Deck 4: Money and Inflation

Question 1

An intrinsically useful good that plays the role of money is called

A) fiat money.
B) a medium of exchange.
C) commodity money.
D) legal tender.

Answer 1

C

Question 2

In today's economy,dollar bills serve as money because

A) people have confidence that others will accept them as money.
B) they are backed by gold.
C) they have a value as a commodity independent of their use as money.
D) they can be redeemed for gold by the Bank of Canada.

Answer 2

A

Question 3

Which of the following functions of money would be least affected if the economy experiences high rates of inflation?

A) unit of account
B) store of value
C) standard of deferred payment
D) medium of exchange

Answer 3

A

Question 4

Suppose you purchase a bottle of vitamin water with a price of $3.The price of $3 best reflects the function of money as a ________,and when you take $3 out of your wallet to purchase the bottle,money is functioning as a ________.

A) medium of exchange; standard of deferred payment
B) store of value; unit of account
C) unit of account; medium of exchange
D) medium of exchange; store of value

Question 5

The M1+ measure of the money supply equals

A) currency in circulation.
B) currency outside banks.
C) currency outside banks plus chequable deposits at chartered banks and other financial institutions.
D) currency outside banks plus non-chequable and personal term deposits at chartered banks and other financial institutions.

Question 6

If bananas were used as money,which of the following functions of money would be the hardest for bananas to satisfy?

A) unit of account
B) store of value
C) divisibility
D) medium of exchange

Question 7

If Jennifer withdraws $750 from her savings account and deposits it in her chequing account,then M1+ will ________ and M2+ will ________.

A) increase; increase
B) increase; decrease
C) increase; not change
D) not change; decrease

Question 8

Which of the following is one of the most important benefits of money in an economy?

A) Money allows for the accumulation of wealth.
B) Money makes exchange easier, leading to more specialization and higher productivity.
C) Money encourages self-sufficiency and therefore increases economic stability.
D) Money allows for the exchange of goods and services.

Question 9

A major shortcoming of a barter economy is

A) the requirement of specialization and exchange.
B) that money loses value over time from inflation.
C) the requirement of a double coincidence of wants.
D) that most goods and services cannot be traded.

Question 10

The government's profit from issuing fiat money is known as

A) seigniorage.
B) menu costs.
C) commodity profit.
D) tax distortions.

Question 11

Describe the three functions of money.Must all money fulfill all three functions?

Question 12

If Jennifer withdraws $750 from her chequing account and holds it as currency,then M1+ will ________ and M2+ will ________.

A) decrease; not change
B) not change; increase
C) decrease; decrease
D) not change; not change

Question 13

Explain why gold,despite its value,is difficult to use as a medium of exchange.

Question 14

Which of the following statements regarding the use of gold as money is false?

A) It is durable.
B) It is acceptable to most people.
C) It is valuable relative to its weight.
D) It has standardized quality.

Question 15

Changes in the money supply are ________ to other economic variables,and since late 1981,the Bank of Canada has ________ in monetary policymaking.

A) closely connected; emphasized the role of M2+ over M1+
B) closely connected; emphasized the role of M1+ over M2+
C) closely connected; emphasized the roles of both M1+ and M2+
D) no longer closely connected; de-emphasized the roles of M1+ and M2+

Question 16

Money's most narrow definition is based on its function as a

A) medium of exchange.
B) store of value.
C) standard of deferred payment.
D) unit of account.

Question 17

Fiat money has

A) little to no intrinsic value but is backed by the quantity of gold held by the central bank.
B) great intrinsic value because it can be exchanged for gold at the central bank.
C) little to no intrinsic value and is authorized by the central bank or governmental body.
D) great intrinsic value that is independent of its use as money.

Question 18

Table 4.1

Refer to Table 4.1.In this simple economy,M2+ equals

A) $4800.
B) $6400.
C) $9200.
D) $16 800.

