Question 1

Irresponsible fiscal policy creates a problem for the central bank, since it may be

Accepted Answer

A) blamed for slowing economic growth if it refuses to money-finance increased government spending 
B) blamed for higher inflation if it money-finances increased government spending 
C) forced to sell too many government securities 
D) forced to lower interest rates by open market sales 
E) both 
A) and 
B)  
A) blamed for slowing economic growth if it refuses to money-finance increased government spending 
B) blamed for higher inflation if it money-finances increased government spending 
C) forced to sell too many government securities 
D) forced to lower interest rates by open market sales 
E) both 
A) and 
B)

Question 2

Between 1960 and 1990, the rate of inflation and the growth of M2 in the U.S.moved roughly together

Accepted Answer

A) and an equally close relation existed between the inflation rate and the growth of M1 
B) despite the fact that the velocity of M2 varied greatly during this period 
C) and it is therefore safe to assume that the income velocity of money will always be constant in the long run 
D) and a similar relationship can be observed in most other countries as well 
E) but in the late 1990s, the link between inflation and M2 started to break down 
A) and an equally close relation existed between the inflation rate and the growth of M1 
B) despite the fact that the velocity of M2 varied greatly during this period 
C) and it is therefore safe to assume that the income velocity of money will always be constant in the long run 
D) and a similar relationship can be observed in most other countries as well 
E) but in the late 1990s, the link between inflation and M2 started to break down

Question 3

Hyperinflation can best be stopped if a government

Accepted Answer

A) reforms its budget process, introduces new money, and pegs the exchange rate of the new money to that of a stable foreign currency 
B) imposes wage-price controls but lets money supply grow at high levels for a prolonged time to accommodate the high demand for money 
C) is replaced by another government more friendly towards industrial nations so more foreign aid can be obtained 
D) implements supply-side policies in an effort to simultaneously reduce the rates of inflation and unemployment 
E) gradually reduces money supply growth so a large increase in unemployment can be avoided 
A) reforms its budget process, introduces new money, and pegs the exchange rate of the new money to that of a stable foreign currency 
B) imposes wage-price controls but lets money supply grow at high levels for a prolonged time to accommodate the high demand for money 
C) is replaced by another government more friendly towards industrial nations so more foreign aid can be obtained 
D) implements supply-side policies in an effort to simultaneously reduce the rates of inflation and unemployment 
E) gradually reduces money supply growth so a large increase in unemployment can be avoided

Question 4

Assume that the debt-to GDP ratio is 60%, the inflation rate is 2.0% and the total budget deficit is 3% of GDP.What is the inflation-adjusted budget deficit as a percentage of GDP?

Accepted Answer

A) 2)4% 
B) 1).8% 
C) 1)5% 
D) 1)2% 
E) 1)0% 
A) 2)4% 
B) 1).8% 
C) 1)5% 
D) 1)2% 
E) 1)0%

Question 5

Economists belonging to the rational expectations school in macroeconomics believe that

Accepted Answer

A) government intervention often makes things worse rather than better 
B) using policy rules is preferable to using discretion 
C) markets tend to clear fairly rapidly 
D) policy makers can benefit from credibility 
E) all of the above 
A) government intervention often makes things worse rather than better 
B) using policy rules is preferable to using discretion 
C) markets tend to clear fairly rapidly 
D) policy makers can benefit from credibility 
E) all of the above

Question 6

In which of the following decades was the average inflation rate (based on the GDP deflator) the highest?

Accepted Answer

A) 1960-69 
B) 1970-79 
C) 1980-89 
D) 1990-99 
E) 2000-09 
A) 1960-69 
B) 1970-79 
C) 1980-89 
D) 1990-99 
E) 2000-09

Question 7

The link between M2 growth and the inflation rate

Accepted Answer

A) was fairly tight between 1975 and 1995 
B) was fairly tight during the Great Recession 
C) was fairly tight between 2000 and 2010 
D) was much tighter between 2000 and 2010 than between 1970 and 1995 
E) both 
C) and 
D)  
A) was fairly tight between 1975 and 1995 
B) was fairly tight during the Great Recession 
C) was fairly tight between 2000 and 2010 
D) was much tighter between 2000 and 2010 than between 1970 and 1995 
E) both 
C) and 
D)

Question 8

The rational expectations approach asserts that, starting from a long-run equilibrium situation, if a restrictive monetary policy is announced and implemented, the economy will

Accepted Answer

A) move rapidly to a new equilibrium without a notable recession 
B) suffer a long and deep recession before reaching a new equilibrium 
C) remain at the same level of inflation since government policies are always ineffective 
D) move slowly to a new equilibrium since wages tend to adjust slowly 
E) fail to adjust since the policy was anticipated 
A) move rapidly to a new equilibrium without a notable recession 
B) suffer a long and deep recession before reaching a new equilibrium 
C) remain at the same level of inflation since government policies are always ineffective 
D) move slowly to a new equilibrium since wages tend to adjust slowly 
E) fail to adjust since the policy was anticipated

Question 9

Which of the following countries had the HIGHEST average inflation rate from 1960 - 2011?

