Question 1

Deflation

Accepted Answer

A)  Increases incomes and enhances the ability of debtors to pay off their debts. 
B)  Increases incomes and reduces the ability of debtors to pay off their debts. 
C)  Decreases incomes and enhances the ability of debtors to pay off their debts. 
D)  Decreases incomes and reduces the ability of debtors to pay off their debts. 
A)  Increases incomes and enhances the ability of debtors to pay off their debts. 
B)  Increases incomes and reduces the ability of debtors to pay off their debts. 
C)  Decreases incomes and enhances the ability of debtors to pay off their debts. 
D)  Decreases incomes and reduces the ability of debtors to pay off their debts. D

Question 2

If a government supplies more money than the quantity people want to hold

Accepted Answer

A)  Spending will decrease and the price level will fall. 
B)  Spending will increase and the price level will rise. 
C)  Spending will remain constant but the price level will rise. 
D)  There will be no change in the level of economic activity or prices; money is neutral. 
A)  Spending will decrease and the price level will fall. 
B)  Spending will increase and the price level will rise. 
C)  Spending will remain constant but the price level will rise. 
D)  There will be no change in the level of economic activity or prices; money is neutral. B

Question 3

In the long run, inflation is caused by

Accepted Answer

A)  Governments that raise taxes so high that it increases the cost of doing business and, hence, raise prices. 
B)  Banks that have market power and refuse to lend money. 
C)  None of these answers. 
D)  Governments that print too much money. 
E)  Increases in the price of inputs, such as labour and oil. 
A)  Governments that raise taxes so high that it increases the cost of doing business and, hence, raise prices. 
B)  Banks that have market power and refuse to lend money. 
C)  None of these answers. 
D)  Governments that print too much money. 
E)  Increases in the price of inputs, such as labour and oil. D

Question 4

Which of the following statements is NOT true?

Accepted Answer

A)  Inflation is an economy-wide phenomenon that concerns, first and foremost, the value of the economy's medium of exchange. 
B)  The quantity theory states that the primary cause of inflation is growth in the supply of money. 
C)  The so-called inflation tax does not affect those people whose incomes do not rise with inflation. 
D)  Some inflation in any economy is desirable because it is a sign that demand is present, that there is a reason to produce and invest, and that there is reward to be gained from enterprise. 
A)  Inflation is an economy-wide phenomenon that concerns, first and foremost, the value of the economy's medium of exchange. 
B)  The quantity theory states that the primary cause of inflation is growth in the supply of money. 
C)  The so-called inflation tax does not affect those people whose incomes do not rise with inflation. 
D)  Some inflation in any economy is desirable because it is a sign that demand is present, that there is a reason to produce and invest, and that there is reward to be gained from enterprise.

Question 5

Suppose that, because of inflation, people in Zimbabwe go to the bank each day to withdraw their daily currency needs. This is an example of

Accepted Answer

A)  Costs due to inflation induced relative price variability which misallocates resources. 
B)  Menu costs. 
C)  Shoeleather costs. 
D)  Costs due to inflation induced tax distortions. 
E)  Costs due to confusion and inconvenience. 
A)  Costs due to inflation induced relative price variability which misallocates resources. 
B)  Menu costs. 
C)  Shoeleather costs. 
D)  Costs due to inflation induced tax distortions. 
E)  Costs due to confusion and inconvenience.

Question 6

With the value of money on the vertical axis, the money supply curve is

Accepted Answer

A)  Upward sloping because people supply a larger quantity of money when the value of money increases. 
B)  Downward sloping because people supply a larger quantity of money when the value of money decreases. 
C)  horizontal because we assume the central bank controls the money supply 
D)  Vertical because we assume the central bank controls the money supply. 
A)  Upward sloping because people supply a larger quantity of money when the value of money increases. 
B)  Downward sloping because people supply a larger quantity of money when the value of money decreases. 
C)  horizontal because we assume the central bank controls the money supply 
D)  Vertical because we assume the central bank controls the money supply.

Question 7

Which of the following costs of inflation does not occur when inflation is constant and predictable?

Accepted Answer

A)  Costs due to inflation induced tax distortions. 
B)  Arbitrary redistributions of wealth. 
C)  Shoeleather costs. 
D)  Menu costs. 
E)  Costs due to confusion and inconvenience. 
A)  Costs due to inflation induced tax distortions. 
B)  Arbitrary redistributions of wealth. 
C)  Shoeleather costs. 
D)  Menu costs. 
E)  Costs due to confusion and inconvenience.

Question 8

The velocity of money is

Accepted Answer

A)  Highly unstable. 
B)  Impossible to measure. 
C)  The rate at which money loses its value. 
D)  The rate at which inflation rises. 
E)  The rate at which money changes hands. 
A)  Highly unstable. 
B)  Impossible to measure. 
C)  The rate at which money loses its value. 
D)  The rate at which inflation rises. 
E)  The rate at which money changes hands.

Question 9

If real GDP falls and the nominal interest rate rises, then the equilibrium price level

Accepted Answer

A)  Must fall. 
B)  Must rise. 
C)  Will fall if the effect of the decline in real GDP dominates. 
D)  Will fall if the effect of the increase in the nominal interest rate dominates. 
A)  Must fall. 
B)  Must rise. 
C)  Will fall if the effect of the decline in real GDP dominates. 
D)  Will fall if the effect of the increase in the nominal interest rate dominates.

Question 10

In the quantity theory of money

Accepted Answer

A)  Prices are rigid. 
B)  Both velocity of money and real output are variable. 
C)  Changes in the money supply cause changes in velocity of money. 
D)  The velocity of money is assumed to be stable. 
A)  Prices are rigid. 
B)  Both velocity of money and real output are variable. 
C)  Changes in the money supply cause changes in velocity of money. 
D)  The velocity of money is assumed to be stable.

