Deck 12: Money Growth and Inflation

Question 1

Which of the following statements concerning the history of U.S. inflation is not correct?

A) Prices rose at an average annual rate of about 4 percent over the last 70 years.
B) There was about a 16-fold increase in the price level over the last 70 years.
C) Inflation in the 1970s was below the average over the last 70 years.
D) The United States has experienced periods of deflation.

Answer 1

C

Question 2

In early 2008, the central bank of Zimbabwe announced the inflation rate in that country had reached

A) 60 percent.
B) 80 percent.
C) 220 percent.
D) 24,000 percent.

Answer 2

D

Question 3

Over the past 70 years, the overall price level in the U.S. has experienced a(n)

A) 4-fold increase.
B) 8-fold increase.
C) 12-fold increase.
D) 16-fold increase.

Answer 3

D

Question 4

If the price level increased from 120 to 150, then what was the inflation rate?

A) 30 percent
B) 25 percent
C) 20 percent
D) None of the above is correct.

Question 5

Inflation can be measured by the

A) change in the consumer price index.
B) percentage change in the consumer price index.
C) percentage change in the price of a specific commodity.
D) change in the price of a specific commodity.

Question 6

If the price level increased from 120 to 126, then what was the inflation rate?

A) 3 percent
B) 5 percent
C) 6 percent
D) None of the above is correct.

Question 7

Which of the following is not correct?

A) The inflation rate is measured as the percentage change in a price index.
B) For the last 40 or so years, U.S. inflation hasn't shown much variation from its average rate of about 2 percent.
C) During the 19th century there were long periods of falling prices in the U.S.
D) Some economists argue that the costs of moderate inflation are not nearly as large as the general public believes.

Question 8

Over the last 70 years, the average annual U.S. inflation rate was about

A) 2 percent, implying that prices have increased 10-fold.
B) 4 percent, implying that prices have increased 10-fold.
C) 2 percent, implying that prices have increased 16-fold.
D) 4 percent, implying that prices increased about 16-fold.

Question 9

In which of the following cases was the inflation rate 10 percent over the last year?

A) One year ago the price index had a value of 110 and now it has a value of 120.
B) One year ago the price index had a value of 120 and now it has a value of 132.
C) One year ago the price index had a value of 126 and now it has a value of 140.
D) One year ago the price index had a value of 145 and now it has a value of 163.

Question 10

Which country is correctly matched with its 2009 inflation rate?

A) 9 percent inflation in the United States
B) -1 percent inflation in Russia
C) 25 percent inflation in Venezuela
D) 2 percent inflation in Japan

Question 11

Over the past 70 years, prices in the U.S. have risen on average about

A) 2 percent per year.
B) 4 percent per year.
C) 6 percent per year.
D) 8 percent per year.

Question 12

In the last part of the 1800's

A) deflation made it harder for farmers to pay off their debt.
B) deflation made it easier for farmers to pay off their debt.
C) inflation made it harder for farmers to pay off their debt.
D) inflation made it easier for farmers to pay off their debt.

Question 13

The term hyperinflation refers to

A) the spread of inflation from one country to others.
B) a decrease in the inflation rate.
C) a period of very high inflation.
D) inflation accompanied by a recession.

Question 14

When prices are falling, economists say that there is

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

Question 15

Economists agree that

A) neither high inflation nor moderate inflation is very costly.
B) both high and moderate inflation are quite costly.
C) high inflation is costly, but they disagree about the costs of moderate inflation.
D) moderate inflation is as costly as high inflation.

Question 16

Which of the following is correct?

A) A period of hyperinflation is a period of extraordinarily low inflation.
B) A period of deflation is any period during which the inflation rate is decreasing.
C) During the 1990s, U.S. inflation averaged about 2 percent per year.
D) All of the above are correct.

Question 17

Which of the following statements about U.S. inflation is not correct?

A) Low inflation was viewed as a triumph of President Carter's economic policy.
B) There were long periods in the nineteenth century during which prices fell.
C) The U.S. public has viewed inflation rates of even 7 percent as a major economic problem.
D) The U.S. inflation rate has varied over time, but international data show even more variation.

Question 18

Between 1880 and 1896 the average level of prices in the U.S. economy

A) fell 23 percent.
B) fell 4 percent.
C) rose 23 percent.
D) rose 50 percent.

Question 19

Deflation

A) increases incomes and enhances the ability of debtors to pay off their debts.
B) increases incomes and reduces the ability of debtors to pay off their debts.
C) decreases incomes and enhances the ability of debtors to pay off their debts.
D) decreases incomes and reduces the ability of debtors to pay off their debts.

Question 20

There was hyperinflation during the

A) period 1880-1896 in the United States.
B) 1970s in the United States.
C) early part of the current century in Zimbabwe.
D) All of the above are correct.

Question 21

Money demand refers to

A) the total quantity of financial assets that people want to hold.
B) how much income people want to earn per year.
C) how much wealth people want to hold in liquid form.
D) how much currency the Federal Reserve decides to print.

Question 22

As the price level rises, the value of money

A) increases, so people want to hold more of it.
B) increases, so people want to hold less of it.
C) decreases, so people want to hold more of it.
D) decreases, so people want to hold less of it.

Question 23

The quantity theory of money

A) is a fairly recent addition to economic theory.
B) can explain both moderate inflation and hyperinflation.
C) argues that inflation is caused by too little money in the economy.
D) All of the above are correct.

Question 24

With the value of money on the vertical axis, the money supply curve is

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

Question 25

The value of money rises as the price level

A) rises, because the number of dollars needed to buy a representative basket of goods rises.
B) rises, because the number of dollars needed to buy a representative basket of goods falls.
C) falls, because the number of dollars needed to buy a representative basket of goods rises.
D) falls, because the number of dollars needed to buy a representative basket of goods falls.

