level decreases, the value of money

Correct AnswerverifiedShow Answer

When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve sells bonds, then the money supply curve

Correct AnswerverifiedShow Answer

The price level is a

Correct AnswerverifiedD

When the price level falls, the number of dollars needed to buy a representative basket of goods

Correct AnswerverifiedShow Answer

According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then

Correct AnswerverifiedShow Answer

Suppose the money market, drawn with the value of money on the vertical axis, is in equilibrium. If the money supply increases, then at the old value of money there is an

Correct AnswerverifiedShow Answer

Based on past experience, if a country is experiencing hyperinflation, then which of the following would be a reasonable guess?

Correct AnswerverifiedShow Answer

There is evidence that the rate at which money changed hands rose during the German hyperinflation. This means that

Correct AnswerverifiedShow Answer

Which of the following are costs incurred by people trying to protect themselves from the effects of inflation?

Correct AnswerverifiedA

A reduction in the inflation rate would make relative prices

Correct AnswerverifiedShow Answer

Over the last 80 years, the average annual U.S. inflation rate was about

Correct AnswerverifiedShow Answer

Last year, Jane spent all of her income to purchase 200 units of corn at $5 per unit. This year, she spent all of her income to purchase 180 units of corn at $6 per unit.

Correct AnswerverifiedShow Answer

Based on the quantity equation, if M = 150, V = 4, and Y = 300, then P =

Correct AnswerverifiedShow Answer

An excess supply of money is eliminated by a falling price level

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

The inflation tax

Correct AnswerverifiedD

U.S. prices rose at an average annual rate of about 3.6 percent over the last 80 years.

Correct AnswerverifiedShow Answer

When the Consumer Price Index increases from 100 to 120

Correct AnswerverifiedShow Answer

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D

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A

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D

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