Deck 11: Money Growth and Inflation

Question 1

Which statement best describes the evolution of the price level in Canada?

A) The price level rose at an average annual rate of about 2 percent over the past 70 years.
B) The price level has increased about 12-fold over the past 70 years.
C) The price level increased in the 1970s at a rate above the average of the past 70 years.
D) The price level has never decreased over the past 70 years.

Answer 1

C

Question 2

How can inflation be measured?

A) by the change in the consumer price index
B) by the percentage change in the consumer price index
C) by the percentage change in nominal GDP
D) by the change in the price of a specific commodity

Answer 2

B

Question 3

Over the past 70 years, what was the approximate average annual inflation rate?

A) 2 percent
B) 3 percent
C) 4 percent
D) 6 percent

Answer 3

C

Question 4

When the money market is depicted in a graph with the value of money on the vertical axis, what does an increase in the price level cause?

A) a shift to the right of the money demand curve
B) a shift to the left of the money demand curve
C) a movement to the left along the money demand curve
D) a movement to the right along the money demand curve

Question 5

Which statement best describes the evolution of inflation in Canada?

A) It has been relatively constant over the past 70 years.
B) The inflation rate was constant at 7 percent annually for most of the twentieth century.
C) During the 1990s, prices rose at an average rate of 2 percent per year.
D) During the 1970s, there was deflation.

Question 6

What does the classical theory of inflation try to explain?

A) changes in relative prices in the economy determined by factors other than inflation
B) the effect of inflation on economic growth and political stability
C) the short-run determinants of the price level and the inflation rate
D) the long-run determinants of the price level and the inflation rate

Question 7

When the money market is depicted in a graph with the value of money on the vertical axis, as the price level increases, what happens to the value of money?

A) It increases, so the quantity of money demanded increases.
B) It increases, so the quantity of money demanded decreases.
C) It decreases, so the quantity of money demanded decreases.
D) It decreases, so the quantity of money demanded increases.

Question 8

When the money market is depicted in a graph with the value of money on the vertical axis, as the price level increases, how does the quantity of money demanded or supplied change?

A) The quantity of money demanded increases.
B) The quantity of money demanded decreases.
C) The quantity of money supplied increases.
D) The quantity of money supplied decreases.

Question 9

When does the supply of money increase?

A) when the Bank of Canada increases the overnight rate
B) when the Bank of Canada makes open-market sales
C) when the Bank of Canada makes open-market purchases
D) when the Bank of Canada increases the bank rate

Question 10

When prices are falling, what term do economists use?

A) disinflation
B) deflation
C) contraction
D) inflation

Question 11

Which event took place in the early 1920s in Germany?

A) deflation that proved detrimental to farmers
B) the government limited the size of wage and prices increases in an effort to reduce the rate of inflation
C) a sudden, unexpected drop in inflation that hurt borrowers
D) an extraordinarily high rate of inflation

Question 12

What do economists think about high and moderate inflation?

A) They agree that neither high inflation nor moderate inflation is very costly.
B) They agree that both high and moderate inflation are quite costly
C) They agree that high inflation is costly, but they disagree about the costs of moderate inflation.
D) They agree that moderate inflation is as costly as high inflation, but they disagree about how to measure those costs.

Question 13

When the price level falls, what happens to the number of dollars needed to buy a representative basket of goods?

A) It increases, so the value of money rises.
B) It increases, so the value of money falls.
C) It decreases, so the value of money rises.
D) It decreases, so the value of money falls.

Question 14

How is the supply of money determined?

A) by the price level
B) by the Ministry of Finance
C) by the Bank of Canada
D) by the demand for money

Question 15

Why is the money supply curve vertical?

A) The quantity of money supplied increases when the value of money increases.
B) The quantity of money supplied increases when the price level decreases.
C) The quantity of money supplied increases only if people desire to hold more money.
D) The quantity of money supplied increases only if the central bank increases the money supply.

Question 16

Over the past 70 years, what was the approximate average annual inflation rate?

