Deck 12: Money and Prices

Question 1

Japan appeared to have entered a liquidity trap at the turn of the century because

A) inflation made currency holdings virtually worthless
B) the central bank pushed nominal interest rates so high than investment stagnated
C) consumer spending rose dramatically, depleting savings
D) deflation pushed real interest rates up to levels that the central bank could not correct
E) long-term investments depleted the economy of cash

Answer 1

deflation pushed real interest rates up to levels that the central bank could not correct

Question 2

The stagflation of the 1970s is generally attributed to

A) the Cold War arms race
B) the introduction of large-scale computer systems into business
C) the opening of US markets to Japanese automobiles
D) increases in oil prices
E) changing cultural values regarding work and leisure

Answer 2

increases in oil prices

Question 3

When depositors transfer funds from savings accounts to checking accounts,

A) M2 falls and M1 rises, while M3 remains constant
B) M1 rises while M2 and M3 remain constant
C) both M1 and M2 increase, while M3 falls
D) M3 falls while M1 and M2 remain constant
E) M1 falls, M3 rises, and M2 remains constant

Answer 3

M1 rises while M2 and M3 remain constant

Question 4

The inflation tax is

A) an additional income tax levied during periods of inflation to prevent government revenue from losing value
B) the movement of taxpayers into higher tax brackets due to inflation
C) the reduction in the value of cash due to inflation
D) the federal sales tax on goods whose prices rise by more than the general inflation rate
E) a tax on trucking, so called because of the inflation of the tires

Question 5

If incomes rose proportionately with prices,then in the absence of taxes

A) money would cease to be a veil
B) real GDP would increase
C) everyone would be worse off
D) prices would have no effect on output or well-being
E) resources would be over allocated to the present at the expense of future generations

Question 6

Consider the following data from the Economic Report of the President. According to the data in the table,the inflation rate for 1996 was

A) 10.22 %
B) 2.28 %
C) 2.46 %
D) 1.1022 %
E) 11.022 %

Question 7

In the 1970s when US President Richard M.Nixon ended the gold standard,

A) barter became the predominant method of transacting business
B) silver took the place of gold
C) hyperinflation occurred
D) he created a pure fiat money
E) a run on banks ensued

Question 8

Which of the following is not a problem associated with barter?

A) tax rates are generally higher on barter than on monetary transactions
B) the quality of goods used in barter may differ across time and place
C) transporting goods for use in barter is inconvenient
D) goods used in barter may not be easily divisible
E) barter requires a double coincidence of wants

Question 9

Which of the following is not a likely consequence of inflation?

A) Firms incur the "menu costs" of changing advertisements
B) Some taxpayers are pushed into higher tax brackets
C) The value of currency is reduced
D) Banks reduce nominal interest rates to reflect expected inflation
E) Price signals sent by consumers to firms are distorted

Question 10

Inflation is primarily a problem

A) because even low inflation rates severely hamper GDP growth
B) for those who are heavily indebted
C) when it is volatile and thus unpredictable
D) because it is severely underestimated, especially when products are improving in quality
E) for accounting and record-keeping, but it does not affect the actual trading of goods and services

Question 11

The inflation rates in the 7 major industrialized countries

A) have fallen steadily since 1970
B) reached a peak in the mid-1990s
C) have been historically high in all countries except the U.S. during the 1990s
D) have been nearly zero since 1970, because prices have been stable
E) were higher in the mid- and late 1970s than at any time since

Question 12

In the late 13^th century,Chinese money consisted of

A) stones
B) tobacco
C) beads made of sea shells
D) paper
E) gold

Question 13

Fiat money differs from commodity money in that

A) only fiat money can be made legal tender
B) fiat money has no intrinsic value
C) fiat money is backed by gold
D) only fiat money can serve as a unit of account
E) only commodity money can serve as a store of value

Question 14

Which of the following is not a reason that the cost of owner-occupied housing is difficult to measure?

A) Housing is both an investment and consumption good
B) Buying a house is a one-off expenditure, but the benefits of home ownership are spread over many years
C) Owner-occupiers do not pay rent which is the most straightforward measure of the cost of housing
D) House purchase, when it occurs, is too large a share of total spending
E) Many countries do not have a well developed rental market from which to calculate imputed rents for owner occupiers

Question 15

Which price index is not affected by the cost of imports?

A) the consumer price index
B) the retail price index
C) the wholesale price index
D) the producer price index
E) the GDP deflator

Question 16

Suppose a loan of $100 is made at a fixed nominal interest rate of 5% for one year. During the year,there is unexpected inflation of 7%. Which of the following is true?

A) The inflation has redistributed income from the lender to the borrower
B) The real rate of interest is 12%
C) The borrower will be obligated to repay $107 instead of $105
D) The real rate of interest is 2%
E) None of the above

Question 17

The widespread historical use of gold or silver in transactions is an example of

A) barter
B) commodity money
C) fiat money
D) credit
E) paper money

Question 18

Which of the following is not included in M2?