Accepted Answer

A) Canada 
B) Italy 
C) Japan 
D) United Kingdom 
E) United States 
A) Canada 
B) Italy 
C) Japan 
D) United Kingdom 
E) United States

Question 10

The term seigniorage refers to

Accepted Answer

A) the difference between the actual budget deficit and the inflation adjusted deficit 
B) the difference between money supply and the monetary base 
C) the government's ability to raise tax revenue by creating money 
D) the fact that a government that defaults on its debt will not face severe consequences 
E) the substitution of another country's currency as a medium of exchange in order to stop hyperinflation 
A) the difference between the actual budget deficit and the inflation adjusted deficit 
B) the difference between money supply and the monetary base 
C) the government's ability to raise tax revenue by creating money 
D) the fact that a government that defaults on its debt will not face severe consequences 
E) the substitution of another country's currency as a medium of exchange in order to stop hyperinflation

Question 11

The term seigniorage refers to the government's ability to

Accepted Answer

A) raise revenue by creating money 
B) raise revenue by selling government securities to the private sector 
C) control the central banking system 
D) raise revenues by raising taxes 
E) stop hyperinflation by imposing wage and price controls 
A) raise revenue by creating money 
B) raise revenue by selling government securities to the private sector 
C) control the central banking system 
D) raise revenues by raising taxes 
E) stop hyperinflation by imposing wage and price controls

Question 12

Suppose that real output is constant, the real monetary base is $30 billion and revenues from the inflation tax are $600 million.What is the inflation rate?

Accepted Answer

A) 5)0% 
B) 3)6% 
C) 2)0% 
D) 1)2% 
E) it cannot be determined from this information 
A) 5)0% 
B) 3)6% 
C) 2)0% 
D) 1)2% 
E) it cannot be determined from this information

Question 13

A big advantage of a policy designed to gradually reduce the rate of inflation is that

Accepted Answer

A) it gives the appearance of a reasoned and steady approach, which is important if inflationary expectations have to be lowered fast 
B) the unemployment rate does not increase significantly so there is little political pressure to abandon the policy 
C) it has great credibility 
D) prices are affected before real output 
E) it lowers inflationary expectations faster than the cold turkey approach 
A) it gives the appearance of a reasoned and steady approach, which is important if inflationary expectations have to be lowered fast 
B) the unemployment rate does not increase significantly so there is little political pressure to abandon the policy 
C) it has great credibility 
D) prices are affected before real output 
E) it lowers inflationary expectations faster than the cold turkey approach

Question 14

When Franco Modigliani stated "we are all monetarists now," he was referring to the fact that most economists now believe that

Accepted Answer

A) inflation cannot be controlled unless monetary growth is controlled 
B) monetary growth has a major effect on long-term economic growth 
C) fiscal policy has no short-term effect on the level of output 
D) discretionary monetary policy should never be undertaken 
E) all of the above 
A) inflation cannot be controlled unless monetary growth is controlled 
B) monetary growth has a major effect on long-term economic growth 
C) fiscal policy has no short-term effect on the level of output 
D) discretionary monetary policy should never be undertaken 
E) all of the above

Question 15

U.S.and international data from 1960 - 2011 confirm that

Accepted Answer

A) changes the rate of inflation always correspond closely to changes in the growth rate of money 
B) the growth rate of money is equal to the inflation rate 
C) the average rate of money growth is about the same as the average rate of GDP growth 
D) higher sustained money growth rates are always associated with higher inflation rates 
E) the growth rate of money is about equal to the GDP growth rate plus the rate of inflation 
A) changes the rate of inflation always correspond closely to changes in the growth rate of money 
B) the growth rate of money is equal to the inflation rate 
C) the average rate of money growth is about the same as the average rate of GDP growth 
D) higher sustained money growth rates are always associated with higher inflation rates 
E) the growth rate of money is about equal to the GDP growth rate plus the rate of inflation

Question 16

Inflation can be reduced sharply if the government is willing to

Accepted Answer

A) induce a deep recession by employing restrictive monetary policy 
B) induce a shallow recession by employing restrictive fiscal policy 
C) reduce income tax rates to stimulate aggregate supply 
D) increase income tax rates but allow money supply to grow 
E) gradually reduce money supply and cut taxes to stimulate growth 
A) induce a deep recession by employing restrictive monetary policy 
B) induce a shallow recession by employing restrictive fiscal policy 
C) reduce income tax rates to stimulate aggregate supply 
D) increase income tax rates but allow money supply to grow 
E) gradually reduce money supply and cut taxes to stimulate growth

Question 17

Assuming a long-run relationship, if real output growth is 2.8% and velocity stays constant, by how much would the money supply have to grow to achieve an inflation rate of 2%?