A) 3 percent, implying that prices have increased 12-fold
B) 4 percent, implying that prices have increased 16-fold
C) 4 percent, implying that prices have increased 18-fold
D) 5 percent, implying that prices increased about 18-fold

Question 17

When the number of dollars needed to buy a representative basket of goods falls, what happens to the value of money?

A) It rises, and so the price level rises.
B) It rises, and so the price level falls.
C) It falls, and so the price level rises.
D) It falls, and so the price level falls.

Question 18

What does the quantity theory of money try to explain?

A) how inflation determines economic growth
B) the relationship between the quantity of money and the price level
C) the determinants of relative prices in the economy
D) the relationship between inflation and unemployment

Question 19

When and where did hyperinflation occur?

A) during 1880-1896 in the United States
B) in post-World War I Germany
C) during the 1970s in Canada
D) during 1930-1933 in the United States

Question 20

When the value of money rises, what happens to the number of dollars needed to buy a representative basket of goods?

A) It increases, and so the price level rises.
B) It increases, and so the price level falls.
C) It decreases, and so the price level rises.
D) It decreases, and so the price level falls.

Question 21

When a graph of the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal. This is due to adjustments in which of the following?

A) the value of money
B) real interest rates
C) nominal interest rates
D) the money supply

Question 22

When the money market is depicted in a diagram with the value of money on the vertical axis, in which situation does the value of money increase?

A) if either money demand or money supply shifts right
B) if either money demand or money supply shifts left
C) if money demand shifts right or money supply shifts left
D) if money demand shifts left or money supply shifts right

Question 23

Which statement best describes the impact of open-market purchases by the Bank of Canada?

A) The money supply and the value of money increase.
B) The money supply increases, which makes the value of money decrease.
C) The money supply and the value of money decrease.
D) The money supply decreases, which makes the value of money increase.

Question 24

When the money market is depicted in a diagram with the value of money on the vertical axis, which statement best describes the long-run effects of an increase in money supply?

A) The price level and the quantity of money demanded increases.
B) The price level increases, but the quantity of money demanded decreases.
C) The price level decreases, but the quantity of money demanded increases.
D) The price level and the quantity of money demanded decreases.

Question 25

What is the immediate and longer-term effect of a decrease in the money supply?

A) A decrease in the money supply creates an excess supply of money that is eliminated by rising prices.
B) A decrease in the money supply creates an excess supply of money that is eliminated by falling prices.
C) A decrease in the money supply creates an excess demand for money that is eliminated by rising prices.
D) A decrease in the money supply creates an excess demand for money that is eliminated by falling prices.

Question 26

When the money market is depicted in a diagram with the value of money on the vertical axis, what happens if the price level is above the equilibrium level?

A) There is a shortage, so the price level will rise.
B) There is a shortage, so the price level will fall.
C) There is a surplus, so the price level will rise.
D) There is a surplus, so the price level will fall.

Question 27

When the money market is depicted in a diagram with the value of money on the vertical axis, which statement best describes the effects of an increase in money supply?

A) It creates an excess supply of money, causing people to spend more.
B) It creates an excess supply of money, causing people to spend less.
C) It creates an excess demand for money, causing people to spend more.
D) It creates an excess demand for money, causing people to spend less.

Question 28

When a graph of the money market is drawn with the value of money on the vertical axis, what will happen if the value of money is below the equilibrium level?

A) The price level will rise.
B) The value of money will rise.
C) Money demand will shift left.
D) Money demand will shift right.

Question 29

When the money market is depicted in a diagram with the value of money on the vertical axis, which statement best describes the money demand function?

A) It slopes upward because at higher prices people want to hold more money.
B) It slopes downward because at higher prices people want to hold more money.
C) It slopes downward because at higher price people want to hold less money.
D) It slopes upward because at higher prices people want to hold less money.

Question 30

As the price level decreases, what happens to the value of money?

