Deck 14: Inflation: a Monetary Phenomenon

Question 1

Increases in the price of gasoline and oil tend to cause inflation

Answer 1

False

Question 2

According to the quantity theory of money, velocity varies with changes in real GDP.

Answer 2

False

Question 3

By increasing the growth rate of the money supply, the Federal Reserve can decrease the inflation rate.

Answer 3

False

Question 4

The GDP deflator measures the prices of goods and services purchased by a typical urban household.

Question 5

The rate of inflation will vary over the business cycle even if the growth rate of the money supply is constant.

Question 6

Demand and other checkable deposits are the largest components of M1.

Question 7

Fiscal policy cannot deal with inflation on a long-term basis.

Question 8

Inflation has been common throughout the history of the United States.

Question 9

Those depending on Social Security payments are adversely affected by inflation because Social Security is not indexed for inflation.

Question 10

If we were most interested in the impact of price changes on consumers, we would examine the consumer price index (CPI).

Question 11

Inflation is a monetary phenomenon.

Question 12

According to the text, inflation is a continuing increase in the price level.

Question 13

Because government is a huge debtor, it benefits from inflation.

Question 14

M1 includes currency, travelers' checks, demand deposits, other checkable deposits, and small denomination time deposits.

Question 15

According to the quantity theory of money, inflation results whenever the growth rate of the money supply exceeds the growth rate of nominal GDP.

Question 16

Money functions as a unit of account, a medium of exchange, and a store of value.

Question 17

According to the equation of exchange, M * V = P * GDP.

Question 18

The effects of inflation will be more pronounced if it is unanticipated.

Question 19

When money functions as a unit of account, it is used as payment for goods and services.

Question 20

Supply-side policies are a powerful anti-inflationary tool.

Question 21

Unanticipated inflation can result in:

A) a redistribution of income and wealth.
B) a increase in net exports.
C) an decrease in tax revenue.
D) a redistribution of income from debtors to creditors.

Question 22

Wage and price controls are an example of an incomes policy.

Question 23

The U.S. government benefits from inflation because:

A) it is a debtor.
B) it is a creditor.
C) inflation causes its expenditures to increase.
D) revenues from personal taxes increase as inflation pushes people into higher income tax brackets.

Question 24

A government established agency that controls the nation's money supply is a:

A) government bank.
B) Congressional established bank.
C) federal funds bank.
D) central bank.

Question 25

If the economy suffers from inflation and unemployment as the result of a supply shock (such as reduction in oil production), expansionary fiscal or monetary policy would reduce unemployment but result in hyperinflation.

Question 26

The largest component of M1 is:

A) demand deposits.
B) other checkable deposits.
C) travelers' checks.
D) savings deposits.

Question 27

The M1 money supply consists of:

A) currency, travelers' checks, demand deposits, and other checkable deposits.
B) currency, demand deposits, and small denomination savings accounts.
C) currency, demand deposits, other checkable deposits, and U.S. savings bonds.
D) currency and demand deposits.

Question 28

Which of the following is not a function of money?

A) a standard of profitability.
B) a unit of account.
C) a medium of exchange.
D) a store of value.

Question 29

Inflation refers to:

A) an increase in prices.
B) a continuing increase in the general price level.
C) an increase in average prices.
D) all of the above.

Question 30

Deflation refers to:

A) a decrease in prices.
B) a continuing decrease in the general price level.
C) a decrease in average prices.
D) all of the above.

Question 31

The consumer price index (CPI) is:

A) a weighted average of the prices of goods and services purchased by a typical urban household.
B) a weighted average of the prices of goods and services purchased by all consumers in the economy.
C) a weighted average of the prices of all final goods and services produced in the economy.
D) a weighted average of the prices of all intermediate goods and services produced in the economy.

Question 32

Inflation can be measured by using:

A) the rate of change of the GDP deflator.
B) the average growth rate of output over the business cycle.
C) the inverse of the unemployment rate.
D) the average price index.