Question 11

The quantity equation states that

Accepted Answer

A)  Money × real output = velocity × price level. 
B)  Money × velocity = price level × real output. 
C)  None of these answers. 
D)  Money × price level = velocity × real output. 
A)  Money × real output = velocity × price level. 
B)  Money × velocity = price level × real output. 
C)  None of these answers. 
D)  Money × price level = velocity × real output.

Question 12

The Fisher effect suggests that, in the long run, if the rate of inflation rises from 3 per cent to 7 per cent, the nominal interest rate should increase by 4 percentage points and the real interest rate should remain unchanged.

Accepted Answer

A) True 
 B)False

Question 13

Real economic variables measure

Accepted Answer

A)  Value in the prices of some certain base year. 
B)  Value in the prices of the current year. 
C)  Nominal values adjusted for the current interest rate. 
D)  Nominal values adjusted for the current money supply. 
A)  Value in the prices of some certain base year. 
B)  Value in the prices of the current year. 
C)  Nominal values adjusted for the current interest rate. 
D)  Nominal values adjusted for the current money supply.

Question 14

If the money supply grows 5 per cent, and real output grows 2 per cent, prices should rise by

Accepted Answer

A)  5 per cent. 
B)  More than 5 per cent. 
C)  Less than 5 per cent. 
D)  None of these answers. 
A)  5 per cent. 
B)  More than 5 per cent. 
C)  Less than 5 per cent. 
D)  None of these answers.

Question 15

Suppose a central bank sells government bonds. Use a graph of the money market to show what this does to the value of money.

Accepted Answer

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Question 16

The nominal demand for money

Accepted Answer

A)  Does not depend on interest rates. 
B)  Does not depend on the price level. 
C)  Is positively related to the price level. 
D)  Is positively related to the nominal interest rate. 
A)  Does not depend on interest rates. 
B)  Does not depend on the price level. 
C)  Is positively related to the price level. 
D)  Is positively related to the nominal interest rate.

Question 17

If the money supply is €500, real output is 2,500 units, and the average price of a unit of real output is €2, the velocity of money is 10.

Accepted Answer

A) True 
 B)False

Question 18

When prices are falling, economists say that there is

Accepted Answer

A)  Disinflation. 
B)  Deflation. 
C)  A contraction. 
D)  An inverted inflation. 
A)  Disinflation. 
B)  Deflation. 
C)  A contraction. 
D)  An inverted inflation.

Question 19

The quantity theory of money concludes that an increase in the money supply causes a proportional

Accepted Answer

A)  Increase in prices. 
B)  Increase in real output. 
C)  Decrease in velocity. 
D)  Increase in velocity. 
E)  Decrease in prices. 
A)  Increase in prices. 
B)  Increase in real output. 
C)  Decrease in velocity. 
D)  Increase in velocity. 
E)  Decrease in prices.

Question 20

If the price level doubles,

Accepted Answer

A)  The quantity demanded of money falls by half. 
B)  The value of money is cut by half. 
C)  Nominal income is unaffected. 
D)  None of these answers. 
E)  The money supply has halved. 
A)  The quantity demanded of money falls by half. 
B)  The value of money is cut by half. 
C)  Nominal income is unaffected. 
D)  None of these answers. 
E)  The money supply has halved.

Exam 28: Money Growth and Inflation

Deflation

If a government supplies more money than the quantity people want to hold

In the long run, inflation is caused by

Which of the following statements is NOT true?

Suppose that, because of inflation, people in Zimbabwe go to the bank each day to withdraw their daily currency needs. This is an example of

With the value of money on the vertical axis, the money supply curve is

Which of the following costs of inflation does not occur when inflation is constant and predictable?

The velocity of money is

If real GDP falls and the nominal interest rate rises, then the equilibrium price level

In the quantity theory of money

The quantity equation states that

The Fisher effect suggests that, in the long run, if the rate of inflation rises from 3 per cent to 7 per cent, the nominal interest rate should increase by 4 percentage points and the real interest rate should remain unchanged.

Real economic variables measure

If the money supply grows 5 per cent, and real output grows 2 per cent, prices should rise by

Suppose a central bank sells government bonds. Use a graph of the money market to show what this does to the value of money.

The nominal demand for money

If the money supply is €500, real output is 2,500 units, and the average price of a unit of real output is €2, the velocity of money is 10.

When prices are falling, economists say that there is

The quantity theory of money concludes that an increase in the money supply causes a proportional

If the price level doubles,

What Is Economics

Thinking Like an Economist

The Market Forces of Supply and Demand

Elasticity and Its Applications

Background to Demand: Consumer Choices

Background to Supply: Firms in Competitive Markets

Consumers, Producers and the Efficiency of Markets

Supply, Demand and Government Policies

The Tax System

Public Goods, Common Resources and Merit Goods

Market Failure and Externalities

Information and Behavioural Economics

Firms Production Decisions

Market Structures I: Monopoly

Market Structures Ii: Monopolistic Competition

Market Structures Iii: Oligopoly

The Economics of Factor Markets

Income Inequality and Poverty

Interdependence and the Gains From Trade

Measuring a Nations Well-Being

Measuring the Cost of Living

Production and Growth

Unemployment

Saving, Investment and the Financial System

The Basic Tools of Finance

Issues in Financial Markets

The Monetary System

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Business Cycles

Keynesian Economics and the Is-Lm Analysis

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Supply-Side Policies

Common Currency Areas and European Monetary Union

The Financial Crisis and Sovereign Debt

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