A) It increases, so people want to hold more of it.
B) It increases, so people want to hold less of it.
C) It decreases, so people want to hold more of it.
D) It decreases, so people want to hold less of it.

Question 31

When the money market is represented in a diagram with the value of money on the vertical axis, which statement best describes the effects of an increase in money supply?

A) It increases the price level and the value of money.
B) It increases the price level and decreases the value of money.
C) It decreases the price level and increases the value of money.
D) It decreases the price level and the value of money.

Question 32

In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks in many countries increased the money supply. How might the central banks have done this?

A) by selling bonds on the open market, which would have raised the value of money
B) by purchasing bonds on the open market, which would have raised the value of money
C) by selling bonds on the open market, which would have lowered the value of money
D) by purchasing bonds on the open market, which would have lowered the value of money

Question 33

When the money market is depicted in a diagram with the value of money on the vertical axis, which statement best describes the effects of an increase in money supply?

A) The equilibrium value and equilibrium quantity of money both increase.
B) The equilibrium value and equilibrium quantity of money both decrease.
C) The equilibrium value increases, while the equilibrium quantity of money decreases.
D) The equilibrium value decreases, while the equilibrium quantity of money increases.

Question 34

Which statement best describes the effects of an open-market operation undertaken by the Bank of Canada?

A) If the Bank of Canada purchases bonds in the open market, then the money supply shifts right and the price level increases.
B) If the Bank of Canada sells bonds in the open market, then the money supply shifts right and the price level decreases.
C) If the Bank of Canada purchases bonds in the open market, then the money supply shifts left and the price level decreases.
D) If the Bank of Canada sells bonds in the open market, then the money supply shifts left and the price level increases.

Question 35

When the money market is represented in a diagram with the value of money on the vertical axis, how does the money supply curve shift from an increase in the money supply?

A) It shifts to the right, lowering the price level.
B) It shifts to the right, raising the price level.
C) It shifts to the left, raising the price level.
D) It shifts to the left, lowering the price level.

Question 36

When the money market is depicted in a diagram with the value of money on the vertical axis, what would shift money demand to the right?

A) an increase in the price level
B) a decrease in the price level
C) a decrease in real GDP
D) an increase in real GDP

Question 37

In the 14th century, the Western African Emperor Kankan Musa travelled to Cairo where he gave away much gold, which was in use as a medium of exchange. How would we predict this increase in gold would do to the price level and value of gold in Cairo?

A) raise both the price level and the value of gold in Cairo
B) raise the price level, but decrease the value of gold in Cairo
C) lower the price level, but increase the value of gold in Cairo
D) lower both the price level and the value of gold in Cairo

Question 38

When the money market is drawn with the value of money on the vertical axis, in which situation does the price level increase?

A) if either money demand or money supply shifts right
B) if either money demand or money supply shifts left
C) if money demand shifts right or money supply shifts left
D) if money demand shifts left or money supply shifts right

Question 39

When the money market is depicted in a diagram with the value of money on the vertical axis, in which situation does the price level decrease?

A) if either money demand or money supply shifts right
B) if either money demand or money supply shifts left
C) if money demand shifts right or money supply shifts left
D) if money demand shifts left or money supply shifts right

Question 40

Figure 11-1

Refer to the Figure 11-1. If the money supply is MS2 and the value of money is 2, which relationship holds?

A) The value of money is less than its equilibrium level.
B) The price level is higher than its equilibrium level.
C) The money demand is greater than the money supply.
D) The money supply is greater than money demand.

Question 41

Alina pays $25 for craft supplies she purchases at the Bargainrama discount store. Which statement accurately identifies the types of variables involved?

A) The $25 is a real variable; the craft supplies is a nominal variable.
B) The $25 is a nominal variable; the craft supplies is a real variable.
C) Both the $25 and the craft supplies are nominal variables.
D) Both the $25 and the craft supplies are real variables.

Question 42

An assistant professor of economics gets a $100-a-month raise, but then she figures that with her current monthly salary she can't buy as many goods as she could last year. What has happened to her real and nominal wage?

