Deck 22: Inflation and hyperinflation

Question 1

The link between M2 growth and the inflation rate

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)

Answer 1

was fairly tight between 1975 and 1995

Question 2

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

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

Answer 2

1970-79

Question 3

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

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

Answer 3

inflation cannot be controlled unless monetary growth is controlled

Question 4

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%?

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

Question 5

Assuming a long-run relationship, if nominal money supply grows at a rate of 4.5%, real output growth is 3.2%, and the percentage change in velocity is 2%, what is the inflation rate?

A)9)7%
B)5)7%
C) 4.5%
D)3)3%
E)2)5%

Question 6

Inflation can be reduced sharply if the government is willing to

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 7

The long-run link between money growth and the inflation rate is not precise since

A)variations in output do not affect real money demand
B)interest rate changes don't affect the cost of holding real money balances or the desired ratio of income to money
C)money demand tends to shift over time as a result of financial innovation
D)the income velocity of money has steadily declined over the last three decades
E)all of the above

Question 8

Economists belonging to the rational expectations school in macroeconomics believe that

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 9

Monetarists emphasize the fact that

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 10

Hyperinflation can best be stopped if a government

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 11

Which of the following countries did NOT experience hyperinflation during the 1980s?

A)Argentina
B)Bolivia
C)Brazil
D)Germany
E)Israel

Question 12

Which of the following is TRUE for the U.S.from 1995 to 2013?

A)the inflation rate fluctuated much less than the growth rate of M2
B)the inflation rate and the growth rate of M2 followed very similar patterns
C)the inflation rate averaged about 4 percent per year
D)the growth rate of M2 averaged about 8 percent per year
E)all of the above

Question 13

When we look at the period from 1960 to 2009, which of the following is TRUE on an average annual basis for the U.S.?

A)M1 grew by more than M2, but neither grew as much as GDP
B)the rate of inflation was about the same as the growth rate of M2
C)the rate of inflation was slightly higher than the growth rate of M1
D)the inflation rate was about the same as the growth rate of M2 minus the GDP growth rate
E)GDP growth exceeded the growth rate of M2 but not M1

Question 14

Assuming a long-run relationship, if nominal money supply grows at a rate of 5%, real output growth is 3%, and the inflation rate is 2%, what is the percentage change in velocity?

A)5%
B)2%
C)1%
D)0%
E)-1%

Question 15

Which of the following is NOT a monetarist proposition?

A)monetary policy is better conducted by a rule than by discretion
B)monetary policy affects the economy with long and variable lags
C)the Fed should undertake a more active monetary policy
D)the private sector is inherently stable
E)to conduct monetary policy, money targets are generally better than interest rate targets

Question 16

Which of the following is FALSE?

A)in the short run, the rate of monetary growth and the rate of inflation always follow the same pattern
B)in the short run, a change in the growth rate of money can affect the level of output
C)in the short run, factors other than an increase in the growth rate of money can cause inflation to increase
D)in the long run, a sustained increase in the growth rate of money will cause the inflation rate to increase
E)in the long run, a sustained increase in the growth rate of money will have no effect on the level of output

Question 17

Monetarists generally propose that the government should

A)use active monetary policy to stabilize the economy since fiscal policy has no credibility
B)let money supply grow whenever budget deficits increase to keep interest rates low
C)always lower monetary growth gradually so inflationary expectations have time to adjust
D)target nominal interest rates rather than real interest rates, since real interest rates are hard to determine
E)none of the above

Question 18

Assuming a long-run relationship, if the nominal money supply grows at a rate of 12%, the inflation rate is 8%, and real output growth is 4%, what is the percentage change in velocity?

A)0%
B)4%
C)8%
D)12%
E)16%

Question 19

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

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 20

If we look at the yearly average rate of M2 growth minus the yearly average rate of GDP growth in different decades for the United States, we see that

A)from 1960 to 2009, this difference was very close to the average inflation rate
B)from 1970 to 1979, this difference was slightly lower than the average inflation rate
C)from 1980 to 1989, this difference was very close to the average inflation rate
D)from 2000 to 2009, this difference was much higher than the average inflation rate
E)all of the above

Question 21

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

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

Question 22

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

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 23

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

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 24

Which measure was successful in 2009 in putting an end to Zimbabwean hyperinflation

A)the Zimbabwean dollar was devalued by more than half
B)the old Zimbabwean dollar was replaced by the new Zimbabwean dollar, which had fewer zeros printed on it
C)the U.S. dollar and the South African rand were substituted for the Zimbabwean dollar as a medium of exchange
D)money was eliminated in favor of a barter economy
E)none of the above

Question 25

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

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

Question 26

Which of the following statements is FALSE?

