Deck 10: Money Growth and Inflation

Question 1

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.

Answer 1

True

Question 2

In the long run, the demand for money is most dependent upon the

A)level of prices.
B)interest rate.
C)availability of banking outlets.
D)availability of credit cards.

Answer 2

level of prices.

Question 3

Real economic variables measure

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.

Answer 3

value in the prices of some certain base year.

Question 4

An inflation tax is paid by those that hold money because inflation reduces the value of their money holdings.

Question 5

Suppose an economy produces only ice cream cones.If the price level rises, the value of currency

A)rises, because one unit of currency buys more ice cream cones.
B)rises, because one unit of currency buys fewer ice cream cones.
C)falls, because one unit of currency buys more ice cream cones.
D)falls, because one unit of currency buys fewer ice cream cones.

Question 6

In the long run, an increase in the money supply tends to have an effect on real variables but no effect on nominal variables.

Question 7

In the long run, inflation is caused by

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.

Question 8

If the price level doubles,

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.

Question 9

If inflation turns out to be higher than people expected, wealth is redistributed to lenders from borrowers.

Question 10

The term hyperinflation refers to

A)the spread of inflation from one country to others.
B)a decrease in the inflation rate.
C)a period of very high inflation.
D)inflation accompanied by a recession.

Question 11

When prices rise at an extraordinarily fast rate, it is called

A)disinflation.
B)deflation.
C)hyperinflation.
D)inflation.
E)hypoinflation.

Question 12

Monetary neutrality means that a change in the money supply doesn't cause a change in anything at all.

Question 13

If the price level were to double, the quantity of money demanded would double because people would need twice as much money to cover the same transactions.

Question 14

The shoeleather costs of inflation should be approximately the same for a medical doctor and for an unemployed worker.

Question 15

The supply of money is determined by

A)the price level.
B)the Treasury and the Budget Office.
C)the South African Reserve Bank.
D)the demand for money.

Question 16

If the nominal interest rate is 7 per cent and the inflation rate is 5 per cent, the real interest rate is 12 per cent.

Question 17

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

A)increase in prices.
B)increase in real output.
C)decrease in velocity.
D)increase in velocity.
E)decrease in prices.

Question 18

If the money supply is R500, real output is 2,500 units, and the average price of a unit of real output is R2, the velocity of money is 10.

Question 19

Economists agree that

A)neither high inflation nor moderate inflation is very costly.
B)both high and moderate inflation are quite costly.
C)high inflation is costly, but they disagree about the costs of moderate inflation.
D)moderate inflation is as costly as high inflation.

Question 20

An increase in the price level is the same as a decrease in the value of money.

Question 21

An example of a real variable is

A)the wage rate in rands.
B)None of these answers are real variables.
C)the price of corn.
D)the nominal interest rate.
E)the ratio of the value of wages to the price of fizzy drinks.

Question 22

According to the classical view, to prevent price-level changes when real output is growing by 3 per cent per year, the money supply must

A)decrease by 3 per cent per year.
B)increase by 3 per cent per year.
C)increase by more than 3 per cent per year.
D)remain constant.

Question 23

Money demand depends on

A)the price level and the interest rate.
B)the price levels but not the interest rate.
C)the interest rates but not the price level.
D)neither the price level nor the interest rate.

Question 24

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

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.

Question 25

If the nominal interest rate is 6 per cent and the inflation rate is 3 per cent, the real interest rate is

A)3 per cent.
B)6 per cent.
C)9 per cent.
D)18 per cent.
E)None of these answers.

Question 26

Countries that employ an inflation tax do so because

A)the governme doesn't understand the causes and consequences of inflation.
B)government expenditures are high, and the government has inadequate tax collections and difficulty borrowing.
C)an inflation tax is the most progressive (paid by the rich) of all taxes.
D)an inflation tax is the most equitable of all taxes.
E)the government has a balanced budget.

Question 27

The velocity of money is

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 28

The nominal demand for money

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 29

An inflation tax

A)is usually employed by governments with balanced budgets.
B)None of these answers.
C)is an explicit tax paid quarterly by businesses based on the amount of increase in the prices of their products.
D)is a tax borne only by people who hold interest bearing savings accounts.
E)is a tax on people who hold money.

Question 30

In the quantity theory of money

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 31

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

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 32

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

A)5 per cent.
B)more than 5 per cent.
C)less than 5 per cent.
D)None of these answers.

