Deck 16: Inflation, Disinflation, and Deflation

Question 1

What distinction did Zimbabwe achieve in June 2008?

A)It was the first African nation to become a democracy.
B)It ended apartheid.
C)It had the world's highest inflation rate.
D)It had the world's highest unemployment rate.

Answer 1

C

Question 2

In the classical model, it is thought that the long-run:

A)and short-run aggregate supply curves are both upward sloping.
B)aggregate supply curve is vertical and the short-run aggregate supply curve is upward sloping.
C)and short-run aggregate supply curves are both vertical.
D)aggregate supply curve is upward sloping and the short-run aggregate supply curve is vertical.

Answer 2

C

Question 3

In the long run, an increase in aggregate demand from a position of full employment leads to:

A)higher prices and higher output.
B)higher prices and the same output.
C)higher output and lower prices.
D)higher output and higher unemployment.

Answer 3

B

Question 4

In the long run, any given percentage increase in the money supply:

A)decreases real GDP.
B)leads to an equal percentage increase in the overall price level.
C)increases real GDP.
D)leads to an equal percentage decrease in the unemployment rate.

Question 5

Use the following to answer questions 14-17:
Figure: Classical Model of the Price Level
(Figure: Classical Model of the Price Level) Look at the figure Classical Model of the Price Level. If the central bank increases the money supply such that aggregate demand shifts from AD₁ to AD₂, according to this classical model, the SRAS will:

A)not change, since in the classical model the SRAS and LRAS are both vertical at potential output.
B)decrease from SRAS₁ to SRAS₂.
C)increase from SRAS₂ to SRAS₁.
D)increase from SRAS₁ to SRAS₂.

Question 6

Assume that workers and businesses are sensitized to inflation and are quick to raise wages and prices in response to changes in the money supply. This implies that inflation is _____ and there are _____ adjustments of wages and prices of intermediate goods.

A)high; quick
B)low; quick
C)high; slow
D)low; slow

Question 7

Inflation does NOT reduce purchasing power if:

A)prices of essential products, such as food and gasoline, don't increase too much.
B)nominal wages rise at the same rate as prices.
C)it remains under 10% per year.
D)the Federal Reserve increases the money supply enough to offset it.

Question 8

During periods of high inflation, the short-run aggregate supply curve is:

A)vertical.
B)horizontal.
C)upward sloping.
D)downward sloping.

Question 9

Workers in country A have wage contracts for cost-of-living adjustments (COLAs), which adjust wages to offset the effect of inflation, and workers in country B do NOT. When the central banks of countries A and B increase the money supply:

A)prices in country A increase faster than prices in country B.
B)prices in country B increase faster than prices in country A.
C)prices in countries A and B will change at the same rate.
D)COLAs have no effect on the speed of price changes.

Question 10

In the short run in periods of low inflation, an increase in aggregate demand from a position of full employment leads to:

A)higher prices and higher unemployment.
B)higher prices and higher output.
C)lower prices and higher output.
D)lower prices and higher unemployment.

Question 11

During hyperinflation in Germany in 1922-1923, prices rose at _____ per day.

A)0)1%
B)16%
C)50%
D)100%

Question 12

The classical model of the price level is most likely to be a good approximation of reality during periods of:

A)recession.
B)high unemployment.
C)low inflation.
D)high inflation.

Question 13

Use the following to answer questions 14-17:
Figure: Classical Model of the Price Level
(Figure: Classical Model of the Price Level) Look at the figure Classical Model of the Price Level. If the central bank increases the money supply such that aggregate demand shifts from AD₁ to AD₂, according to this classical model, the price level will:

A)not change.
B)increase from P₁ to P₂.
C)increase from P₁ to P₃.
D)decrease from P₁ to P₂.

Question 14

During periods of low inflation, the short-run aggregate supply curve is:

A)vertical.
B)horizontal.
C)upward sloping.
D)downward sloping.

Question 15

The classical model of the price level is associated with:

A)John Maynard Keynes.
B)economists who followed Keynes's work.
C)economists who came before Adam Smith.
D)economists who came after Adam Smith but before Keynes.

Question 16

Which of the following is the BEST explanation for an upward-sloping short-run aggregate supply curve?

A)Prices are perfectly flexible.
B)Wages are perfectly flexible.
C)Wages and prices of some goods are sticky in the short run.
D)Wages and prices of some goods are flexible in the short run but sticky in the long run.