Question 33

As a result of unanticipated inflation,

A) government will be made worse off due to increases in expenditures.
B) government will be made better off due to increases in revenues.
C) individuals living on fixed incomes will be made better off.
D) debtors will be made worse off due to increases in the interest rate.

Question 34

Demand deposits are:

A) time deposits that banks must pay to depositors upon demand.
B) checking accounts at commercial banks, savings institutions, and credit unions.
C) checking accounts at commercial banks.
D) commercial bank deposits at one of the twelve Federal Reserve Banks.

Question 35

The rate of inflation increases. The government will benefit because:

A) it is a huge creditor.
B) tax revenues will increase.
C) the interest that must be paid on government bonds will decline.
D) productivity increases will cause economic growth to increase.

Question 36

The consumer price index is not an accurate measure of the cost of living because:

A) it measures the goods and services bought by all urban households.
B) it is made up of a weighted average of prices.
C) it is made up of a variable basket of goods and services.
D) it does not fully account for changes in the quality of products.

Question 37

An increase in the inflation rate in the United States will:

A) cause an increase in net exports.
B) cause an increase in the relative price of imports.
C) cause a decrease in the relative price of exports.
D) cause a decrease in the relative price of imports.

Question 38

A high and variable rate of inflation can:

A) cause resources to be concentrated on short-run projects.
B) increase economic uncertainty.
C) decrease the nation's productive capacity as people engage in speculation.
D) all of the above.

Question 39

The GDP deflator is:

A) a weighted average of the prices of goods and services purchased by a typical urban household.
B) a weighted average of the prices of goods and services purchased by a typical manufacturer.
C) a weighted average of the prices of all final goods and services produced in the economy.
D) a weighted average of the prices of all intermediate goods and services produced in the economy.

Question 40

The broadest price index is:

A) the CPI.
B) the producer price index for finished goods.
C) the GDP deflator.
D) the economy-wide deflator.

Question 41

In the United States, monetary policy is conducted by:

A) Congress.
B) the President.
C) a joint commission made up of the legislative and executive branches of the federal government.
D) the Federal Reserve.

Question 42

According to the quantity theory of money:

A) ΔM/M = ΔP/P + ΔGDP/GDP.
B) ΔM/M + ΔP/P = ΔGDP/GDP.
C) ΔM/M + ΔGDP/GDP = ΔP/P
D) ΔM/M = ΔP/P - ΔGDP/GDP

Question 43

A theory emphasizing that the money supply is the principal determinant of nominal GDP is:

A) the income velocity theory of money.
B) the theory of money.
C) the volume theory of money.
D) the quantity theory of money.

Question 44

The number of times the money supply is used to purchase final goods and services during a year refers to:

A) the income velocity of money.
B) the growth rate in velocity.
C) the income velocity of money times the money supply.
D) the growth rate in velocity times the money supply.

Question 45

Supply-side policies are an ineffective way to deal with inflation because:

A) it is difficult to increase the growth rate in aggregate supply.
B) supply-side policies can cause aggregate demand to decrease.
C) supply-side policies work so rapidly that they can cause a demand shock.
D) increases in aggregate supply are accompanied by decreases in employment.

Question 46

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

A) the rate of growth in the money supply.
B) the rate of growth in the money supply less the rate of growth in output.
C) the rate of growth in the money supply less the rate of growth in velocity.
D) the rate of growth in the money supply less the rate of growth in the price level.

Question 47

According to the quantity theory of money, the main determinant of nominal GDP is:

A) the money supply.
B) the growth rate of the capital stock.
C) the interest rate.
D) the level of consumption.

Question 48

Many economists feel that oil prices do not have a significant impact on inflation because

A) the government has price ceilings on gasoline
B) oil prices get cheaper every year
C) oil price increases are relative price increases
D) none of the answers are sufficient

Question 49

According to the quantity theory of money, an increase in the money supply will cause:

A) a proportional increase in the income velocity of money.
B) a proportional decrease in the income velocity of money.
C) a proportional increase in nominal GDP.
D) a proportional decrease in nominal GDP.