Question 33

If money is neutral,

A)an increase in the money supply does nothing.
B)a change in the money supply only affects real variables such as real output.
C)a change in the money supply reduces velocity proportionately; therefore there is no effect on either prices or real output.
D)a change in the money supply only affects nominal variables such as prices and wages.
E)the money supply cannot be changed because it is tied to a commodity such as gold.

Question 34

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

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 35

Suppose the nominal interest rate is 7 per cent, while the money supply is growing at a rate of 5 per cent per year.If the government increases the growth rate of the money supply from 5 per cent to 9 per cent, the Fisher effect suggests that, in the long run, the nominal interest rate should become

A)4 per cent.
B)9 per cent.
C)11 per cent.
D)12 per cent.
E)16 per cent.

Question 36

If actual inflation turns out to be greater than people had expected, then

A)no redistribution occurred.
B)wealth was redistributed to lenders from borrowers.
C)the real interest rate is unaffected.
D)wealth was redistributed to borrowers from lenders.

Question 37

The Fisher effect is

A)the one-for-one adjustment of the nominal interest rate to the rate of growth of real GDP.
B)the one-for-one adjustment of the nominal interest rate to the inflation rate.
C)the effect of changes in the velocity of money on the nominal interest rate.
D)the effect of a current account deficit on the nominal interest rate.

Question 38

If real output in an economy is 1,000 units of goods per year, the money supply is R300, and each euro is spent 3 times per year, then the average price of goods is

A)R0.90 per unit.
B)R1.11 per unit.
C)R1.50 per unit.
D)R1.33 per unit.

Question 39

The quantity equation states that

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 40

Since, in classical economic theory, both the velocity of money and real output are assumed to be stable,

A)changes in the quantity of money explain changes in the price level.
B)changes in the quantity of money explain changes in real GDP.
C)changes in the money supply cause changes in the velocity of money.
D)prices are fixed.

Question 41

Some economists feel inflation is bad

A)because it reduces real GDP so much.
B)only if it is persistent.
C)because it redistributes income arbitrarily.
D)only if it is anticipated.

Question 42

Which of the following statements is NOT true?

A)Deflation refers to a situation in which the price level is falling.
B)When the price level is falling there is always an incentive to delay spending, and so there is a negative effect on economic activity.
C)Cutting interest rates to zero to fight deflation may not work, because the opportunities for profitable investment are likely to be limited.
D)Deflation is good for workers, because with wages falling there will be plenty of employment opportunities.

Question 43

Deflation

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.

Question 44

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

Question 45

Economists agree that increases in the money supply growth rate increase inflation and that inflation is undesirable.So why have there been hyperinflations and how have they been ended?

Question 46

According to the classical dichotomy, what changes nominal variables? What changes real variables?

Question 47

What is the inflation tax, and how might it explain the creation of inflation by a central bank?

Question 48

Wages and prices are many times higher today than they were 30 years ago, yet people do not work a lot more hours or buy fewer goods.How can this be?

Question 49

Suppose that velocity and output are constant and that the quantity theory and the Fisher effect both hold.What happens to inflation, real interest rates, and nominal interest rates when the money supply growth rate increases from 5 per cent to 10 per cent.

Question 50

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

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 51

Define each of the symbols and explain the meaning of M×V = P×Y.

Question 52

When prices are falling, economists say that there is

A)disinflation.
B)deflation.
C)a contraction.
D)an inverted inflation.

Question 53

Which of the following statements is NOT true?

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 54

Using separate graphs, demonstrate what happens to the money supply, money demand, the value of money, and the price level if:
a.The central bank increases the money supply.
b.People decide to demand less money at each value of money.

Question 55

Unanticipated inflation benefits

A)investors at the expense of savers.
B)publicly quoted companies at the expense of private partnerships.
C)borrowers at the expense of lenders.
D)taxpayers at the expense of government.

Question 56

What assumptions are necessary to argue that the quantity equation implies that increases in the money supply lead to proportional changes in the price level?

Question 57

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

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 58

Suppose that, because of inflation, a business in South Africa must calculate, print, and mail a new price list to its customers each month.This is an example of

A)shoeleather costs.
B)costs due to confusion and inconvenience.
C)arbitrary redistributions of wealth.
D)costs due to inflation induced tax distortions.
E)menu costs.