Deck 8: Money, Prices, and Inflation

Question 1

The questions with which Chapter 8 is concerned include each of the following except

A) What do economists mean when they say "money"?
B) Why is money useful?
C) What do economists mean when they say that money is a "unit of account"?
D) What can individuals do to make money?

Answer 1

What can individuals do to make money?

Question 2

The questions with which Chapter 8 is concerned include each of the following except

A) What determines the price level and the inflation rate?
B) Why is inflation always bad?
C) What determines the demand for money?
D) What determines the supply of money?

Answer 2

Why is inflation always bad?

Question 3

The questions with which Chapter 8 is concerned include each of the following except

A) What do economists mean when they say "money"?
B) Why would a government ever generate hyperinflation?
C) Why is inflation always caused by too much money in the economy?
D) Why is inflation best avoided?

Answer 3

Why is inflation always caused by too much money in the economy?

Question 4

The questions with which Chapter 8 is concerned include each of the following except

A) What does money have to backed by gold in order to be "good" money?
B) Why is money useful?
C) What do economists mean when they say that money is a "unit of account"?
D) What determines the demand for money?

Question 5

The overall price level is

A) the marginal level of nominal prices in an economy.
B) the average level of real prices in an economy.
C) the marginal level of real prices in an economy.
D) the average level of nominal prices in an economy.

Question 6

The rate of inflation or deflation is

A) the rate of change in the overall interest rate level.
B) the rate of change in the overall price level.
C) the rate of change in the overall wage level.
D) the rate of change in the overall exchange rate level.

Question 7

In Russia in 1998 the price level

A) rose at a rate of 60 percent per month.
B) rose at a rate of 60 percent per week.
C) rose at a rate of 60 percent per year.
D) rose at a rate of between five and ten percent per year.

Question 8

In Germany in 1923 the price level

A) rose at a rate of 60 percent per month.
B) rose at a rate of 60 percent per week.
C) rose at a rate of 60 percent per year.
D) rose at a rate of between five and ten percent per year..

Question 9

In the United States during the 1970s, the price level

A) rose at a rate of 60 percent per month.
B) rose at a rate of 60 percent per week.
C) rose at a rate of 60 percent per year.
D) rose at a rate of between five and ten percent per year.

Question 10

The classical dichotomy means that

A) real variables (such as real GDP, real investment spending, or the real exchange rate) can be analyzed and calculated without thinking of nominal variables such as the price level.
B) real variables (such as the price level)can be analyzed and calculated without thinking of nominal variables such as real GDP, real investment spending, or the real exchange rate.
C) real variables (such as real GDP, real investment spending, or the real exchange rate) cannot be analyzed and calculated without thinking of nominal variables such as the price level.
D) real variables (such as real GDP, real investment spending, or the price level) can be analyzed and calculated with out thinking of nominal variables such as wage rate.

Question 11

One of the reasons for exploring what determines the overall level of prices and the rate of inflation in our flexible-price full-employment model of the macroeconomy is that

A) over the short-run, wages and prices are effectively flexible.
B) over relatively long periods of time, wages and prices are effectively flexible.
C) wages and prices are always flexible, as assumed in the model.
D) unemployment very rarely occurs anymore.

Question 12

To an economist, money

A) is wealth that is not easily spent.
B) is a precious metal such as gold.
C) is wealth that is held in a readily spendable form.
D) is equal to the difference between total revenue and total cost of a business.

Question 13

Each of the following is part of the economy's stock of money except

A) coin and currency that are transferred by handing the cash over to the seller.
B) credit cards held by the private sector.
C) checking account balances that are transferred by electronic debit or by writing a check.
D) other assets, like savings account balances, that can be turned into cash or demand deposits nearly . instantaneously, risklessly, and costlessly.

Question 14

In a barter economy

A) one could easily find another with which to make a transaction.
B) the only money used is gold.
C) an extraordinary amount of time and energy would be spent simply arranging the goods one needed to trade.
D) none of the above.

Question 15

The fact that money serves as a medium of exchange as well as a unit of account is a potential cause of trouble because anything that alters the real value of the domestic money in terms of its purchasing power over goods and services

A) will also alter the real terms of those existing contracts that use money as the unit of account.
B) will also alter the real terms of those existing contracts that use money as the medium of exchange.
C) will invalidate existing contracts that use money as the unit of account.
D) will cause people to hoard money.

