Question 1

Negative real rates of interest tend to:

Accepted Answer

A)  increase economic growth. 
B)  reduce economic growth. 
C)  have no impact on economic growth. 
D)  exist only in poor countries. 
A)  increase economic growth. 
B)  reduce economic growth. 
C)  have no impact on economic growth. 
D)  exist only in poor countries.

Question 2

When the money supply and the demand for goods increase at the same time:

Accepted Answer

A)  producers understand how to react, but consumers are confused. 
B)  consumers act rationally, but producers cannot read the market signals. 
C)  the government is able to clarify how the markets will be affected. 
D)  both consumers and producers can often become confused. 
A)  producers understand how to react, but consumers are confused. 
B)  consumers act rationally, but producers cannot read the market signals. 
C)  the government is able to clarify how the markets will be affected. 
D)  both consumers and producers can often become confused.

Question 3

In the quantity theory of money, growth of _____ is the cause of inflation.

Accepted Answer

A)  the money supply 
B)  velocity 
C)  real GDP 
D)  the CPI 
A)  the money supply 
B)  velocity 
C)  real GDP 
D)  the CPI

Question 4

The GDP deflator measures the average price for a basket of goods and services bought by a typical consumer.

Accepted Answer

A) True 
 B)False

Question 5

Explain why higher inflation helps borrowers and hurts lenders.

Accepted Answer

Most loan contracts specify a fixed nomi

Question 6

Inflation generally causes the taxes paid by individuals and business firms to:

Accepted Answer

A)  remain relatively constant. 
B)  increase. 
C)  decrease. 
D)  become less of a burden. 
A)  remain relatively constant. 
B)  increase. 
C)  decrease. 
D)  become less of a burden.

Question 7

How might changes in the money supply be non-neutral in the short run?

Accepted Answer

A)  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. 
B)  When money supply changes in the short run, it will affect nominal, but not real, variables in the short run. 
C)  As money growth increases at a faster rate, it will cause real GDP to grow at an even faster rate. 
D)  If producers expect inflation to increase, they will increase supply in order to sell before the arrival of inflation. 
A)  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. 
B)  When money supply changes in the short run, it will affect nominal, but not real, variables in the short run. 
C)  As money growth increases at a faster rate, it will cause real GDP to grow at an even faster rate. 
D)  If producers expect inflation to increase, they will increase supply in order to sell before the arrival of inflation.

Question 8

If the average price level rises from 105 to 110, then the inflation rate is 5%.

Accepted Answer

A) True 
 B)False

Question 9

According to the quantity theory, what causes inflation in the long run?

Accepted Answer

A)  unemployment 
B)  unexpected inflation 
C)  money supply growth 
D)  aggregate demand shocks 
A)  unemployment 
B)  unexpected inflation 
C)  money supply growth 
D)  aggregate demand shocks

Question 10

Which price index comprises the prices of all final goods and services produced within the economy?

Accepted Answer

A)  the consumer price index 
B)  the GDP inflator 
C)  the GDP deflator 
D)  the producer price index 
A)  the consumer price index 
B)  the GDP inflator 
C)  the GDP deflator 
D)  the producer price index

Question 11

Disinflation is a decrease in the:

Accepted Answer

A)  exchange rate. 
B)  average level of prices. 
C)  inflation rate. 
D)  the velocity of money. 
A)  exchange rate. 
B)  average level of prices. 
C)  inflation rate. 
D)  the velocity of money.

Question 12

Inflation hurts the economy because:

Accepted Answer

A)  it raises all prices in the economy. 
B)  it affects the ability of market prices to send signals about the value of resources. 
C)  all can perfectly see the increases in prices. 
D)  higher prices reduce real output. 
A)  it raises all prices in the economy. 
B)  it affects the ability of market prices to send signals about the value of resources. 
C)  all can perfectly see the increases in prices. 
D)  higher prices reduce real output.

Question 13

Compared to the early 1980s, inflation since 1985 has been relatively low.

Accepted Answer

A) True 
 B)False

Question 14

According to the quantity theory of money, a nation that increases its money supply by 30% should expect its price level to increase by approximately:

Accepted Answer

A)  15%. 
B)  30%. 
C)  45%. 
D)  60%. 
A)  15%. 
B)  30%. 
C)  45%. 
D)  60%.

Question 15

Money illusion is:

Accepted Answer

A)  the average number of times a dollar is spent on final goods and services in a year. 
B)  mistaking changes in nominal prices for changes in real prices. 
C)  a decrease in the average level of prices. 
D)  an increase in the average level of prices. 
A)  the average number of times a dollar is spent on final goods and services in a year. 
B)  mistaking changes in nominal prices for changes in real prices. 
C)  a decrease in the average level of prices. 
D)  an increase in the average level of prices.

