Deck 11: Money Growth and Inflation

Question 1

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.

Answer 1

B

Question 2

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 determine the costs of inflation.

Answer 2

C

Question 3

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.

Answer 3

C

Question 4

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 5

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 6

Why is the money supply curve vertical?

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

Question 7

Which of the following events in took place in the early 1920s in Germany?

A)deflation that proved detrimental to farmers
B)an aversion to inflation by policymakers that kept wages stagnant
C)an unexpected drop in inflation that hurt borrowers
D)an extraordinarily high rate of inflation

Question 8

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

A)2 percent
B)3 percent
C)4 percent
D)7 percent

Question 9

When the money market is depicted in a graph with the value of money on the vertical axis, as the price level increases, which of the following 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 10

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 11

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 12

Which of the following 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
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 13

Which of the following best describes the evolution of inflation in Canada?

A)Prices rose at an average annual rate of about 2 percent over the last 60 years.
B)There was about a 12-fold increase in the price level over the last 60 years.
C)Inflation in the 1970s was above the average over the last 60 years.
D)Canada has never experienced periods of deflation.

Question 14

When does the supply of money increase?

A)when the value of money increases
B)when the price level decreases
C)when the Bank of Canada makes open-market purchases
D)when the Bank of Canada increases the bank rate

Question 15

When prices are falling, which of the following terms do economists use?

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

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)3 percent, implying that prices have increased 18-fold
D)5 percent, implying that prices increased about 18-fold

Question 17

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 the price of a specific commodity
D)by the change in the price of a specific commodity

Question 18

Which of the following 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 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 20

Which of the following 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 1990s, prices rose at an average rate of about 2 percent per year.
D)There was deflation during the 1990s.

Question 21

When the money market is depicted in a diagram with the value of money on the vertical axis, which of the following 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 22

Which of the following 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 money supply shifts right and the price level decreases.
C)If the Bank of Canada purchases bonds, then the money supply shifts left and the price level decreases.
D)If the Bank of Canada sells bonds, then the money supply shifts right and the price level decreases.

Question 23

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

Question 24

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 25

When a graph of the money market is drawn with the value of money on the vertical axis, which of the following 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 26

When the money market is drawn with the value of money on the vertical axis, in which of the following situations 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 27

When the money market is depicted in a diagram with the value of money on the vertical axis, which of the following 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 28

When the money market is depicted in a diagram with the value of money on the vertical axis, which of the following 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 29

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 30

Which of the following 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 31

Which of the following 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 32

When the money market is depicted in a diagram with the value of money on the vertical axis, which of the following 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 33

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. Which of the following 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 34

When the money market is depicted in a diagram with the value of money on the vertical axis, which of the following 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 35

Use the figure below for the following questions.
Figure 30-1
Refer to Figure 30-1. If the money supply is MS₂ and the value of money is 2, which of the following relationships holds?

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

Question 36

When the money market is depicted in a diagram with the value of money on the vertical axis, in which of the following situations 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 37

As the price level decreases, which of the following 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 38

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 39

When the money market is depicted in a diagram with the value of money on the vertical axis, which of the following 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 40

When the money market is represented in a diagram with the value of money on the vertical axis, which of the following 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 41

According to the classical dichotomy, which of the following is influenced by monetary factors?

A)the amount of goods and services that wages can buy
B)the interest rate adjusted for inflation
C)the current-dollar wage
D)the constant-dollar GDP

Question 42

According to the classical dichotomy, which of the following is NOT influenced by monetary factors?

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

Question 43

According to the classical dichotomy, which of the following is influenced by monetary factors?

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

Question 44

Use the figure below for the following questions.
Figure 30-1
Refer to Figure 30-1. 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 45

Use the figure below for the following questions.
Figure 30-1
Refer to Figure 30-1. 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 46

Your boss gives you an increase in the number of dollars you earn per hour. 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 47

Which of the following terms refers to economic variables whose values are measured in monetary units?

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

Question 48

According to the classical dichotomy, which of the following increases when the money supply increases?

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

Question 49

Which of the following 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 price level

Question 50

Use the figure below for the following questions.
Figure 30-1
Refer to Figure 30-1. If the current money supply is located at MS₁ and the value of money is 2, what is the excess demand or supply?