Question 16

The benefit of holding money in one's portfolio is

A) the rate of return foregone by not holding interest-bearing assets.
B) the high rate of interest earned on money balances.
C) that it makes buying things easier.
D) that holding money is necessary in order to buy things.

Question 17

The cost of holding money in one's portfolio is

A) that holding money makes you wealthier than holding other assets.
B) how much it costs to store money.
C) that it makes buying things easier.
D) the rate of return foregone by not holding interest-bearing assets.

Question 18

The amount of wealth households and businesses wish to hold in the form of money depends on

A) the benefits of holding money - the interest and profits gained - and the opportunity cost - the ease of making transactions gained.
B) the benefits of holding money - the status gained by doing so - and the opportunity cost - the cost of transactions not made.
C) the benefits of holding money - the ease of transactions gained - and the opportunity cost - the lost interest and profits.
D) the savings rate of households and businesses.

Question 19

The amount of money households and businesses wish to hold will _________ if total spending increases and will _________ transactions technology increases.

A) increase; increase
B) decrease; increase
C) decrease; decrease
D) increase; decrease

Question 20

The theory that the only important determinant of the demand for money is the flow of spending is called the

A) nominal theory of money.
B) quantity theory of money.
C) quality theory of money.
D) price theory of money.

Question 21

The quantity theory of money equation is

A) money demand equals one divided by the velocity of money times the total nominal flow of spending.
B) money times the velocity of money equals the total nominal flow of spending.
C) money divided by the velocity of money equals the total nominal flow of spending.
D) money divided by the price level equals the velocity of money times the output level.

Question 22

In quantity theory of money equation, P x Y represents

A) the total real flow of spending.
B) the net nominal flow of spending.
C) the total nominal flow of spending.
D) the net real flow of spending.

Question 23

In the quantity theory of money, V represents

A) the velocity of money: the amount of money households and businesses wish to hold.
B) the velocity of money: amount of money households and businesses actually hold.
C) the velocity of money: amount of wealth households and businesses wish to hold.
D) the velocity of money: how often a given unit of money is spent and changes hands over the course of a year.

Question 24

In the flexible-price model of the macroeconomy with a given velocity of money and real GDP, the price level is determined by

A) the wealth level of households and businesses.
B) the stock of money in the economy.
C) the amount of savings in the economy.
D) the amount of total spending in the economy.

Question 25

In the flexible-price model of the macroeconomy with a given velocity of money and real GDP, the price level is equal to

A) (V / Y) x M.
B) (V x Y) / M.
C) (Y / V) x M.
D) (M/V)+Y.

Question 26

If the real GDP is equal to $8 trillion, the stock of money is equal to $2 trillion, and the velocity of money is equal to 5, the price level would be equal to

A) 20.
B) 3.2
C) 1.25
D) 8.4.

Question 27

If the money supply increases by10%, velocity decreases by 1%, and real GDP grows by 3%, then the price level

A) will increase by 12%.
B) will increase by 6%.
C) will increase by 14%.
D) will increase 8%.

Question 28

In the United States, the ____________, determines the money stock.

A) Federal Reserve
B) the House of Representatives.
C) the Senate
D) the President

Question 29

The monetary base is

A) the sum of currency in circulation plus the amount of demand deposits in the banking system.
B) the sum of currency in circulation plus the amount of gold in Fort Knox.
C) the amount of gold in Fort Knox.
D) the amount of currency in circulation plus the amount of deposits in the Federal Reserve's 12 branches.

Question 30

When the central bank wants to reduce the monetary base,

A) it buys short-term government bonds and accepts as payment either currency or deposits that banks already hold at the Fed's regional branches.
B) it sells short-term government bonds and accepts as payment either currency or deposits that banks already hold at the Fed's regional branches.
C) it buys back government bonds to reduce government debt.
D) it raises taxes.

Question 31

When the central bank wants to increase the monetary base,

A) it buys short-term government bonds and accepts as payment either currency or deposits that banks already hold at the Fed's regional branches.
B) it sells short-term government bonds and accepts as payment either currency or deposits that banks already hold at the Fed's regional branches.
C) it sells newly created government bonds to cover the increased government debt.
D) it decreases taxes.

Question 32

The process of a central bank buying and selling government bonds is called

A) fiscal policy.
B) changing the discount rate.
C) changing the federal funds rate.
D) open market operations.