A) Her real and nominal wages have risen.
B) Her real and nominal wages have fallen.
C) Her real wage has risen, but her nominal wage has fallen.
D) Her real wage has fallen, but her nominal wage has risen.

Question 43

What is the price of an Apple iPhone divided by the price of a Samsung Galaxy smart phone called?

A) a classical variable
B) a dichotomous variable
C) a nominal variable
D) a real variable

Question 44

Your boss gives you an increase in the number of dollars you earn per hour, from $11 to $12. How does this change your nominal and real wages?

A) This increase in pay makes your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased.
B) This increase in pay makes your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage decreased.
C) This increase in pay makes your real wage increase. If your real wage rose by a greater percentage than the price level, then your nominal wage also increased.
D) This increase in pay makes your real wage decrease. If your real wage rose by a greater percentage than the price level, then your nominal wage decreased.

Question 45

What kind of economic variables are the interest rates when adjusted for the effects of inflation?

A) nominal
B) real
C) stock
D) flow

Question 46

What does nominal GDP measure?

A) the total quantity of final goods and services produced
B) the dollar value of the economy's output of final goods and services
C) the total income received from producing final goods and services in constant dollars
D) the percentage change in price level

Question 47

Figure 11-1

Refer to the Figure 11-1. What happens when the money supply curve shifts from MS1 to MS2?

A) The equilibrium value of money decreases.
B) The equilibrium price level decreases.
C) The supply of money decreases.
D) The demand for goods and services decreases.

Question 48

What idea does the classical dichotomy refer to?

A) The supply of money is irrelevant for understanding the determinants of nominal and real variables.
B) The supply of money determines nominal variables, but not real variables.
C) The supply of money determines real variables, but not nominal variables.
D) The supply of money is a determinant of both real and nominal variables.

Question 49

According to the classical dichotomy, what is influenced by monetary factors?

A) production
B) the interest rate adjusted for inflation
C) the current-dollar wage
D) the constant-dollar GDP

Question 50

Figure 11-1

Refer to the Figure 11-1. What happens when the money supply curve shifts from MS1 to MS2?

A) The demand for goods and services decreases.
B) The economy's ability to produce goods and services increases.
C) The equilibrium price level increases.
D) The equilibrium value of money increases.

Question 51

According to the classical dichotomy, what increases when the money supply increases?

A) the real interest rate
B) the real GDP
C) the value of money
D) the price level

Question 52

According to the classical dichotomy, what is influenced by monetary factors?

A) real GDP
B) investment
C) nominal interest rates
D) the real wage rate

Question 53

Figure 11-1

Refer to the Figure 11-1. If the money supply is MS2 and the value of money is 2, how much is the excess demand or supply?

A) There is an excess demand equal to the distance between A and C.
B) There is an excess demand equal to the distance between A and B.
C) There is an excess supply equal to the distance between A and C.
D) There is an excess supply equal to the distance between A and B.

Question 54

What does real GDP measure?

A) the total quantity of final goods and services produced
B) the dollar value of the economy's output of final goods and services
C) the total income received from producing final goods and services at current prices
D) the change in prices from the base year to current year

Question 55

There is an idea that nominal variables are heavily influenced by the quantity of money and that money is largely irrelevant for understanding the determinants of real variables. What is this idea called?

A) the velocity concept
B) the Keynesian principle
C) the classical dichotomy
D) the classical theory of money

Question 56

What kind of variables are the interest rates usually published in newspapers such as the Financial Post?

A) classical
B) dichotomous
C) nominal
D) real

Question 57

Figure 11-1

Refer to the Figure 11-1. If the current money supply is located at MS1 and the value of money is 2, what is the excess demand or supply?

A) 0
B) 1
C) 2
D) 3

Question 58

Which term refers to economic variables whose values are measured in monetary units?

A) dichotomous variables
B) nominal variables
C) classical variables
D) real variables

Question 59

What type of variable is the price level?