Question 19

Table 4.1

Refer to Table 4.1.In this simple economy,M1+ equals

A) $2500.
B) $2600.
C) $4800.
D) $12 400.

Question 20

Reserves are a bank ________ consisting of ________.

A) asset; vault cash plus bank deposits with the central bank
B) asset; chequing account deposits and savings account balances
C) liability; vault cash plus bank deposits with the Federal Reserve
D) liability; chequing account deposits and savings account balances

Question 21

The money supply will decrease if

A) either the monetary base or the money multiplier increases in value.
B) either the monetary base or the money multiplier decreases in value.
C) either the monetary base increases in value or the money multiplier decreases in value.
D) either the monetary base decreases in value or the money multiplier increases in value.

Question 22

The sale of government securities by the Bank of Canada will,in general,

A) not change the money supply.
B) not change the quantity of reserves held by banks.
C) decrease the quantity of reserves held by banks.
D) increase the quantity of reserves held by banks.

Question 23

If the required reserve ratio increases and the monetary base is unchanged,the value of the money multiplier will ________ and the value of the money supply will ________.

A) decline; decline
B) decline; increase
C) increase; decline
D) increase; increase

Question 24

If there is no change in the quantity of currency,the purchase of $100 million of government bonds by the Bank of Canada will cause reserves at banks to

A) decrease by $100 million.
B) increase by $100 million.
C) decrease by less than $100 million.
D) increase by less than $100 million.

Question 25

The growth rate of real GDP in Astoria is 7.5%.Assume the growth rate of velocity is constant at a rate of 5%.If Astoria wishes to decrease the inflation rate from the annual rate of 5.99% to a target rate of 4.5% and maintain its current growth rate of real GDP,what will the growth rate of the money supply need to be?

A) 6.49%
B) 7%
C) 8%
D) 8.49%

Question 26

The quantity theory of money predicts that,in the long run,inflation results from the

A) money supply growing at a slower rate than real GDP.
B) money supply growing at a faster rate than real GDP.
C) velocity of money growing at a slower rate than real GDP.
D) velocity of money growing at a faster rate than real GDP.

Question 27

Suppose banks hold no excess reserves,households and firms do not change the amount of currency they hold,and the required reserve ratio is 25%.If the Bank of Canada purchases $1 million in government bonds,what will be the changes in bank reserves and total chequing account deposits in the whole banking system?

Question 28

Assume that the growth rate of real GDP in Astoria is 7.5%.Assume the growth rate of velocity is 0%.If Astoria's current annual inflation rate is 5.99%,the growth rate of the money supply will be

A) -1.51%.
B) 1.51%.
C) 5.99%.
D) 13.49%.

Question 29

The quantity equation states that the

A) money supply times the velocity of money equals the price level times real GDP.
B) money supply times the price level equals real GDP divided by the velocity of money.
C) money supply times the price level equals real GDP times the velocity of money.
D) money supply divided by the velocity of money equals the price level divided by real GDP.

Question 30

According to the quantity theory of money,if the money supply grows at 25% and the inflation rate is 20%,the growth in real GDP is

A) 0.8%.
B) 1.25%.
C) 5%.
D) 45%.

Question 31

Which of the following determines the amount of money the banking system as a whole can create?

A) the quantity of bank reserves
B) the quantity of vault cash held by banks
C) currency held by the Bank of Canada
D) the total amount of assets held by the banking system

Question 32

The purchase of government securities by the Bank of Canada will,in general,

A) not change the money supply.
B) not change the quantity of reserves held by banks.
C) decrease the quantity of reserves held by banks.
D) increase the quantity of reserves held by banks.

Question 33

If the money supply grows at 5% and real GDP grows at 6%,the quantity theory predicts the inflation rate will be

A) -1%.
B) 1%.
C) 1.2%.
D) 11%.

Question 34

The growth rate of real GDP in Astoria is 7.5%.Assume the growth rate of velocity is 0%.If Astoria wishes to decrease the inflation rate from the annual rate of 5.99% to a target rate of 4.5% and maintain its current growth rate of real GDP,by how many percentage points will the growth rate of the money supply need to change?