Question 17

Use the following to answer questions 14-17:
Figure: Classical Model of the Price Level
(Figure: Classical Model of the Price Level) Look at the figure Classical Model of the Price Level. If the central bank increases the money supply such that aggregate demand shifts from AD₁ to AD₂, according to this classical model, the equilibrium point will:

A)not change.
B)immediately move from E₁ to E₂.
C)immediately move from E₂ to E₁.
D)immediately move from E₁ to E₃.

Question 18

The notion that the real quantity of money is always at its long-run equilibrium level is associated with the _____ of the price level.

A)classical model
B)Keynesian model
C)monetarist model
D)modern view

Question 19

Use the following to answer question 7:
Figure: AD-AS Model
(Figure: AD-AS Model) Look at the figure AD-AS Model. Suppose the economy is at Y_E with a price level of P_1. Which of the following would represent the new long-run equilibrium position if the aggregate demand curve shifted to the right from AD₁ to AD₂ as a result of an increase in the money supply?

A)Y_E and P₂
B)Y_E and P₁
C)Y₁ and P₂
D)Y_E and P₃

Question 20

Use the following to answer questions 14-17:
Figure: Classical Model of the Price Level
(Figure: Classical Model of the Price Level) Look at the figure Classical Model of the Price Level. If the central bank increases the money supply such that aggregate demand shifts from AD₁ to AD₂, according to this classical model, real GDP will:

A)not change.
B)increase from Y_E to Y₁.
C)increase from Y₁ to Y_E.
D)establish a new potential output.

Question 21

According to the classical model of the price level, an increase in the money supply will cause _____ and _____ increase in real GDP.

A)inflation; no long-run
B)inflation; a long-run
C)no inflation; a long-run
D)deflation; no long-run

Question 22

Use the following to answer questions 27-31:
Figure: AD-AS
(Figure: AD-AS) Look at the figure AD-AS. Suppose the economy starts at E₁ and moves to E₂, where AD₂ intersects SRAS₁. Finally the economy moves to E₃. The classical model of price level assumes that the economy moves from _____; thus, inflation _____ and real GDP _____.

A)E₁ to E₃, ignoring E₂; increases; remains the same
B)E₂ to E₃, ignoring E₁; remains the same; increases
C)E₂ to E₃; decreases; remains the same
D)E₁ to E₂, ignoring E₃; remains the same; remains the same

Question 23

Government debt is monetized when:

A)commercial banks buy newly issued Treasury bills.
B)the Fed conducts open-market purchases.
C)the Fed transfers part of its financial reserves to the Treasury, which in turn buys Treasury bills back.
D)the Fed sells Treasury bills in the bond market.

Question 24

The inflation tax is the effect on the public of:

A)the increase in the real value of money caused by inflation.
B)the decrease in the real value of money caused by inflation.
C)the result of indexing wages to inflation.
D)cost of living adjustments.

Question 25

When the Treasury Department borrows from the public to finance the government's purchases of goods and services and the Fed buys the debt back from the public in the form of Treasury bills, it is known as:

A)moral suasion.
B)money illusion.
C)structuring the deficit.
D)monetizing the debt.

Question 26

The Fed monetizes the debt when it:

A)prints money and buys government debt from the public.
B)sells bonds.
C)decreases the money supply.
D)targets interest rates.

Question 27

In economies with persistently high inflation, an increase in the money supply will have:

A)a positive effect on the real quantity of money in the long run.
B)a negative effect on the real quantity of money, as the aggregate price level increases by more than the money supply.
C)a positive effect on the aggregate real output in the long run.
D)no effect on the real quantity of money, making money neutral in the long run.

Question 28

Use the following to answer questions 27-31:
Figure: AD-AS
(Figure: AD-AS) Look at the figure AD-AS. Suppose the economy starts at E₁ and moves to E₂, where AD₂ intersects SRAS_1. SRAS₁ will shift to SRAS₂ because:

A)real wages rise in the long run.
B)nominal wages rise in the long run.
C)the real money supply rises in the long run.
D)aggregate real output rises in the long run.

Question 29

Historical evidence has led economists to conclude that during periods of high inflation, the _____ model of the price level is a good approximation of reality because nominal wages and prices adjust more _____ than during periods of low inflation.

