Question 1

If the CPI was 125 last year and is now 135, then the inflation rate last year was:

Accepted Answer

A)  6%. 
B)  7%. 
C)  8%. 
D)  10%. 
A)  6%. 
B)  7%. 
C)  8%. 
D)  10%.

Question 2

Which price index measures prices of both intermediate and final goods?

Accepted Answer

A)  Consumer Price Index (CPI) 
B)  Producer Price Index (PPI) 
C)  GDP inflator 
D)  GDP deflator 
A)  Consumer Price Index (CPI) 
B)  Producer Price Index (PPI) 
C)  GDP inflator 
D)  GDP deflator

Question 3

What is the Fisher effect?

Accepted Answer

A)  the tendency of nominal interest rates to fall with higher expected inflation rates 
B)  the tendency of nominal interest rates to rise with higher expected inflation rates 
C)  the tendency of real interest rates to fall with higher expected inflation rates 
D)  the tendency of real interest rates to rise with higher expected inflation rates 
A)  the tendency of nominal interest rates to fall with higher expected inflation rates 
B)  the tendency of nominal interest rates to rise with higher expected inflation rates 
C)  the tendency of real interest rates to fall with higher expected inflation rates 
D)  the tendency of real interest rates to rise with higher expected inflation rates

Question 4

From 2003 to 2013, the United States experienced average annual inflation of about:

Accepted Answer

A)  0.24%. 
B)  2.4%. 
C)  24%. 
D)  240%. 
A)  0.24%. 
B)  2.4%. 
C)  24%. 
D)  240%.

Question 5

Hyperinflation refers to the case in which inflation:

Accepted Answer

A)  remains relatively constant. 
B)  is extremely high. 
C)  is extremely low. 
D)  is extremely unpredictable. 
A)  remains relatively constant. 
B)  is extremely high. 
C)  is extremely low. 
D)  is extremely unpredictable.

Question 6

The identity that expresses the quantity theory of money is:

Accepted Answer

A)  money supply × money velocity = average price × quantity of goods and services. 
B)  money supply + money velocity = average price - quantity of goods and services. 
C)  money supply - money velocity = average price - quantity of goods and services. 
D)  money supply ÷ money velocity = average price ÷ quantity of goods and services. 
A)  money supply × money velocity = average price × quantity of goods and services. 
B)  money supply + money velocity = average price - quantity of goods and services. 
C)  money supply - money velocity = average price - quantity of goods and services. 
D)  money supply ÷ money velocity = average price ÷ quantity of goods and services.

Question 7

An unexpected disinflation benefits lenders and harms borrowers.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is an example of money illusion assuming that inflation is 5%?

Accepted Answer

A)  You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend. 
B)  You receive a 5% raise at your part-time job but do not increase or decrease your spending. 
C)  You do not receive a raise at your part-time job but cut out some expenses as you notice some prices rising. 
D)  You receive a 10% raise at your part-time job and start spending extra money on entertainment every weekend. 
A)  You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend. 
B)  You receive a 5% raise at your part-time job but do not increase or decrease your spending. 
C)  You do not receive a raise at your part-time job but cut out some expenses as you notice some prices rising. 
D)  You receive a 10% raise at your part-time job and start spending extra money on entertainment every weekend.

Question 9

If expected inflation is higher than actual inflation, then:

Accepted Answer

A)  wealth will be redistributed from lenders to borrowers. 
B)  wealth will be redistributed from borrowers to lenders. 
C)  both borrowers and lenders will gain wealth. 
D)  both borrowers and lenders will lose wealth. 
A)  wealth will be redistributed from lenders to borrowers. 
B)  wealth will be redistributed from borrowers to lenders. 
C)  both borrowers and lenders will gain wealth. 
D)  both borrowers and lenders will lose wealth.

Question 10

What effect did reducing U.S. inflation from 13.5% in 1980 to 3% in 1983 have?

Accepted Answer

A)  Wealth was shifted from lenders to borrowers. 
B)  The unemployment rate fell to 4%. 
C)  The country experienced a recession. 
D)  Per capita income increased by 18 % in 3 years. 
A)  Wealth was shifted from lenders to borrowers. 
B)  The unemployment rate fell to 4%. 
C)  The country experienced a recession. 
D)  Per capita income increased by 18 % in 3 years.

Question 11

Which of these statements is NOT correct?

Accepted Answer

A)  If your nominal wages rise at a rate higher than the inflation rate, you have received a "real" pay raise. 
B)  If your nominal wages rise at exactly the rate of inflation, your purchasing power over time remains constant. 
C)  If your nominal wages rise at 4% while inflation rises at 5%, you have essentially received a "pay cut." 
D)  If deflation occurs, you will receive a "real" pay raise regardless of what happens to your nominal wage. 
A)  If your nominal wages rise at a rate higher than the inflation rate, you have received a "real" pay raise. 
B)  If your nominal wages rise at exactly the rate of inflation, your purchasing power over time remains constant. 
C)  If your nominal wages rise at 4% while inflation rises at 5%, you have essentially received a "pay cut." 
D)  If deflation occurs, you will receive a "real" pay raise regardless of what happens to your nominal wage.

