Deck 8: Inflation

Question 1

Fiat money has value because:

A) people believe it has value
B) it is backed by silver
C) it is backed by gold
D) it has intrinsic value
E) it is a commodity

Answer 1

A

Question 2

In 1979, President Carter appointed ________ as chairman of the Board of Governors of the Federal Reserve to battle ________.

A) Greenspan; inflation
B) Volcker; the Soviet Union
C) Volcker; inflation
D) Bernanke; unemployment
E) Powell; Ayatollah Khomeini

Answer 2

C

Question 3

Money that has no intrinsic value except as money is called ________ money.

A) bonded
B) commodity
C) fiat
D) intrinsic
E) None of these answers are correct.

Answer 3

C

Question 4

Liquidity is a measure of:

A) the monetary base
B) how many coins are in circulation
C) how quickly coins can be melted down
D) how quickly an asset can be converted to currency
E) the amount of reserves

Question 5

M2 includes M1 and:

A) large time deposits
B) overnight repurchase agreements
C) saving accounts
D) long-term bonds
E) gold reserves

Question 6

A country on the silver standard uses:

A) coins
B) fiat money
C) bond money
D) commodity money
E) None of these answers are correct.

Question 7

Sometimes when discussing inflation, we use a measure of inflation that excludes ________ from its calculation because these prices tend to be volatile.

A) commodity and energy prices
B) food and energy prices
C) housing prices
D) food and housing prices
E) energy and housing prices

Question 8

What contributed to Reagan's defeat of Carter in the 1980 presidential election?

A) double-digit inflation
B) the low rate of unemployment
C) the takeover of the U.S. embassy in Tehran, Iran
D) Billy Carter's beer
E) Margaret Thatcher

Question 9

In 2007, the movie Transformers generated about $27.8 million on its opening day. In 1995, Batman Forever generated $20 million on its opening day. If the CPI in 2005 was 100, the CPI in 1995 was 78.0, and the CPI in 2007 was 106.2, ________ is the larger single-day grossing movie, with about ________ million in revenues in 2005 dollars.

A) Transformers; $27.8
B) Batman Forever; $35.6
C) Transformers; $26.2
D) Transformers; $35.6
E) Batman Forever; $27.8

Question 10

Silver, gold, and chocolate are examples of:

A) fiat money
B) commodity money
C) backed money
D) government money
E) None of these answers are correct.

Question 11

The measure of money that includes demand deposits and currency only is called:

A) M0
B) MZ
C) M2
D) M1
E) MB

Question 12

In the United States, money is backed by:

A) oil
B) gold
C) silver
D) no physical commodity
E) None of these answers are correct.

Question 13

Fiat money has value because:

A) it is backed by gold
B) people believe it has value
C) it has intrinsic value
D) it is backed by silver
E) None of these answers are correct.

Question 14

Today, the Wendy's Junior Cheeseburger Deluxe is on the "Right Price Right Size" menu and is priced at $1.19. If the CPI in 1979 was 37.2 and the CPI in 2012 was 117.6, what is the price of a 2012 cheeseburger in 1979 dollars?

A) $2.66
B) $1.07
C) $1.01
D) $0.38
E) $3.76

Question 15

The quote "Inflation is always and everywhere a monetary phenomenon" is attributed to:

A) Karl Marx
B) Thomas Sargent
C) Milton Friedman
D) Alan Greenspan
E) David Ricardo

Question 16

Inflation is calculated as:

A) the overall price level
B) the rate of change of the price level
C) the percent change in the price level
D) the difference in the price level
E) the percent change in output

Question 17

When discussing inflation, we generally speak of it in terms of:

A) the percent change in the consumer price index
B) the percent change in the GDP deflator
C) the level of the consumer price index
D) one over the consumer price index
E) the change in the producer price index

Question 18

The quote "Inflation is always and everywhere a fiscal phenomenon" is attributed to:

A) Adam Smith
B) Thomas Sargent
C) Karl Marx
D) Alan Greenspan
E) David Ricardo

Question 19

In 1979, in the face of rising competition in the fast food hamburger market, McDonald's reduced the price of its cheeseburger to $0.43. If the CPI in 1979 was 37.2 and the CPI in 2005 was 100, what is the price of a 1979 cheeseburger in 2005 dollars?