A)classical; quickly
B)modern; slowly
C)classical; slowly
D)modern; quickly

Question 30

In economies with persistently high inflation, an increase in the money supply:

A)will translate into a proportional increase in the aggregate price level much faster than usual.
B)will translate into a proportional increase in the aggregate price level only in the long run.
C)will not affect either the aggregate price level or the aggregate output.
D)will translate into a proportional increase in the aggregate output much faster than usual.

Question 31

Fiat money is:

A)money backed by gold.
B)money that only the government will accept to pay taxes.
C)paper money with no intrinsic value.
D)used only in the United States as a medium of exchange.

Question 32

The inflation tax is the effect on the public of:

A)the higher tax paid by individuals whose incomes are indexed to inflation.
B)the sales taxes paid during periods of inflation.
C)the reduction in the value of money caused by inflation.
D)the higher prices consumers pay due to inflation.

Question 33

The inflation tax is equal to:

A)inflation multiplied by the demand for money.
B)inflation multiplied by the nominal money supply.
C)the money supply divided by the price level.
D)the nominal money supply divided by inflation.

Question 34

If the monetary authorities decide to increase the nominal money supply by 10% when the economy is at its full-employment level of output, in the long run the aggregate price level increases by _____ and real GDP _____.

A)10%; increases by 10%
B)5%; increases by 5%, according to Okun's law
C)10%; returns to the potential level of output
D)5%; increases by 20%, given a marginal propensity to consume of 0.5

Question 35

The main difference between the classical model of the price level and the modern understanding of the relationship between the money supply, the price level, and real GDP is that according to classical economists, _____, while today's economists _____.

A)money is neutral in the long run; do not consider money to be neutral in the long run.
B)the adjustment of prices takes some time; expect changes in the money supply to be instantaneous.
C)did not consider money to be neutral in the long run; consider money neutral in the long run.
D)the adjustment of prices to changes in the money supply is instantaneous; argue that this adjustment process takes some time.

Question 36

As people get used to inflation:

A)the short-run aggregate demand curve adjusts more rapidly.
B)wages adjust faster, and the short-run aggregate supply shifts quickly to the right.
C)wages adjust faster, and the short-run aggregate supply shifts quickly to the left.
D)the long-run aggregate demand adjusts more slowly.

Question 37

Use the following to answer questions 27-31:
Figure: AD-AS
(Figure: AD-AS) Refer to the figure AD-AS. If our economy is at equilibrium and the Fed uses expansionary monetary policy, _____ will shift to _____ and the economy will move from _____. Then nominal wages will _____ and _____ will shift to _____. The economy will move from _____.

A)AD₂; AD₁; E₂ to E₁; rise very quickly; SRAS₁; SRAS₂; E₂ to E₃
B)SRAS₁ ; SRAS₂ ; E₂ to E₃; stay the same; AD₂; AD₁; E₂ to E₁
C)SRAS₂; SRAS₁; E₃ to E₂; stay the same; AD₂; AD₁; E₂ to E₁
D)AD₁; AD₂; E₁ to E₂; rise very quickly; SRAS₁; SRAS₂; from E₂ to E₃

Question 38

Use the following to answer questions 27-31:
Figure: AD-AS
(Figure: AD-AS) Look at the figure AD-AS. Suppose the economy is initially at E₁, where AD₁ intersects SRAS₁ and LRAS. Now, suppose that the AD₁ shifts to AD_2. That shift could be due to:

A)an increase in the aggregate price level.
B)a decrease in government expenditure.
C)an increase in tax rates.
D)an increase in money supply.

Question 39

If the Fed increases the monetary base by $40 billion through open-market operations:

A)GDP will increase by $40 billion.
B)the price level will increase by $40 billion.
C)the U.S. government debt held by the public has been reduced by $40 billion.
D)government spending has increased by $40 billion.

Question 40

Use the following to answer questions 27-31:
Figure: AD-AS
(Figure: AD-AS) Refer to the figure AD-AS. If our economy is at equilibrium with low-level inflation and the Fed uses expansionary monetary policy, the initial effect is that _____ will shift to _____ and the economy will move from _____.

A)AD₁; AD₂; E₁ to E₂
B)SRAS₁; SRAS₂; E₂ to E₃
C)SRAS₂; SRAS₁; E₃ to E₂
D)AD₂; AD₁; E₂ to E₁

Question 41

Seignorage refers to the:

A)problems faced by Social Security as the population ages.
B)government's right to print money.
C)problems senior citizens face in retirement.
D)problems created when the government prints too much money.