A) -3
B) -2.99
C) -1.49
D) 2.99

Question 35

Suppose the required reserve ratio is 100%.Explain if the Bank of Canada could still change the money supply with open market operations.

Question 36

According to the quantity theory of money,the inflation rate equals

A) money supply minus real GDP.
B) the growth rate of the money supply minus the growth rate of real GDP.
C) real GDP minus the money supply.
D) the growth rate of real GDP minus the growth rate of the money supply.

Question 37

If the money supply grows at 6% and the inflation rate is 2%,the quantity theory predicts that the change in real GDP will be

A) 0.33%.
B) 3%.
C) 4%.
D) 8%.

Question 38

If the currency-to-deposit ratio decreases and the monetary base is unchanged,the value of the money multiplier will ________ and the value of the money supply will ________.

A) decline; decline
B) decline; increase
C) increase; decline
D) increase; increase

Question 39

If the excess reserves-to-deposit ratio decreases and the monetary base is unchanged,the value of the money multiplier will ________ and the value of the money supply will ________.

A) decline; decline
B) decline; increase
C) increase; decline
D) increase; increase

Question 40

Which of the following best represents the money supply?

A) Money supply = Monetary base
B) Money supply = Monetary base / Money multiplier
C) Money supply = Money multiplier ( Currency in circulation + Reserves)
D) Money supply = (Currency in circulation + Reserves) / Money multiplier

Question 41

If the expected inflation rate rises from 3% to 5% when the nominal interest rate is 4%,the Fisher effect asserts that the nominal interest rate would

A) not change.
B) rise to 6%.
C) fall to 2%.
D) fall to 3%.

Question 42

The Fisher equation states that the

A) expected real interest rate minus the expected inflation rate equals the nominal interest rate.
B) expected inflation rate plus the nominal interest rate equals the expected real interest rate.
C) nominal interest rate equals the expected real interest rate plus the expected inflation rate.
D) expected real interest rate equals the expected inflation rate minus the nominal interest rate.

Question 43

When the Federal Reserve in the United States purchased a large quantity of long-term bonds,as it did during 2008-2010 with its quantitative easing policies,but most banks held onto their new reserves,the money multiplier ________ while the monetary base ________.

A) increased; increased
B) increased; decreased
C) decreased; increased
D) decreased; decreased

Question 44

Suppose you lend $5000 to your brother for one year at a nominal interest rate of 7%.Inflation during that year is 4%.As a result,you will receive ________ at the end of the year.

A) $5150
B) $5225
C) $5350
D) $5550

Question 45

Suppose the velocity of money is not fixed,but stable at about 4% growth per year.How could the quantity theory of money be modified to include a stable growth rate of the velocity of money? In this modified version with velocity growing at about 4% per year,what would the growth rate of the other variables need to be to cause inflation?

Question 46

Suppose the money supply is set to grow at 12%,real GDP grows at 4%,and the nominal interest rate on Aaa corporate bonds is 10%.Using the quantity theory of money and the Fisher equation,the expected real interest rate on Aaa corporate bonds should average

A) -2%.
B) 2%.
C) 6%.
D) 7%.

Question 47

Borrowers benefit and lenders lose when the

A) actual interest rate is less than the expected real interest rate.
B) actual interest rate is greater than the expected real interest rate.
C) actual interest rate is equal to the expected real interest rate.
D) actual inflation rate is less than the expected inflation rate.

Question 48

Real interest rates have,at times,been negative.Why would anyone lending money agree to a negative real interest rate?

Question 49

Suppose the annual growth rate of real GDP for the nation of Svengali is 5% and the growth rate of velocity is 0%.If the money supply growth rate decreases from 6% to 2%,what was the initial rate of inflation in Svengali?