A)the relationship between money growth and inflation is much looser for M1 than M2
B)in the short run, the velocity of M2 is affected by variations in output and interest rates
C)there is no economic rule that says that velocity must be constant in the long run
D) in the long run, the inflation rate is always exactly equal to the growth rate of money supply
E)higher monetary growth lowers real interest rates in the short run, but raises nominal interest rates in the long run

Question 27

From 1983-88, Peru had an annual inflation rate of 1,797%.What percentage of GDP did the Peruvian government raise in revenue through the so-called "inflation tax"?

A)1)9%
B)3)5%
C)4)7%
D)7)2%
E)9)8%

Question 28

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

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 29

When an anti-inflation policy is credible,

A)a new long-run equilibrium at a lower inflation rate is reached much faster
B)the sacrifice ratio is zero
C)the Fed can cheat a little by letting money supply grow to avoid a recession
D)real wages immediately adjust and thus no increase in the rate of unemployment is needed to reduce inflation
E)there is no need for workers to adjust their wage demands, so the economy will adjust more easily to a new long-run equilibrium

Question 30

The term seigniorage refers to the government's ability to

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 31

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

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

Question 32

Disinflation is less costly if

A)the anti-inflation policy is not announced in advance
B)wages and prices are not very flexible
C)it is phased in gradually
D)a cold turkey approach is chosen
E)money supply is drastically reduced

Question 33

From 1983-88, which of these countries had the HIGHEST average inflation rate?

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

Question 34

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

Question 35

Which of the following scenarios will result in the largest reduction in inflation at the lowest cost in terms of a reduction in output?

A)monetary restriction combined with fiscal expansion
B)monetary restriction implemented after an oil price decrease
C)monetary expansion combined with fiscal contraction
D)a spending cut combined with a tax cut of equal magnitude
E)a sharp reduction in monetary growth after an oil price increase

Question 36

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

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 37

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

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 38

The inflation tax revenue is defined as

A)the inflation rate plus the growth in the real money base
B)the inflation rate minus the growth in the real money base
C)the inflation rate minus the real money base
D)the inflation rate times the real money base
E)the inflation rate times the growth in the real money base

Question 39

What was Bolivia's average inflation rate during the period of 1983-88?

A)21%
B)35%
C)87%
D)382%
E)1,797%

Question 40

The recent hyperinflation in Zimbabwe was finally stopped when

A)the inflation rate reached 1,000% per year
B)the government implemented a massive tax increase
C)the government replaced its old currency with a new currency
D)the government made it legal for people to use foreign currencies for trade
E)none of the above

Question 41

In order to stop hyperinflation a government can

A)introduce new money and ensure that the money growth remains stable
B)peg the exchange rate of the new money that is introduced to that of a stable foreign currency
C)allow the use of another country's currency as a medium of exchange
D)all of the above
E)none of the above

Question 42

Assume that the debt-to GDP ratio is 100%, the inflation rate is 2.5% and the total budget deficit is 4% of GDP.What is the inflation-adjusted budget deficit as a percentage of GDP?

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

Question 43

In 2011, the increase in the U.S.monetary base was

A)more than 4% of GDP
B)more than 3% of GDP
C)almost 3% of GDP
D)only 2% of GDP
E)less than 1% of GDP

Question 44

The term seigniorage refers to

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 45

Which of the following statements is TRUE?

A)hyperinflation often occurs in the aftermath of a war
B) large budget deficits are typical for a country experiencing hyperinflation
C)a government can utilize the inflation tax to finance at least part of its deficit
D)the inflation tax revenue is equal to the inflation rate multiplied by the real money base
E)all of the above

Question 46

If we create a diagram with inflation tax revenue measured on the vertical axis and the inflation rate measured on the horizontal axis, we will get a curve that

A)is U-shaped
B)is steadily increasing
C) is steadily declining
D)initially increases but then decreases
E)none of the above

Question 47

During the hyperinflation in Zimbabwe early in this century, which of the following was TRUE?

A)in 2006, the inflation rate reached 1,200 percent
B)in 2004, the inflation rate reached 600 percent
C)between January, 2004 and January, 2005, the rate of inflation was cut by 400 percent
D)in November, 2008, the rate of inflation was about 100 percent a day
E)all of the above

Question 48

Assuming a long-run relationship, if nominal money supply grows at a rate of 6.5%, real output growth is 3.2%, and the inflation rate is 2.8%, what is the percentage change in velocity?

A)6)1%
B)0)5%
C)0%
D)-0.1%
E)-0.5%

Question 49

When deciding whether or not to monetize a deficit, a central bank faces a dilemma, since if it decides

A)not to finance the deficit, higher interest rates may lead to the crowding out of private spending
B) not to finance the deficit, the domestic currency may depreciate and balance of payments problems may result
C) to finance the deficit, excessive monetary growth may lead to inflation
D)to finance the deficit, interest rates may increase too much
E)both A)and C)

Question 50

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?

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