Question 42

Historically, governments have turned to seignorage to pay their bills when:

A)the economy is growing.
B)the government lacks the will to reduce the budget deficit by raising taxes or reducing spending.
C)the inflation rate is low.
D)the unemployment rate is low.

Question 43

If the real money supply is $500 billion and the money supply grows by 2%, then real seignorage is:

A)$25 trillion.
B)$1 trillion.
C)$10 billion.
D)$1 billion.

Question 44

The inflation tax is likely to be high when:

A)there is a budget surplus.
B)the government relies on seignorage to finance large portions of a budget deficit.
C)the Fed decreases the money supply.
D)corporate and personal income tax rates are increased.

Question 45

A large inflation tax causes people to do all of the following EXCEPT:

A)substitute real goods for money.
B)substitute interest-bearing assets for money.
C)reduce their real money holdings.
D)sell gold.

Question 46

Real seignorage is calculated by the:

A)real interest rate times the money supply.
B)rate of growth of the money supply times the real money supply.
C)real interest rate minus the inflation rate.
D)rate of growth of the money supply divided by the price index.

Question 47

Economists call the revenue generated by the government's right to print money:

A)seignorage.
B)monetary policy.
C)fiscal policy.
D)reserve policy.

Question 48

From 2000 to 2008 Zimbabwe's prices:

A)decreased by 50%.
B)increased by 50%.
C)increased by 100%.
D)increased by 80 trillion percent.

Question 49

When a central bank prints money to pay government debts, causing rising prices that erode the purchasing power of money held by the public, it is called a(n) _____ tax.

A)payroll
B)inflation
C)currency
D)budget

Question 50

The inflation tax refers to the:

A)increase in taxes when inflation rises.
B)inflation rate when aggregate demand increases.
C)inflation rate multiplied by the tax rate.
D)inflation rate multiplied by the money supply.

Question 51

An inflation tax is:

A)the reduction in purchasing power due to inflation.
B)a tax on businesses for raising prices.
C)a tax on people with inflated incomes.
D)an excise tax on new automobile tires.

Question 52

Zimbabwe's economic instability was caused primarily by:

A)its joining the Coalition of the Willing in the Iraq war.
B)its attempts to join the European Union.
C)the government's seizure of the country's farms, which disrupted production.
D)its high tariffs on imported goods.

Question 53

If the money held by the public is $3 billion and inflation is 6%, the inflation tax is:

A)$3.18 billion.
B)$50 billion.
C)$180 million.
D)$1.8 billion.

Question 54

Seignorage is:

A)the government's cost of printing and coining money.
B)the revenue generated by the government's right to print money.
C)the money financial institutions make selling government bonds to the Fed when the Fed creates money.
D)the revenue the government generates in tax receipts.

Question 55

As people try to avoid the inflation tax, the government must _____ the inflation rate to _____.

A)lower; avoid a budget deficit
B)lower; raise the same revenue from inflation
C)increase; raise the same revenue from inflation
D)increase; avoid a budget surplus, which will harm employment

Question 56

Politicians have an incentive to push the unemployment rate below the natural rate of unemployment right before their reelection because:

A)the expansionary monetary policy is used to finance the political campaigns.
B)the political benefits are immediate and the economic costs are delayed.
C)the Phillips curve is horizontal in the long run.
D)the opportunistic seignorage gains are very large.

Question 57

If a high inflation rate leads people to _____ their money holdings, this may lead to a further increase in the money supply and _____ inflation.

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

Question 58

If the money supply grows by 4% and the real money supply is $100 billion, real seignorage is:

A)$4 billion.
B)$25 billion.
C)$400 billion.
D)$2.5 trillion.

Question 59

If the public holds $300 billion in monetary purchasing power and the inflation rate is 5%, then the inflation tax that year is:

A)$5 billion.
B)$15 billion.
C)$60 billion.
D)$1,500 billion.

Question 60

The inflation tax refers to:

A)moving into higher tax brackets.
B)the reduction in the real value of money when inflation falls.
C)the reduction in the real value of money when inflation rises.
D)the tax imposed on inflation by the government.

Question 61

Politicians may accept moderate inflation in an election year, since the _____ in aggregate _____ serves to _____.