A) $0.77
B) $7.36
C) $1.16
D) $0.43
E) $0.14

Question 20

If P_t is the price level in time t, inflation is calculated as:

A) 1/P_t
B) $P _ { t + 1 } / P _ { t }$
C) $P _ { t + 1 } - P _ { t }$
D) $P _ { t } / P _ { t + 1 }$
E) $\left( P _ { t + 1 } - P _ { t } \right) / P _ { t }$

Question 21

If the real GDP growth is 4 percent per year, the money growth rate is 6 percent, and velocity is constant, using the quantity theory, the inflation rate is:

A) 6 percent
B) 4 percent
C) -2 percent
D) 2 percent
E) -4 percent

Question 22

The essence of the quantity theory of money is that:

A) the price level is indeterminate
B) in the long run, the only determinant of the price level is the money supply
C) in the long run, a key determinant of the price level is the money supply
D) only the central bank knows what the price level is
E) money cannot pin down the price level

Question 23

Using the quantity equation, if M_t = $1,000, P_t = 1.1, and V_t = 11, then real GDP is:

A) $100,000
B) $0.01
C) $100
D) $909.19
E) $826.45

Question 24

The velocity of money is:

A) how quickly money can be printed
B) how quickly individuals spend their income
C) the average number of times a dollar is used in a transaction per year
D) how many times individuals are paid per year
E) None of these answers are correct.

Question 25

The quantity theory states that the nominal GDP is equal to:

A) the real GDP
B) the number of dollars in circulation
C) the velocity of money
D) the effective amount of money used in purchases
E) velocity times real GDP

Question 26

Using the quantity equation, if, M_t = $1,000, P_t = 1.1, and Y_t = 100,000, then the velocity of money is:

A) 100,000
B) 0.09
C) 110
D) 9.09
E) 0.11

Question 27

Alternative forms of money include:

A) frequent flier miles
B) gift cards
C) debit cards
D) PayPal
E) All of these answers are correct.

Question 28

According to the quantity theory of money, the price level is:

A) exogenous
B) determined by the money supply only
C) determined by the ratio of the effective quantity of money to the volume of goods
D) indeterminate in the long run
E) determined by the volume of goods produced

Question 29

According to the quantity theory of money, the price level can be written as:

A) $P _ { t } ^ { * } = \bar { M } _ { t }$
B) $p _ { t } ^ { * } = \bar { M } _ { t } / \bar { Y } _ { t }$
C) $p _ { t } ^ { * } = \left( \bar { M } _ { t } \bar { V } _ { t } \right) / \bar { Y } _ { t }$
D) $P _ { t } ^ { * } = 1 / \bar { Y } _ { t }$
E) $p _ { t } ^ { * } = \bar { Y } _ { t } \bar { M } _ { t } / \bar { V } _ { t }$

Question 30

The monetary base consists of:

A) reserves and currency
B) M1 plus M2
C) only M1
D) gold reserves plus currency
E) a country's holdings of foreign and domestic currencies

Question 31

According to the classical dichotomy, in the long run there is:

A) accelerating economic growth
B) perfect connectivity between the nominal and real sides of the economy
C) complete separation of the nominal and real sides of the economy
D) no growth after the economy reaches the steady state
E) zero inflation

Question 32

In dollar amounts, which of the following is the largest?

A) MB
B) M2
C) M1
D) currency
E) demand deposits

Question 33

In the simple quantity theory of money, the supply of money is:

A) exogenous
B) a policy variable
C) determined by the relationship between output and the price level
D) endogenous
E) equal to the supply of gold reserves

Question 34

In the quantity equation, the value $P _ { t } Y _ { t }$ is:

A) real GDP
B) nominal GDP
C) aggregate expenditure
D) the velocity of money
E) real money

Question 35

In the quantity theory of money, the:

A) price level is exogenous
B) real GDP, velocity, and money supply are endogenous
C) real GDP and money supply are endogenous
D) real GDP, velocity, and money supply are exogenous
E) real GDP is endogenous

Question 36

Which of the following has NO effect on long-run economic growth?