Question 33

The narrowest definition of money - called H for "High-Powered Money," or B for "Monetary Base,"
Includes

A) cash and deposits at branches of the Federal Reserve.
B) cash plus demand deposits at commercial banks.
C) the amount of gold held by the Federal Reserve plus deposits at branches of the Federal Reserve.
D) the amount of gold held by the Federal Reserve.

Question 34

The most commonly used definition of money is M1, which consists of

A) cash plus deposits at branches of the Federal Reserve.
B) currency plus checking account deposits.
C) currency plus checking account deposits, travelers checks, and any other deposits at institutions from . which the depositor can demand his or her money back and get it instantaneously.
D) currency plus the amount of gold held by banks and the public.

Question 35

The M2 definition of money consists of

A) wealth held in the form of savings accounts, in relatively small term deposits, and in money-market mutual funds.
B) M1 plus wealth held in the form of savings accounts, wealth held in relatively small term deposits, and . money in money market mutual funds.
C) M1 plus wealth held in money-market mutual fund.
D) M1 plus wealth held in the form of savings accounts.

Question 36

The inflation rate $\pi$ is equal to

A) the velocity growth rate plus the real GDP growth rate minus the money growth rate.
B) the money growth rate plus the real GDP growth rate minus the velocity growth rate.
C) the money growth rate plus the velocity growth rate minus the real GDP growth rate.
D) the velocity growth rate times the money growth rate divided by the real GDP growth rate.

Question 37

If the velocity decreases by 1% per year, the money supply increases by 4% per year, and real GDP increases by 2%, then inflation $\pi$ will equal

A) 3%
B) -1%
C) 5%
D) 1%

Question 38

If the velocity remains constant, the money supply increases by 4% per year, and real GDP increases by 2%, then inflation $\pi$ will equal

A) -2%
B) 2%
C) 6%
D) 0%

Question 39

The inflation rate $\pi$ is equal to

A) v + y - m.
B) m + v - y.
C) m + y - v.
D) v x m / y.

Question 40

Using the quantity theory of money, the bulk of changes in the rate of inflation are due to

A) changes in the growth rate the velocity of money.
B) changes in the growth rate of real GDP.
C) changes in the growth rate of the money supply.
D) changes in the growth rate of real wages.

Question 41

In the world of the quantity theory of money, the growth rate of the velocity of money is

A) determined by the slow pace of institutional and technological change in the banking system.
B) determined by changes in the rate of interest.
C) determined by changes in real GDP.
D) determined by changes in the money supply.

Question 42

One reason to care about inflation is

A) that inflation makes us directly and significantly poorer.
B) inflation rewards debtors.
C) inflation causes firms to devote more time and energy changing prices.
D) inflation causes us to devote less time and energy to managing our cash balances.

Question 43

The costs of __________ inflation are less than the costs of __________ inflation.

A) unexpected; expected
B) expected; unexpected
C) moderate; expected
D) moderate; unexpected

Question 44

The most significant cost of moderate inflation that is greater than expected is

A) that it redistributes wealth from debtors to creditors.
B) that it redistributes income from wage workers to salaried workers.
C) that it redistributes income from the service sector to the manufacturing sector.
D) that it redistributes wealth from creditors to debtors.

Question 45

The most significant cost of moderate inflation that is less than expected is

A) that it redistributes wealth from debtors to creditors.
B) that it redistributes income from wage workers to salaried workers.
C) that it redistributes income from the service sector to the manufacturing sector.
D) that it redistributes wealth from creditors to debtors.

Question 46

A very important cost of unexpected inflation is

A) that it creates a windfall gain for property owners.
B) that it creates uncertainty and unpredictability.
C) that it has a tendency to increase nominal interest rates and thus reduce investment spending.
D) that it creates a windfall gain for creditors.

Question 47

Moderate inflation has proven to be

A) popular with voters.
B) a significant cause of political stability in the world.
C) unpopular with voters.
D) a powerful too for showing that governments can successfully mange the economy.

Question 48

Hyperinflations arise when governments attempt to obtain extra revenue

A) by printing money and overestimate how much they can raise.
B) by selling bonds and overestimate how much they can raise.
C) by raising taxes and overestimate how much they can raise.
D) by printing money and underestimate how much they can raise.

Question 49

A government that finances its spending by printing money is actually financing its spending by

A) borrowing from the public.
B) borrowing from other branches of government.
C) levying a tax on holdings of cash.
D) borrowing from people in other countries.