A) -1%
B) 1%
C) 1.25%
D) 9%

Question 50

If a government chooses to finance a budget deficit by borrowing and the expected inflation rate does not change,this will cause the real interest rate to ________ and the nominal interest rate to ________.

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

Question 51

If you take out a mortgage with a nominal interest rate of 8% and you expect the inflation rate to be 2%,then you expect to pay a real interest rate of

A) 4%.
B) 6%.
C) 10%.
D) 16%.

Question 52

In the long run,an increase in the growth rate of the money supply causes the inflation rate to ________,which then causes the nominal interest rate to ________.

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

Question 53

Suppose the annual growth rate of real GDP for the nation of Vicuna is 8%,the growth rate of velocity is 0%,and the growth rate of the money supply is 12%.
a. What is the current rate of inflation?
b. What will happen to the inflation rate if the growth of the money supply increases to 16%?
c. What will happen to the inflation rate if the growth of the money supply increases to 16%,and,at the same time,the growth rate of velocity increases to 4%?

Question 54

During the 1990s,Japan experienced periods of deflation and nominal interest rates that approached zero percent.Why would anyone lending money agree to a nominal interest rate of almost zero percent?

Question 55

Suppose the money supply is set to grow at 7%,real GDP grows at 5%,and the expected real interest rate on Aaa corporate bonds averages 6%.Using the quantity theory of money and the Fisher equation,the nominal interest rate on the Aaa corporate bond should be

A) -2%.
B) 2%.
C) 6%.
D) 8%.

Question 56

Suppose the annual growth rate of real GDP for the nation of Svengali is 5% and the growth rate of velocity is 0%.If the money supply growth rate decreases from 4% to 2%,what is the new rate of inflation in Svengali?

A) -3%
B) -1%
C) 3%
D) 7%

Question 57

Suppose you borrow $5000 at an interest rate of 8%.If the expected real interest rate is 3%,then the rate of inflation over the upcoming year that would be most beneficial to you would be

A) 0%.
B) greater than 0% but less than 5%.
C) equal to 5%.
D) greater than 5%.

Question 58

How is the quantity theory of money different from the quantity equation,and why must the quantity equation always be true?

Question 59

Over the long run and across countries,there is evidence of ________ between the growth rate of the money supply and the inflation rate.

A) no relationship
B) a weak link
C) a strong link
D) a negative relationship

Question 60

If you take out a mortgage with a nominal interest rate of 8% and you expect the inflation rate to be 2%,but the actual inflation rate turns out to be 8%,then you end up paying a real interest rate of

A) 0%.
B) 1%.
C) 2%.
D) 6%.

Question 61

A government's budget deficit is equal to

A) the change in the value of bonds issued plus the change in the money supply.
B) the change in the value of bonds issued minus the change in the money supply.
C) the change in the money supply minus the change in the value of bonds issued.
D) either the change in the value of bonds issued or the change in the money supply.

Question 62

All of the following are costs of expected inflation,except

A) shoe-leather costs.
B) menu costs.
C) velocity costs.
D) tax distortions.

Question 63

In countries that have experienced hyperinflation,what role have large government budget deficits played in causing the very high inflation rates?

Question 64

Hyperinflation can be caused by

A) the central bank selling bonds to the public.
B) the government selling bonds to the central bank.
C) the central bank selling bonds to the government.
D) the government selling bonds to the public.

Question 65

When a government has a large budget deficit,it must issue government bonds to finance the deficit.Explain if it matters for the rate of inflation if the government sells the bonds to the public or sells the bonds to the central bank.

Question 66

Which of the following is not an example of inflation causing a redistribution of income because the inflation was unexpected?

A) Firms have to hire extra workers to change prices because of inflation.
B) A firm signs a 4-year contract with a union based on a 3% expected rate of inflation per year, and the actual inflation rate ends up being 5% per year.
C) An employee receives an increase in salary that is less than the rate of inflation because management under-predicted inflation.
D) A bank collects a lower amount of interest from a loan because inflation was predicted to be 2% but was actually 4%.