A)increase; supply; decrease employment
B)decrease; supply; increase employment
C)decrease; demand; increase output
D)increase; demand; increase employment

Question 62

If potential output is higher than actual output, then the unemployment rate is:

A)below the natural rate.
B)above the natural rate.
C)equal to the natural rate.
D)zero.

Question 63

Use the following to answer questions 70-77:
Figure: Actual and Natural Rates of Unemployment
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and Natural Rates of Unemployment. In 2014 the output gap was:

A)positive.
B)negative.
C)zero.
D)impossible to determine without more information.

Question 64

If an administration pursues expansionary policy before an election to bring down unemployment, it can:

A)produce inflation only if the real interest rate is zero to begin with.
B)lower people's expectations about inflation through a sense of false complacency.
C)produce inflation if the targeted rate of unemployment is too low.
D)produce disinflation if the expansionary monetary policy is unanticipated.

Question 65

When the output gap is _____, the unemployment rate is _____ the natural rate.

A)negative; below
B)zero; zero
C)inflationary; above
D)positive; below

Question 66

When the output gap is _____, reflecting an inflationary gap, the unemployment rate is _____ the natural rate of unemployment.

A)positive; above
B)negative; below
C)positive; below
D)negative; above

Question 67

Politicians may accept moderate inflation in an election year, since the _____ in aggregate _____ serves to _____.

A)increase; supply; increase output
B)decrease; supply; decrease employment
C)decrease; demand; decrease output
D)increase; demand; increase output

Question 68

The difference between real GDP and potential GDP is known as the:

A)price gap.
B)unemployment gap.
C)output gap.
D)budget deficit.

Question 69

Use the following to answer questions 70-77:
Figure: Actual and Natural Rates of Unemployment
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and Natural Rates of Unemployment. In 2014, the actual unemployment rate was approximately:

A)zero.
B)3%.
C)5%.
D)6%.

Question 70

When the output gap is positive, the unemployment rate is:

A)positive.
B)above the natural rate.
C)below the natural rate.
D)negative.

Question 71

Use the following to answer questions 70-77:
Figure: Actual and Natural Rates of Unemployment
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and Natural Rates of Unemployment. In 1982, the actual unemployment rate was approximately:

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

Question 72

When the actual unemployment rate is equal to the natural rate of unemployment:

A)the unemployment rate is zero.
B)potential output exceeds actual output.
C)the output gap is zero.
D)actual output exceeds potential output.

Question 73

Use the following to answer questions 70-77:
Figure: Actual and Natural Rates of Unemployment
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and Natural Rates of Unemployment. In 1982, the natural unemployment rate (structural plus frictional) was approximately:

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

Question 74

Which of the following is likely to be TRUE if actual output is equal to potential output?

A)The actual unemployment rate is equal to the natural rate of unemployment.
B)The actual unemployment rate is above the natural rate of unemployment.
C)There will be zero unemployment.
D)The natural rate of unemployment will be above the actual unemployment rate.

Question 75

Use the following to answer questions 70-77:
Figure: Actual and Natural Rates of Unemployment
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and Natural Rates of Unemployment. In 1982, the cyclical unemployment rate was approximately:

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

Question 76

Suppose actual aggregate output is equal to the potential output; the actual unemployment rate is:

A)equal to the natural rate of unemployment.
B)higher than the natural rate of unemployment.
C)zero.
D)equal to the cyclical rate of unemployment.

Question 77

Use the following to answer questions 70-77:
Figure: Actual and Natural Rates of Unemployment
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and Natural Rates of Unemployment. In 2000 the output gap was:

A)positive.
B)negative.
C)zero.
D)impossible to determine without more information.

Question 78

When the output gap is negative, the actual unemployment rate is:

A)above the natural rate.
B)below the natural rate.
C)equal to the natural rate.
D)The actual and natural unemployment rates are not related to the output gap.

Question 79

Use the following to answer questions 70-77:
Figure: Actual and Natural Rates of Unemployment
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and Natural Rates of Unemployment. In 2014, the amount of cyclical unemployment was approximately:

A)2%.
B)0)5%
C)9%.
D)14%.

Question 80

Use the following to answer questions 70-77:
Figure: Actual and Natural Rates of Unemployment
(Figure: Actual and Natural Rates of Unemployment) Look at the figure Actual and Natural Rates of Unemployment. In 2014, the natural unemployment rate was approximately:

A)zero.
B)3%.
C)5)5%.
D)9%.