Question 16

The Fisher effect is the tendency of:

Accepted Answer

A)  real interest rates to rise with expected inflation rates. 
B)  real interest rates to rise with unexpected inflation rates. 
C)  nominal interest rates to rise with expected inflation rates. 
D)  nominal interest rates to rise with unexpected inflation rates. 
A)  real interest rates to rise with expected inflation rates. 
B)  real interest rates to rise with unexpected inflation rates. 
C)  nominal interest rates to rise with expected inflation rates. 
D)  nominal interest rates to rise with unexpected inflation rates.

Question 17

The Fisher effect indicates that an increase in the expected inflation rate will cause the nominal rate of interest to:

Accepted Answer

A)  remain relatively constant. 
B)  increase by the same amount. 
C)  decrease by the same amount. 
D)  become unpredictable. 
A)  remain relatively constant. 
B)  increase by the same amount. 
C)  decrease by the same amount. 
D)  become unpredictable.

Question 18

The concept of money illusion refers to:

Accepted Answer

A)  people who do not understand the purchasing power of money and therefore spend it faster than they can earn it. 
B)  consumers with inflation-indexed wages seeing a rise in prices and believing that their purchasing power has been compromised. 
C)  consumers paying prices that are higher than normal and not feeling bad about it because it's happening to everyone just the same. 
D)  an unobserved change in relative prices. 
A)  people who do not understand the purchasing power of money and therefore spend it faster than they can earn it. 
B)  consumers with inflation-indexed wages seeing a rise in prices and believing that their purchasing power has been compromised. 
C)  consumers paying prices that are higher than normal and not feeling bad about it because it's happening to everyone just the same. 
D)  an unobserved change in relative prices.

Question 19

When an increase in the money supply is unexpected by firms and workers, real GDP:

Accepted Answer

A)  increases in the short run. 
B)  decreases in the short run. 
C)  increases in the long run. 
D)  decreases in the long run. 
A)  increases in the short run. 
B)  decreases in the short run. 
C)  increases in the long run. 
D)  decreases in the long run.

Question 20

Suppose a nation's CPI is 150 in Year 1 and 180 in Year 2. What is the rate of inflation?

Accepted Answer

A)  17% 
B)  15% 
C)  20% 
D)  25% 
A)  17% 
B)  15% 
C)  20% 
D)  25%

Exam 12: Inflation and the Quantity Theory of Money

Negative real rates of interest tend to:

When the money supply and the demand for goods increase at the same time:

In the quantity theory of money, growth of _____ is the cause of inflation.

The GDP deflator measures the average price for a basket of goods and services bought by a typical consumer.

Explain why higher inflation helps borrowers and hurts lenders.

Inflation generally causes the taxes paid by individuals and business firms to:

How might changes in the money supply be non-neutral in the short run?

If the average price level rises from 105 to 110, then the inflation rate is 5%.

According to the quantity theory, what causes inflation in the long run?

Which price index comprises the prices of all final goods and services produced within the economy?

Disinflation is a decrease in the:

Inflation hurts the economy because:

Compared to the early 1980s, inflation since 1985 has been relatively low.

According to the quantity theory of money, a nation that increases its money supply by 30% should expect its price level to increase by approximately:

Money illusion is:

The Fisher effect is the tendency of:

The Fisher effect indicates that an increase in the expected inflation rate will cause the nominal rate of interest to:

The concept of money illusion refers to:

When an increase in the money supply is unexpected by firms and workers, real GDP:

Suppose a nation's CPI is 150 in Year 1 and 180 in Year 2. What is the rate of inflation?

The Big Ideas

The Power of Trade and Comparative Advantage

Supply and Demand

Equilibrium: How Supply and Demand Determine Prices

Price Ceilings and Floors

GDP and the Measurement of Progress

The Wealth of Nations and Economic Growth

Growth, Capital Accumulation and the Economics of Ideas: Catching up Vs the Cutting Edge

Saving, Investment, and the Financial System

Stock Markets and Personal Finance

Unemployment and Labor Force Participation

Business Fluctuations: Aggregate Demand and Supply

Transmission and Amplification Mechanisms

The Federal Reserve System and Open Market Operations

Monetary Policy

The Federal Budget: Taxes and Spending

Fiscal Policy

International Trade

International Finance

Political Economy and Public Choice

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