A) coins
B) gold
C) savings accounts
D) retail money market mutual funds
E) overnight repurchase agreements

Question 19

Post-World War II inflation rates,as measured by the CPI

A) are overestimated due to the inability to measure quality improvements
B) are underestimated due to the exclusion of import prices
C) are not comparable across decades due to decennial changes in the base year
D) have tended to move in the opposite direction of inflation rates as measured by the GDP deflator
E) have become increasingly accurate as technology has improved

Question 20

The ease with which assets can be converted to cash for transactions is called

A) convertibility
B) liquidity
C) float
D) seignorage
E) the substitution effect

Question 21

Which of the following is an assumption used by monetarists in establishing the quantity theory of money?

A) real GDP is equal to the multiplicative product of the money supply and the price level
B) the velocity of money is constant
C) households exhibit rational expectations
D) households exhibit money illusion
E) all of the above

Question 22

Seignorage is an especially important source of government revenue in countries

A) with weak credit industries
B) with low inflation rates
C) with high tariffs on imports
D) with a currency tied to the dollar
E) that still use commodity money

Question 23

The equation of exchange states that the relationship among the money supply (M),the price level (P),the velocity of money (V) and real output (Y) is

A) MP = VY
B) M/P = YV
C) PV = MY
D) MV = PY
E) Y/V = MP

Question 24

Compared with a 100% reserve system,fractional reserve banking

A) makes the economy more stable
B) creates a greater risk of bank insolvency
C) gives banks less control over the money supply
D) makes the money multiplier smaller
E) means that each dollar of currency is backed by a smaller amount of gold

Question 25

The quantity theory of money is most likely to be relevant

A) when money supply growth is 2% or less
B) as a short-term policy prescription
C) for economies on the gold standard
D) as a long run explanation for inflation
E) when the velocity of money is volatile

Question 26

The next questions refer to the following.
The Economic Report of the President estimated that for 1997, the US had the following money stock components (in billions): $426 in currency; $391.7 in checking account deposits; $8.2 in travelers checks; $242.8 in other checkable deposits; $963.7 in small denomination time deposits; $1395.4 in savings accounts; $591.5 in retail money market mutual funds; $579.2 in large time deposits; $235.9 in term repurchase agreements; $139.1 in Eurodollar accounts; and $359.5 in institutional money market mutual funds.
The value of M2 was

A) $2454.1
B) $3417.8
C) $4019.3
D) $4958.0
E) $5333.0

Question 27

The next questions refer to the following.
The Economic Report of the President estimated that for 1997, the US had the following money stock components (in billions): $426 in currency; $391.7 in checking account deposits; $8.2 in travelers checks; $242.8 in other checkable deposits; $963.7 in small denomination time deposits; $1395.4 in savings accounts; $591.5 in retail money market mutual funds; $579.2 in large time deposits; $235.9 in term repurchase agreements; $139.1 in Eurodollar accounts; and $359.5 in institutional money market mutual funds.
The value of M1 was

A) $434.2
B) $825.9
C) $1068.7
D) $2454.1
E) $3417.8

Question 28

According to the quantity theory of money,

A) the quantity of money determines the long run equilibrium price level
B) the amount of money in the economy determines the long run quantity of output
C) money affects the aggregate supply curve, while the aggregate demand curve determines real output
D) the money supply only affects the economy in the long run, not in the short run
E) the full-capacity level of output determines the supply of money needed in the economy

Question 29

Suppose a sunken ship containing $1000 in currency is dredged out of Lake Erie. The currency is still legal tender,but interest rates are high so no one wants to hold onto the currency; the owners therefore deposit it in a bank. If the reserve requirement is 20% and the banks hold no excess reserves,the eventual result will be

A) the money supply decreases by $200
B) the money supply increases by $1000
C) the money supply increases by $2000
D) the money supply increases by $5000
E) the money supply remains unchanged

Question 30

The number of times a unit of currency changes hands for transactions in a given period is called

A) the transactions demand for money
B) the money multiplier
C) M1
D) GDP
E) velocity

Question 31

Consider the following (hypothetical) cash economy with no banks. The money supply consists entirely of $1000 in currency. Output is currently at potential. The government is currently faced with a $100 budget deficit and chooses not to raise taxes,but instead prints $100 more currency with which to balance its budget. The long run result is likely to be

A) an interest rate of 10%
B) an inflation rate of 10%
C) a 10% increase in the velocity of money
D) a 10% growth rate of real GDP
E) a 10% increase in the national debt

Question 32

Banks can expand the nation's money supply by

A) issuing credit cards
B) paying interest on deposits c
C) lending out excess reserves
D) cashing checks
E) selling life insurance

Question 33

The government's profit from printing currency is called

A) seignorage
B) arbitrage
C) the rate of exploitation
D) the inflation tax
E) the velocity of money

Question 34

Which of the following is characteristic of a hyperinflation?

A) the government runs a large budget surplus by raising taxes
B) households increase their savings
C) government finances expenditures by printing money
D) the real stock of money rises by more than 50% per month
E) currency is issued according to a gold standard