A)There is no excess supply or excess demand.
B)There is an excess demand.
C)There is an excess supply.
D)There is both an excess demand and an excess supply.

Question 51

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. Which of the following 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 and her nominal wage has fallen.
D)Her real wage has fallen and her nominal wage has risen.

Question 52

Use the figure below for the following questions.
Figure 30-1
Refer to Figure 30-1. 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 53

What is the price of a Honda Accord divided by the price of a Honda Civic called?

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

Question 54

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 Fisher effect
C)the classical dichotomy
D)the classical theory of money

Question 55

Which of the following ideas does the classical dichotomy refers 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 56

What type of variable is the price level?

A)a relative variable
B)an actual variable
C)a real variable
D)a nominal variable

Question 57

Which of the following kinds of variables are interest rates adjusted for the effects of inflation?

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

Question 58

Which of the following 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 59

Which of the following kinds of variables are the interest rates stated in the Wall Street Journal?

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

Question 60

Randy pays $120 for a bag of goods he purchases at the HyValu discount store. Which of the following accurately identifies the types of the variables involved?

A)The $120 is a real variable; the bag of groceries is a nominal variable.
B)The $120 is a nominal variable; the bag of groceries is a real variable.
C)Both the $120 and the bag of groceries are nominal variables.
D)Both the $120 and the bag of groceries are real variables.

Question 61

According to the quantity equation, if P = 4 and Y = 800, which of the following pairs could M and V be?

A)800, 4
B)600, 3
C)400, 2
D)200, 1

Question 62

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

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

Question 63

Based on the quantity equation, if M = 125, V = 4, and Y = 200, what is P?

A)0.5
B)1
C)1.5
D)2.5

Question 64

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

A)the price level and nominal wages
B)the price level, but not the nominal wage
C)the nominal wage, but not the price level
D)neither the nominal wage nor the price level

Question 65

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

A)the value of the dollar
B)nominal interest rates
C)real interest rates
D)the price level

Question 66

According to the classical dichotomy, which of the following is NOT influenced by monetary factors?

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

Question 67

How is velocity computed?

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

Question 68

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 69

According to the quantity equation, if V and M are constant, and Y doubles, which of the following 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 70

According to which of the following theories are changes in nominal variables determined mostly by the quantity of money and the monetary system?

A)both the classical dichotomy and the quantity theory of money
B)the classical dichotomy, but not the quantity theory of money
C)the quantity theory of money, but not the classical dichotomy
D)neither the classical dichotomy nor the quantity theory of money

Question 71

Assuming that V is constant, the quantity equation implies that an increase in M could result in which of the following?

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 72

Which of the following 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 same thing as 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 73

If velocity and output were nearly constant, how would the inflation rate compare with the money supply growth rate?

A)The inflation rate would be much higher than the money supply growth rate.
B)The inflation rate would be about the same as the money supply growth rate.
C)The inflation rate would be much lower than the money supply growth rate.
D)The inflation rate cannot be compared with the money supply growth rate because they are independent of each other.

Question 74

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

A)It will less than double.
B)It will double.
C)It will more than double.
D)It might double, more than double, or less than double; more information is needed.

Question 75

Monetary neutrality implies that an increase in the quantity of money will increase which of the following?

A)employment
B)the price level
C)the incentive to save
D)no other economic variable

Question 76

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

A)the price level and nominal GDP
B)the price level and real GDP
C)only real GDP
D)only the price level

Question 77

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

A)It will more than double.
B)It will less than double.
C)It will double.
D)It might double, less than double, or more than double; more information is needed.

Question 78

According to the quantity equation, if P = 15, Y = 10, and M = 20, what is V?

A)30
B)15
C)7.5
D)7

Question 79

Last year, Tealandia produced 60 000 bags of green tea, which sold at 5 units each of Tealandia's currency-the Leaf. Tealandia's money supply was 10 000. What was the velocity of money in Tealandia?

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

Question 80

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

A)relevant to both the short and long run
B)irrelevant to both the short and long run
C)mostly relevant to the short run
D)mostly relevant to the long run