Accepted Answer

A) 4)8% 
B) 2)8% 
C) 2)0% 
D) 0)8% 
E) the answer can't be determined from this information 
A) 4)8% 
B) 2)8% 
C) 2)0% 
D) 0)8% 
E) the answer can't be determined from this information

Question 18

Monetarists emphasize the fact that

Accepted Answer

A) the growth rate of money supply determines the inflation rate only in the short run 
B) instability in the growth rate of money causes instability in economic activity 
C) since monetary policy has powerful effects on the economy, it should be used actively to fine-tune the economy 
D) in conducting monetary policy, setting interest rate targets is preferable to setting monetary targets 
E) all of the above 
A) the growth rate of money supply determines the inflation rate only in the short run 
B) instability in the growth rate of money causes instability in economic activity 
C) since monetary policy has powerful effects on the economy, it should be used actively to fine-tune the economy 
D) in conducting monetary policy, setting interest rate targets is preferable to setting monetary targets 
E) all of the above

Question 19

The government can increase revenues from an inflation tax only up to some maximum, beyond which higher inflation rates result in lower tax revenues, since

Accepted Answer

A) higher tax rates create a work disincentive 
B) people will hold their wealth in the form of cash to avoid the inflation tax 
C) banks will hold more excess reserves for precautionary reasons 
D) individuals will hold less currency and banks fewer excess reserves and therefore the monetary base will shrink 
E) many people will refuse to pay their taxes 
A) higher tax rates create a work disincentive 
B) people will hold their wealth in the form of cash to avoid the inflation tax 
C) banks will hold more excess reserves for precautionary reasons 
D) individuals will hold less currency and banks fewer excess reserves and therefore the monetary base will shrink 
E) many people will refuse to pay their taxes

Question 20

From 1983-88, which country raised the most in revenue as percentage of GDP through the so-called "inflation tax"?

Accepted Answer

A) Argentina 
B) Bolivia 
C) Colombia 
D) Mexico 
E) Peru 
A) Argentina 
B) Bolivia 
C) Colombia 
D) Mexico 
E) Peru

Exam 22: Inflation and hyperinflation

Irresponsible fiscal policy creates a problem for the central bank, since it may be

Between 1960 and 1990, the rate of inflation and the growth of M2 in the U.S.moved roughly together

Hyperinflation can best be stopped if a government

Assume that the debt-to GDP ratio is 60%, the inflation rate is 2.0% and the total budget deficit is 3% of GDP.What is the inflation-adjusted budget deficit as a percentage of GDP?

Economists belonging to the rational expectations school in macroeconomics believe that

In which of the following decades was the average inflation rate (based on the GDP deflator) the highest?

The link between M2 growth and the inflation rate

The rational expectations approach asserts that, starting from a long-run equilibrium situation, if a restrictive monetary policy is announced and implemented, the economy will

Which of the following countries had the HIGHEST average inflation rate from 1960 - 2011?

The term seigniorage refers to

The term seigniorage refers to the government's ability to

Suppose that real output is constant, the real monetary base is $30 billion and revenues from the inflation tax are $600 million.What is the inflation rate?

A big advantage of a policy designed to gradually reduce the rate of inflation is that

When Franco Modigliani stated "we are all monetarists now," he was referring to the fact that most economists now believe that

U.S.and international data from 1960 - 2011 confirm that

Inflation can be reduced sharply if the government is willing to

Assuming a long-run relationship, if real output growth is 2.8% and velocity stays constant, by how much would the money supply have to grow to achieve an inflation rate of 2%?

Monetarists emphasize the fact that

The government can increase revenues from an inflation tax only up to some maximum, beyond which higher inflation rates result in lower tax revenues, since

From 1983-88, which country raised the most in revenue as percentage of GDP through the so-called "inflation tax"?

Introduction

National income accounting

Growth and accumulation

Growth and policy

Aggregate supply and demand

Aggregate supply and the phillips curve

Unemployment

Inflation

Policy preview

Income and spending

Money, interest, and income

Monetary and fiscal policy

International linkages

Consumption and saving

Investment spending

The demand for money

The fed, money, and credit

Policy

Financial markets and asset prices

The national debt

Recession and depression

International adjustment and interdependence

Advanced topics

Filters