A) a store of gold
B) money
C) productivity
D) investment
E) population

Question 37

Using the quantity theory of money, we can calculate inflation using ________, under the assumption that ________.

A) $\pi _ { t } = \% \Delta \bar { M } _ { t }$ ; velocity is constant
B) $\pi _ { t } = \% \Delta \bar { M } _ { t } - \% \Delta \bar { Y } _ { t }$ ; percent change in velocity always equals one
C) $\pi _ { t } = \% \Delta \bar { M } _ { t } - \% \Delta \bar { Y } _ { t }$ ; velocity is constant
D) $\pi _ { t } = \% \Delta \bar { Y } _ { t }$ ; velocity is variable
E) $\pi _ { t } = 0$ ; velocity is constant

Question 38

The velocity of money can be calculated from the quantity equation with:

A) P_tY_t
B) P_tY_t
    M_t
C) M_t
    /P_tY_t
D) P_tY_t
 
/M_t
E) M_t

Question 39

You are the head of the central bank and you want to maintain 2 percent long-run inflation, using the quantity theory of money. If the real GDP growth is 4 percent and velocity is constant, you suggest a:

A) 6 percent interest rate
B) 6 percent money supply growth
C) 2 percent money supply growth
D) 0 percent money supply growth
E) 2 percent interest rate

Question 40

If long-run real GDP growth is determined by real changes in the economy, the quantity theory of money implies that:

A) changes in the money growth rate lead one-for-one to changes in the inflation rate in the long run
B) changes in the money growth rate lead one-for-one to changes in the inflation rate but only in the short run
C) changes in velocity lead one-for-one to changes in the inflation rate
D) changes in the money growth rate lead to a greater than one-for-one change in the inflation rate in the long run
E) None of these answers are correct.

Question 41

Practically, the real interest rate is equal to:

A) a savings account
B) the rate of return to long-term bonds
C) the marginal product of capital
D) the return to stock markets
E) the return to housing

Question 42

Suppose you put $100 dollars in the bank on January 1, 2013. If the annual nominal interest rate is 5 percent and the inflation rate is 2 percent, you will be able to buy ________ worth of goods on January 1, 2014.

A) $93
B) $107
C) $103
D) $105
E) $99

Question 43

Let r denote the real interest rate, i denote the nominal interest rate, and $\pi$ denote the rate of inflation. The equation $i = r + \pi$ is called:

A) the money supply
B) the quantity equation
C) the Fisher equation
D) the quantity theory of money
E) money neutrality

Question 44

You are the head of the central bank and you want to maintain 2 percent long-run inflation. Using the quantity theory of money, if real GDP growth is 4 percent and velocity is constant, you suggest a:

A) 4 percent money supply growth
B) 6 percent interest rate
C) 2 percent money supply growth
D) 0 percent money supply growth
E) None of these answers are correct.

Question 45

The implications of the quantity theory of money are the main basis for which of the following quotes?

A) "Inflation is always zero in the long run."
B) "Inflation is always and everywhere a fiscal phenomenon."
C) "Inflation is always and everywhere a monetary phenomenon."
D) "Velocity growth should be equal to 2 percent in the long run."
E) "Velocity is always constant."

Question 46

The real interest rate is:

A) the interest rate not adjusted for inflation
B) the "advertised" interest rate
C) a description of the return in units of currency
D) All of these answers are correct.
E) None of these answers are correct.

Question 47

Empirically, a large amount of evidence suggests that money neutrality ________, but changes in money supply ________.

A) holds in the short run; do not affect nominal variables
B) does not hold in the long run; can have real effects in the short run
C) holds in the short run; can have real effects in the long run
D) holds in the long run; can have real effects in the short run
E) does not hold in the long run; have an effect on unemployment in the long run

Question 48

If the inflation rate is larger than the nominal interest rate:

A) unemployment rises
B) the real interest rate is zero
C) the real interest rate is negative
D) the real interest rate is larger than the nominal interest rate
E) Not enough information is given.