A) quantitative
B) controlled
C) real
D) nominal

Question 60

According to the classical dichotomy, what is NOT influenced by monetary factors?

A) the price level
B) real GDP
C) nominal interest rates
D) nominal GDP

Question 61

According to the quantity theory of money, when the money supply doubles, which variable doubles?

A) the price level
B) the velocity of money
C) the real GDP
D) the real wage rate

Question 62

According to the classical dichotomy, what is NOT influenced by monetary factors?

A) the nominal GDP
B) the real wage rate
C) the price level
D) the nominal interest rate

Question 63

According to the principle of monetary neutrality, what will an increase in the quantity of money also increase?

A) employment
B) nominal GDP
C) the incentive to save
D) labour productivity

Question 64

According to the classical dichotomy theory, when the money supply doubles, what also doubles?

A) the price level
B) the real interest rate
C) the inflation rate
D) the real income

Question 65

When do most economists believe the principle of monetary neutrality can be relevant?

A) in both the short run and the long run
B) in neither the short run nor the long run
C) mostly in the short run
D) mostly in the long run

Question 66

Assuming that V is constant, what could result from an increase in M in the quantity equation?

A) a decrease in the price level
B) an increase in real GDP
C) a decrease in nominal GDP
D) an increase in the price level

Question 67

How is velocity computed?

A) (P × Y)/M
B) (P × M)/Y
C) (Y × V)/P
D) (Y × M)/V

Question 68

According to the quantity equation, if V and M are constant and Y doubles, what will happen to the price level?

A) It will fall to half its original level.
B) It will not change.
C) It will double.
D) It will more than double.

Question 69

According to the quantity equation, if P = 15, Y = 100, and M = 250, what is V?

A) 1.75
B) 3
C) 6
D) 30

Question 70

According to the quantity equation, if Y and M are constant and V doubles, what factor does the price level multiply by?

A) 1/4
B) 1/2
C) 1
D) 2

Question 71

According to the quantity equation, if P = 6 and Y = 800, which of the following pairs could M and V be?

A) 200, 3
B) 400, 4
C) 600, 5
D) 800, 6

Question 72

What does the principle of monetary neutrality imply?

A) An increase in the money supply will increase real GDP and the price level.
B) An increase in the money supply will increase real GDP, but not the price level.
C) An increase in the money supply will increase the price level, but not real GDP.
D) An increase in the money supply will increase neither the price level nor real GDP.

Question 73

Which statement best defines the velocity of money?

A) It is the rate at which the central bank puts money into the economy.
B) It is the long-term growth rate of the money supply.
C) It is the money supply divided by nominal GDP.
D) It is the average number of times per year a dollar is spent.

Question 74

According to the principle of monetary neutrality, what will a decrease in the money supply NOT change?

A) nominal GDP
B) the price level
C) labour productivity
D) the nominal wage rate

Question 75

Based on the quantity equation, if M = 120, V = 4, and Y = 160, what is P?

A) 0.5
B) 1
C) 2.5
D) 3

Question 76

Last year, Tealandia produced 60,000 bags of green tea, which sold at 10 units each of Tealandia's currency-the leaf. Tealandia's money supply was 15,000. What was the velocity of money in Tealandia?

A) 1/30
B) 5/6
C) 30
D) 40

Question 77

According to the classical dichotomy, when the money supply doubles, what also double(s)?

A) employment
B) nominal interest rates
C) real interest rates
D) the price level

Question 78

If velocity and output were nearly constant, the inflation rate would be equal to the money supply growth rate times what factor?

A) -2
B) -1
C) 1
D) 2

Question 79

According to the quantity equation, if Y doubles, V is constant, and M doubles, what factor does the price level multiply by?

A) 1/4
B) 1/2
C) 1
D) 2

Question 80

According to the classical dichotomy, when the money supply doubles, what also doubles?

A) the real prices
B) the nominal interest rate
C) the real GDP
D) the nominal GDP