Question 50

Economists argue that if an economy is highly monopolized:

A) it will have higher prices for its goods and services than a more competitive economy.
B) its average costs of production will be less than the average costs of production in a more competitive economy.
C) it will have higher inflation rates than a more competitive economy.
D) it will have lower inflation rates than a more competitive economy.

Question 51

Fiscal policy cannot be used to deal with inflation on a long-term basis because:

A) government cannot lower the growth rate in the money supply indefinitely.
B) there is a limit as to how much government can cut taxes.
C) government may have difficulties on reaching a compromise as to the appropriate policy, a change in taxes or a change in government spending.
D) there is a limit as to how much government can decrease spending.

Question 52

According to the equation of exchange:

A) M * P = V * GDP.
B) V * P = M * GDP.
C) M * V = P * GDP.
D) M * V = GDP.

Question 53

Supply-side policies attempt to deal with inflation by:

A) increasing aggregate demand.
B) decreasing aggregate demand.
C) increasing aggregate supply.
D) decreasing aggregate supply.

Question 54

The inflation rate may change even if the money supply grows at a constant rate because:

A) velocity is constant in the short run.
B) the growth rate of output is constant in the short run.
C) the growth rate of output may vary in the short run.
D) the growth rate of output is constant in the long run.

Question 55

When conducting monetary policy, the Federal Reserve focuses on:

A) changing government spending.
B) increasing taxes.
C) decreasing taxes.
D) changing the money supply.

Question 56

Incomes policy attempts to control inflation by:

A) decreasing aggregate demand.
B) increasing aggregate supply.
C) controlling the rate of increase in prices, wages, and other forms of income.
D) Both a and b

Question 57

According to the quantity theory of money:

A) the growth rate in the money supply is constant.
B) velocity is constant.
C) the price level is constant.
D) the growth rate in nominal GDP is constant.

Question 58

Which of the following statements is correct?

A) The aggregate demand-aggregate supply model shows the relationship between the money supply, the income velocity of money, the GDP deflator, and real GDP.
B) The equation of exchange shows the relationship between the money supply, the income velocity of money, the GDP deflator, and real GDP.
C) The quantity theory of money shows the relationship between the money supply, the income velocity of money, the GDP deflator, and real GDP.
D) Incomes policy shows the relationship between the money supply, the income velocity of money, the GDP deflator, and real GDP.

Question 59

The most appropriate policy to deal with inflation is:

A) contractionary fiscal policy.
B) contractionary monetary policy.
C) supply-side policy.
D) All of the above.

Question 60

Economists feel that incomes policy, if successful in controlling inflation:

A) is the most desired policy because it allows government to decrease the rate of inflation relatively quickly.
B) causes an underallocation of resources to the production of products for which there is high demand.
C) causes an underallocation of resources to the production of products for which there is low demand.
D) is very cost efficient.

Question 61

Advocates of incomes policy believe inflation is caused by:

A) an excessive growth in the money supply.
B) an excessive growth in aggregate demand.
C) ineffective unions.
D) excessive monopoly power.

Question 62

Suppose that economic actors correctly anticipate the rate of inflation. In this case:

A) debtors will gain at the expense of creditors.
B) creditors will gain at the expense of debtors.
C) persons on fixed incomes will not be affected by inflation.
D) persons on fixed incomes will still lose as a result of inflation.

Question 63

Tei compares the price of a Toyota Celica with the price of a Nissan Stanza. In this example money is functioning as:

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

Question 64

Decreasing the money supply will cause:

A) an increase in both aggregate demand and the price level.
B) a decrease in both aggregate demand and the price level.
C) an increase in aggregate demand and a decrease in the price level.
D) an decrease in aggregate demand and an increase in the price level.