Question 49

Suppose you put $100 dollars in the bank on January 1, 2013. If the annual nominal interest rate is 5 percent and the inflation rate is 5 percent, you will be able to buy ________ worth of goods on January 1, 2014.

A) $90
B) $110
C) $100
D) $105
E) $95

Question 50

The real interest rate describes:

A) the net return to government bonds
B) the rate of return adjusted for inflation
C) the rate of return in units of a currency
D) the return with an interest rate equal to zero
E) the rate of return in real goods

Question 51

The nominal interest rate is:

A) the interest rate not adjusted for inflation
B) the "advertised" interest rate
C) a description of the return in units of currency
D) All of these answers are correct.
E) None of these answers are correct.

Question 52

If the real interest rate is negative, it must mean that:

A) in the short run, bond rates can be very volatile
B) in the short run, the real interest rate equals the marginal product of capital
C) in the short run, the real interest rate can deviate from the marginal product of capital
D) it is difficult to predict long-term interest rates
E) there is no relationship between long- and short-term interest rates

Question 53

A risk a bank takes on by offering long-term fixed interest rate loans is:

A) the loss of real returns due to anticipated inflation
B) the gain that could be made from offering short-term loans
C) the loss of real returns due to an unexpected inflation surprise
D) the gains that could have been made if the money were invested in an alternative asset
E) the loss of customers wanting flexible interest loans

Question 54

Suppose you put $100 dollars in the bank on January 1, 2013. If the annual nominal interest rate is 2 percent and the inflation rate is 5 percent, you will be able to buy ________ worth of goods on January 1, 2014.

A) $95
B) $102
C) $97
D) $103
E) -$3

Question 55

Figure 8.1: Money Growth and Inflation in the United States by Decade

-The data presented in Figure 8.1 confirm that the relationship between inflation and money growth is:

A) positive, as suggested by the Fisher equation
B) positive, as suggested by money neutrality
C) positive, as suggested by the quantity theory of money
D) negative, as suggested by the quantity theory of money
E) None of these answers are correct.

Question 56

Let $r$ denote the real interest rate and i denote the nominal interest rate; these two interest rates are related by:

A) $i = \pi$
B) $i = r - \pi$
C) $i = r + \pi$
D) $i = r / \pi$
E) None of these answers are correct.

Question 57

Compared to the nominal interest rate, the real interest rate is:

A) negative
B) always smaller
C) always greater than zero
D) relatively stable
E) relatively volatile

Question 58

If the real GDP growth is 6 percent per year, the money growth rate is 4 percent, and velocity is constant, using the quantity theory, the inflation rate is:

A) 4 percent
B) -2 percent
C) 2 percent
D) 6 percent
E) -4 percent

Question 59

The proposition that changes in money have no real effect on the economy and affect only prices is called:

A) inflation
B) the classical dichotomy
C) the quantity equation
D) the neutrality of money
E) the quantity theory

Question 60

When calculating fixed retirement payments, it is important not to forget:

A) changes in flexible interest rates
B) the decline in the payment's value due to inflation
C) the increase in the payment's value due to inflation
D) rates of return in other markets
E) the price of tea in China

Question 61

One problem with unexpected changes in inflation is that:

A) it steadily erodes real income
B) it often comes in surprising and unpredictable ways
C) nominal interest rates are not indexed to inflation
D) fixed-rate mortgages are not adjusted for inflation
E) price staggering occurs

Question 62

The right to seignorage is the right to:

A) make coins
B) raise tax revenues
C) print money
D) borrow from the public
E) raise an army

Question 63

Inflation ________ price volatility and ________ allocative efficiency.

A) decreases; increases
B) decreases; leaves unchanged
C) increases; leaves unchanged
D) increases; decreases
E) leaves unchanged; increases

Question 64

The revenue governments obtain from printing money is called:

A) issued debt
B) the inflation tax
C) raised taxes
D) government expenditures
E) None of these answers are correct.