Question 67

The costs of inflation to households and firms due to holding less money and making more frequent trips to the bank are known as

A) seigniorage.
B) menu costs.
C) velocity costs.
D) shoe-leather costs.

Question 68

All else equal,if individuals save less because inflation lowers returns on savings,this should ________ the supply of loanable funds and ________ the capital stock.

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

Question 69

As the average annual inflation rate ________,the volatility of inflation tends to ________.

A) decreases; increase
B) increases; increase
C) increases; remain stable
D) decreases; remain stable

Question 70

Table 4.2

Tax brackets for a single person, 2013
Refer to Table 4.2.Assume Darryl earned $47 500 in 2013.
a. How much would Darryl pay in taxes?
b. Suppose that inflation in 2013 was 7%,and Darryl received a 3% raise in 2013.What happens to Darryl's nominal income,and what happens to his real income?
c. What happens to Darryl's tax payment once he receives the raise? Has his real tax payment increased,decreased,or stayed the same?

Question 71

Which of the following is not a consequence of hyperinflation?

A) The price level can grow in excess of hundreds of percentage points per year.
B) Hyperinflation causes an economy to suffer slow growth.
C) Money loses value so rapidly that individuals and firms stop holding it.
D) Money's function as a medium of exchange is enhanced.

Question 72

The German hyperinflation of the early 1920s was caused by

A) an overly aggressive monetary policy implemented to combat a severe recession.
B) large surpluses resulting from the high levels of wartime production and low level of taxes.
C) rising oil prices following World War I and the resulting severe stagflation.
D) the German government raising funds to finance its expenditures by printing money.

Question 73

If individuals save less because inflation lowers returns on savings,this should ________ real interest rates and ________ investment expenditures.

A) raise; increase
B) raise; reduce
C) lower; increase
D) lower; reduce

Question 74

By the time the German hyperinflation following World War I ended in November 1923,the price level in Germany was ________ times higher than at the beginning of the hyperinflation.

A) 1000
B) 1 million
C) 250 million
D) 50 billion

Question 75

Explain how inflation can be costly even if it is expected.

Question 76

The costs of inflation to firms due to reprinting price lists are known as

A) seigniorage.
B) menu costs.
C) velocity costs.
D) shoe-leather costs.

Question 77

Suppose that in 2013,all prices in the economy increased by 50% and that all wages and salaries also increased by 50%.Which of the following is true?

A) In 2013, you were better off than you were in 2012 as your salary was higher than it was in 2012 and you could buy more goods and services.
B) In 2013, you were worse off than you were in 2012 as you could no longer afford to buy as many goods and services.
C) In 2013, you were no better off or worse off than you were in 2012 as the purchasing power of your salary remained the same.
D) The purchasing power of your salary cannot be determined with the given information, so you cannot determine if you were better off or worse off in 2013 than in 2012.

Question 78

If the real wage needs to decrease to restore equilibrium in a labour market,this can happen by

A) keeping the nominal wage constant and allowing deflation to allow the real wage to decline.
B) keeping the nominal wage constant and allowing inflation to allow the real wage to decline.
C) raising the nominal wage and allowing deflation to allow the real wage to decline.
D) raising the nominal wage so long as there is no inflation occurring in the economy.

Question 79

Suppose the money supply grows at an annual rate of 10%,real GDP grows at 4%,the growth rate of velocity is 0%,and the expected real interest rate on Aaa corporate bonds averages 5.5%.Use the Fisher equation to determine the nominal interest rate on Aaa bonds.What will happen to the nominal interest rate in the long run if the growth rate of the money supply decreases to 7%?

Question 80

If actual inflation is lower than expected inflation,

A) there is a redistribution of wealth from borrowers to lenders.
B) there is a redistribution of wealth from lenders to borrowers.
C) there is no redistribution of wealth, but the total wealth in the economy increases.
D) there is no redistribution of wealth, but the total wealth in the economy decreases.