Question 65

If you wish to measure price changes of the goods and services bought by households, you should use:

A) the consumer price index.
B) the GDP deflator.
C) the producer price index for finished goods.
D) the producer price index for crude materials.

Question 66

Suppose the economy is currently suffering from inflation. In order to decrease the price level:

A) the growth rate in the money supply could be decreased.
B) government spending could be increased.
C) aggregate supply could be decreased.
D) taxes could be decreased.

Question 67

Abraham buys lunch at work everyday. In this example money is functioning as a:

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

Question 68

Suppose the long-run annual growth rate in real GDP is 4 percent. If monetary authorities want stable prices over the long-run, they should allow the money supply to:

A) increase at 4 percent annually.
B) increase between 1 percent and 4 percent annually.
C) decrease at 4 percent annually.
D) This cannot be determined from the information given.

Question 69

If you wish to measure price changes of final goods and services produced in the economy, you should use:

A) the consumer price index.
B) the GDP deflator.
C) the producer price index for intermediate goods.
D) the producer price index for crude materials.

Question 70

Suppose the CPI was 132.00 in 1997 and is 135.30 in 1998. What is the rate of inflation over the period?

A) 2.43 percent.
B) 2.5 percent.
C) 3.3 percent.
D) 9.77 percent.

Question 71

Suppose the money supply is $1,500 billion, the price level is 2.50, and real GDP is $3,000 billion. The income velocity of money is:

A) 3.
B) 4.
C) 5.
D) 6.

Question 72

Suppose borrowers and lenders underestimate the rate of inflation. In this case:

A) borrowers gain at the expense of lenders.
B) lenders gain at the expense of borrowers.
C) neither borrowers or lenders gain.
D) both borrowers and lenders gain.

Question 73

Who is most likely to gain as a result of unanticipated inflation?

A) Roberta who invested $5,000 in real estate before the inflation began.
B) Hector who invested $10,000 in government bonds that pay a fixed rate of interest of 5.3 percent.
C) James who just signed a two-year consulting contract that does not include a cost of living adjustment.
D) Rebecca who put $2,000 in her savings account.

Question 74

Suppose the rate of growth in output is 3.5 percent. The rate of growth in the money supply is 6.0 percent. The rate of growth in velocity is 0 percent. What is the inflation rate?

A) 9.5 percent.
B) 6.0 percent.
C) 3.5 percent.
D) 2.5 percent.

Question 75

Who is most likely to lose as a result of unanticipated inflation?

A) Jerry, who has borrowed $500 from Scott.
B) Sandy, who lives on a monthly pension.
C) Mary, who has invested her financial resources in gold.
D) Joan, whose wages are determined by a five year contract which includes a cost of living adjustment clause.

Question 76

Suppose the growth rate in the money supply is 8 percent. If the growth rate in real GDP is 3 percent, the quantity theory of money would predict:

A) an inflation rate of 8 percent.
B) an inflation rate of 5 percent.
C) an inflation rate of 3 percent.
D) an inflation rate of 2 percent.

Question 77

In which of the following examples is money functioning as a medium of exchange?

A) Robin compares the price of apples and oranges.
B) Kathy saves her money to purchase a personal computer.
C) Scott puts money into a personal retirement account.
D) Bill purchases a new pair of Nike shoes.

Question 78

Who is most likely to lose as a result on unanticipated inflation?

A) Margaret who receives Social Security.
B) James, who borrowed $2,000 from Jack.
C) Jack who loaned James $2,000.
D) Jennifer who has signed a contract with her employer that includes a cost of living adjustment clause.

Question 79

Who is likely to lose the least from an unanticipated inflation?

A) Chris, who loaned $5,000 to Todd at a fixed rate of interest.
B) Janice, whose wage is determined by a five year contract that does not include a cost of living adjustment.
C) Beth, who works for a firm that gives its employees an annual cost of living adjustment.
D) Steve, who has put his financial assets into a savings account paying a fixed rate of interest.

Question 80

Maria saves $300 each month in order to buy a house. In this example money is functioning as a:

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