Question 65

________ prevent(s) governments from being tempted to use seignorage excessively.

A) Gold reserves
B) The power of bond markets
C) The government budget constraint
D) Future generations
E) Central bank independence

Question 66

If some goods' prices adjust more quickly than others, there is:

A) a perfect short-run allocation of resources
B) a short-run misallocation of resources
C) no inflation
D) a hyperinflation
E) a deflation

Question 67

With unanticipated inflation:

A) creditors are hurt unless they have an indexed contract, because they get less than they expected in real terms
B) debtors with an indexed contract are hurt, because they pay more than they contracted for in nominal terms
C) debtors with an unindexed contract lose, because they pay exactly what they contracted for in nominal terms
D) creditors with indexed contracts gain, because they receive more than they contracted for in nominal terms
E) debtors with an indexed contract are hurt, because they pay more than they contracted for in real terms

Question 68

Negative inflationary surprises lead to:

A) an increase in the real interest rate
B) a redistribution of wealth from borrowers to lenders
C) a decline in the nominal interest rate
D) a decline in inflation risk for lenders
E) a redistribution of wealth from lenders to borrowers

Question 69

By purchasing a fixed-rate 30-year mortgage, inflation risk is:

A) eradicated
B) spread equally to the borrower and lender
C) passed from the lender to the borrower
D) passed from the borrower to the lender
E) borne by the government

Question 70

The cure for hyperinflation is:

A) reducing money growth
B) maintaining government spending
C) lower taxes
D) seignorage
E) All of these answers are correct.

Question 71

The price controls imposed by the Nixon administration lasted for:

A) four weeks
B) six months
C) ninety days
D) one year
E) two years

Question 72

To minimize what was believed to be a wage-price spiral, the ________ administration ________.

A) Reagan; increased corporate income
B) Carter; increased interest rates
C) Clinton; released oil from the strategic reserves
D) first Bush; increased taxes
E) Nixon; imposed price controls

Question 73

If you decide to buy a house with an adjustable-rate mortgage (ARM), you are:

A) exposing yourself to inflation risk
B) reducing your inflation risk
C) passing inflation risk to the lender
D) taking on some of the lender's inflation risk
E) increasing your mortgage payment

Question 74

During times of high inflation, people hold ________ and must incur ________.

A) less savings; lower interest rates
B) more money; lower interest rates
C) less money; higher shoe-leather costs
D) more savings; shoe-leather costs
E) less savings; higher transaction costs

Question 75

The costs associated with changing prices in times of inflation are called:

A) inflation risks
B) price staggering
C) transaction costs
D) shoe-leather costs
E) menu costs

Question 76

If income tax rates are based on nominal income, as inflation increases, taxpayers will see:

A) an increase in their real incomes
B) their taxes fall as their incomes fall
C) their taxes rise even though their real incomes are falling
D) an increase in the nominal income
E) their taxes fall even though their real incomes are rising

Question 77

According to the quantity equation, the cure for hyperinflation is:

A) higher taxes
B) reducing government spending
C) reducing money growth
D) All of these answers are correct.
E) None of these answers are correct.

Question 78

A government that relies on seignorage to finance excess government expenditures is the foundation for the following quote:

A) "Inflation is always zero in the long run."
B) "Inflation is always and everywhere a monetary phenomenon."
C) "Inflation is always and everywhere a fiscal phenomenon."
D) "Velocity growth should be equal to 2 percent in the long run."
E) "Velocity is always constant."

Question 79

With an inflation tax:

A) everybody loses
B) all individuals in an economy feel the pressures equitably
C) there is a redistribution of income from owners of real assets to income earners
D) there is a redistribution of income from income earners to owners of real assets
E) the government has a lot of debt to repay

Question 80

According to the government's budget constraint, if the government spends more than it generates in taxes, it can raise revenues by:

A) printing money
B) decreasing its debt
C) lowering interest rates
D) privatizating
E) increasing interest rates