Question 12

Disinflation occurs when the overall price level:

Accepted Answer

A)  falls. 
B)  rises at a decreasing rate. 
C)  rises at an exponential rate. 
D)  falls at an increasing rate. 
A)  falls. 
B)  rises at a decreasing rate. 
C)  rises at an exponential rate. 
D)  falls at an increasing rate.

Question 13

The inflation rate is the rate of change of the:

Accepted Answer

A)  value of the dollar. 
B)  New York Stock Exchange. 
C)  average level of prices. 
D)  money supply. 
A)  value of the dollar. 
B)  New York Stock Exchange. 
C)  average level of prices. 
D)  money supply.

Question 14

Which of the following is NOT a price index used by economists to measure inflation?

Accepted Answer

A)  Consumer Price Index (CPI) 
B)  Commodity Consumption Indicator (CCI) 
C)  GDP deflator 
D)  Producer Price Index (PPI) 
A)  Consumer Price Index (CPI) 
B)  Commodity Consumption Indicator (CCI) 
C)  GDP deflator 
D)  Producer Price Index (PPI)

Question 15

Which of the following is NOT a price index often used to measure inflation?

Accepted Answer

A)  consumer price index 
B)  producer price index 
C)  net price index 
D)  GDP deflator 
A)  consumer price index 
B)  producer price index 
C)  net price index 
D)  GDP deflator

Question 16

According to the Fisher effect, a 5% decrease in the expected inflation rate results in:

Accepted Answer

A)  a 5% decrease in the nominal interest rate. 
B)  a more than 5% increase in the nominal interest rate. 
C)  a 5% decrease in the real interest rate. 
D)  a more than 5% increase in the real interest rate. 
A)  a 5% decrease in the nominal interest rate. 
B)  a more than 5% increase in the nominal interest rate. 
C)  a 5% decrease in the real interest rate. 
D)  a more than 5% increase in the real interest rate.

Question 17

Money illusion is a condition in which people:

Accepted Answer

A)  see money as an illusion for value. 
B)  expect the value of money will illusively surge. 
C)  mistakenly confuse changes in nominal GDP for changes in real GDP. 
D)  mistakenly confuse changes in nominal prices for changes in real prices. 
A)  see money as an illusion for value. 
B)  expect the value of money will illusively surge. 
C)  mistakenly confuse changes in nominal GDP for changes in real GDP. 
D)  mistakenly confuse changes in nominal prices for changes in real prices.

Question 18

The inflation parable discussed in the text suggests a:

Accepted Answer

A)  short-run relationship between unexpected inflation and output. 
B)  short-run relationship between expected inflation and output. 
C)  long-run relationship between unexpected inflation and output. 
D)  long-run relationship between expected inflation and output. 
A)  short-run relationship between unexpected inflation and output. 
B)  short-run relationship between expected inflation and output. 
C)  long-run relationship between unexpected inflation and output. 
D)  long-run relationship between expected inflation and output.

Question 19

The quantity theory of money predicts that the price level:

Accepted Answer

A)  increases with the quantity of money in the economy. 
B)  decreases with the quantity of money in the economy. 
C)  is relatively constant. 
D)  is difficult to predict. 
A)  increases with the quantity of money in the economy. 
B)  decreases with the quantity of money in the economy. 
C)  is relatively constant. 
D)  is difficult to predict.

Question 20

Lonnie lends Burt $15,000 in 2009. Burt repaid Lonnie $150 in real interest for the 1-year loan. Inflation that year was 1.5%. What nominal interest rate did Lonnie charge Burt?

Accepted Answer

A)  0.5% 
B)  2% 
C)  2.5% 
D)  -0.5% 
A)  0.5% 
B)  2% 
C)  2.5% 
D)  -0.5%

Exam 12: Inflation and the Quantity Theory of Money

If the CPI was 125 last year and is now 135, then the inflation rate last year was:

Which price index measures prices of both intermediate and final goods?

What is the Fisher effect?

From 2003 to 2013, the United States experienced average annual inflation of about:

Hyperinflation refers to the case in which inflation:

The identity that expresses the quantity theory of money is:

An unexpected disinflation benefits lenders and harms borrowers.

Which of the following is an example of money illusion assuming that inflation is 5%?

If expected inflation is higher than actual inflation, then:

What effect did reducing U.S. inflation from 13.5% in 1980 to 3% in 1983 have?

Which of these statements is NOT correct?

Disinflation occurs when the overall price level:

The inflation rate is the rate of change of the:

Which of the following is NOT a price index used by economists to measure inflation?

Which of the following is NOT a price index often used to measure inflation?

According to the Fisher effect, a 5% decrease in the expected inflation rate results in:

Money illusion is a condition in which people:

The inflation parable discussed in the text suggests a:

The quantity theory of money predicts that the price level:

Lonnie lends Burt $15,000 in 2009. Burt repaid Lonnie $150 in real interest for the 1-year loan. Inflation that year was 1.5%. What nominal interest rate did Lonnie charge Burt?

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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