Question 50

If the government increases the money supply by 25%, and the velocity of money and real GDP remain constant,

A) the inflation tax will be 50%.
B) the inflation tax will be 25%.
C) the inflation tax will be 75%.
D) the inflation tax will be 100%.

Question 51

If the government increases the money supply by 25%, and the velocity of money and real GDP remain constant,

A) the value of real cash balances will increase by 50%.
B) the value of real cash balances will decrease by 50%.
C) the value of real cash balances will decrease by 75%.
D) the value of real cash balances will decrease by 25%.

Question 52

The inflation tax is considered a bad tax because

A) it is a heavy tax on a narrow base of economic activity - holding wealth as cash balances.
B) it is a heavy tax on a narrow base of economic activity - holding wealth as demand deposits.
C) it is a heavy tax on a narrow base of economic activity - holding wealth as stocks.
D) it is a heavy tax on a narrow base of economic activity - holding wealth as bonds.

Question 53

One of the distinct possibilities of a continued hyperinflation is

A) the breakdown of the price system and the resort to a barter system
B) the breakdown of the tax collection system and the resort to a barter system.
C) the breakdown of the monetary system and the resort to a barter system.
D) the breakdown of the energy system and the resort to a barter system.

Question 54

One problem with the quantity theory of money is that, in the real world,

A) real GDP fluctuates greatly.
B) real wages fluctuate greatly.
C) inflation is not always proportional to money growth.
D) the velocity of money never changes.

Question 55

One problem with the quantity theory of money is

A) the representation of real GDP as growing at a fairly stable percentage.
B) the representation of inflation as the rate of change of the price level.
C) the representation of the velocity of money as wildly fluctuating and unstable.
D) the representation of velocity of money as a constant or slowly-moving steady trend.

Question 56

Economic theory suggests that money demand should be inversely related to

A) the real interest rate.
B) the nominal interest rate.
C) real GDP.
D) the exchange rate.

Question 57

The nominal interest rate is

A) the sum of the real interest rate and the current inflation rate.
B) the difference between the real interest rate and the current exchange rate.
C) the real interest rate times the current inflation rate.
D) the real interest rate plus the real exchange rate.

Question 58

The expected real return on holding wealth in readily spendable form is

A) the expected nomianl interest rate.
B) the expected real interest rate.
C) the expected inflation rate.
D) the negative of the expected inflation rate

Question 59

The opportunity cost of holding money is

A) the real rate of interest.
B) the negative of the expected inflation rate.
C) the sum of the real interest rate and the expected inflation rate.
D) the difference between the expected inflation rate and the real interest rate

Question 60

The opportunity cost of holding money is

A) the real rate of interest.
B) the negative of the expected inflation rate.
C) the nominal interest rate.
D) the difference between the expected inflation rate and the real interest rate.

Question 61

The demand for real money balances (M^d/Y) is equal to

A) M_yY + M_i i.
B) M_yY - M_i i.
C) M_y i + M_i Y.
D) M_i i - M_y Y.

Question 62

The demand for real money balances (M^d/Y) is equal to

A) M_yY + M_i (r + B^e).
B) M_yY - M_i (r + B^e).
C) M_y (r + B^e) + M_i Y.
D) M_i (r + B^e) - M_y Y.

Question 63

If the nominal interest rate increases, the demand for money will ________ and the velocity of money will ________.

A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease

Question 64

If the nominal interest rate decreases, the demand for money will ________ and the velocity of money will ________.

A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease

Question 65

If the expected inflation rate increases, the demand for money will ________ and the velocity of money will ________.

A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease

Question 66

If the expected inflation rate decreases, the demand for money will ________ and the velocity of money will ________.

A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease

Question 67

In the flexible price macroeconomy with the demand for money inversely related to the nominal interest rate, an increase in the rate of growth of the money supply

A) leads to an immediate jump in real GDP, to an increase in the inflation rate, to a decrease in the quantity of money demanded, and to an increase in the velocity of money.
B) leads to an immediate jump in the price level, to an increase in the inflation rate, to a decrease in the quantity of money demanded, and to an increase in the velocity of money.
C) leads to an immediate jump in real GDP, to a decrease in the inflation rate, and to a decrease in the quantity of money demanded, and to a decrease in the velocity of money.
D) leads to an immediate jump in the price level, to an increase in the inflation rate, to an increase in the quantity of money demanded, and to a decrease in the velocity of money.