Question 26

When the price level rises, the number of dollars needed to buy a representative basket of goods

A) increases, and so the value of money rises.
B) increases, and so the value of money falls.
C) decreases, and so the value of money rises.
D) decreases, and so the value of money falls

Question 27

The supply of money is determined by

A) the price level.
B) the Treasury and Congressional Budget Office.
C) the Federal Reserve System.
D) the demand for money.

Question 28

When the price level falls, the number of dollars needed to buy a representative basket of goods

A) increases, so the value of money rises.
B) increases, so the value of money falls.
C) decreases, so the value of money rises.
D) decreases, so the value of money falls.

Question 29

The supply of money increases when

A) the value of money increases.
B) the interest rate increases.
C) the Fed makes open-market purchases.
D) None of the above is correct.

Question 30

Suppose an economy produces only ice cream cones. If the price level rises, the value of currency

A) rises, because one unit of currency buys more ice cream cones.
B) rises, because one unit of currency buys fewer ice cream cones.
C) falls, because one unit of currency buys more ice cream cones.
D) falls, because one unit of currency buys fewer ice cream cones.

Question 31

If P denotes the price of goods and services measured in terms of money, then

A) 1/P represents the value of money measured in terms of goods and services.
B) P can be regarded as the "overall price level."
C) an increase in the value of money is associated with a decrease in P.
D) All of the above are correct.

Question 32

Money demand depends on

A) the price level and the interest rate.
B) the price level but not the interest rate.
C) the interest rate but not the price level.
D) neither the price level nor the interest rate.

Question 33

The value of money falls as the price level

A) rises, because the number of dollars needed to buy a representative basket of goods rises.
B) rises, because the number of dollars needed to buy a representative basket of goods falls.
C) falls, because the number of dollars needed to buy a representative basket of goods rises.
D) falls, because the number of dollars needed to buy a representative basket of goods falls.

Question 34

With the value of money on the vertical axis, the money supply curve is

A) upward sloping because people supply a larger quantity of money when the value of money increases.
B) downward sloping because people supply a larger quantity of money when the value of money decreases.
C) horizontal because we assume the central bank controls the money supply
D) vertical because we assume the central bank controls the money supply.

Question 35

If the CPI rises, the number of dollars needed to buy a representative basket of goods

A) increases, and so the value of money rises.
B) increases, and so the value of money falls.
C) decreases, and so the value of money rises.
D) decreases, and so the value of money falls

Question 36

To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the

A) quantity theory of money.
B) price-index theory of money.
C) theory of hyperinflation.
D) disequilibrium theory of money and inflation.

Question 37

If P denotes the price of goods and services measured in terms of money, then

A) 1/P represents the value of money measured in terms of goods and services.
B) P can be interpreted as the inflation rate.
C) the supply of money influences the value of P, but the demand for money does not.
D) All of the above are correct.

Question 38

When we assume that the supply of money is a variable that the central bank controls, we

A) must then assume as well that the demand for money is not influenced by the value of money.
B) must then assume as well that the price level is unrelated to the value of money.
C) are ignoring the fact that, in the real world, households are also suppliers of money.
D) are ignoring the complications introduced by the role of the banking system.

Question 39

As the price level decreases, the value of money

A) increases, so people want to hold more of it.
B) increases, so people want to hold less of it.
C) decreases, so people want to hold more of it.
D) decreases, so people want to hold less of it.

Question 40

The classical theory of inflation

A) is also known as the quantity theory of money.
B) was developed by some of the earliest economic thinkers.
C) is used by most modern economists to explain the long-run determinants of the inflation rate.
D) All of the above are correct.

Question 41

When 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 due to adjustments in

A) the value of money.
B) real interest rates.
C) nominal interest rates.
D) the money supply.

Question 42

When the money market is drawn with the value of money on the vertical axis, an increase in the money supply

A) increases the price level and increases the value of money.
B) increases the price level and decreases the value of money.
C) decreases the price level and increases the value of money.
D) decreases the price level and decreases the value of money.

Question 43

When the money market is drawn with the value of money on the vertical axis,

A) money demand slopes upward and money supply is horizontal.
B) money demand slopes downward and money supply is horizontal.
C) money demand slopes upward and money supply is vertical.
D) money demand slopes downward and money supply is vertical.

Question 44

When the money market is drawn with the value of money on the vertical axis, 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 leftward.
D) money demand will shift rightward.

Question 45

When the money market is drawn with the value of money on the vertical axis, an increase in the price level causes a

A) shift to the right of the money demand curve.
B) shift to the left of the money demand curve.
C) movement to the left along the money demand curve.
D) movement to the right along the money demand curve.

Question 46

When the money market is drawn with the value of money on the vertical axis, a decrease in the price level causes a

A) movement to the right along the money demand curve.
B) movement to the left along the money demand curve.
C) shift to the right of the money supply curve.
D) shift to the left of the money supply curve.

Question 47

When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is an

A) excess demand for money, so the price level will rise.
B) excess demand for money, so the price level will fall.
C) excess supply of money, so the price level will rise.
D) excess supply of money, so the price level will fall.

Question 48

When the money market is drawn with the value of money on the vertical axis, an increase in the money supply causes the equilibrium value of money

A) and equilibrium quantity of money to increase.
B) and equilibrium quantity of money to decrease.
C) to increase, while the equilibrium quantity of money decreases.
D) to decrease, while the equilibrium quantity of money increases.

Question 49

When the money market is drawn with the value of money on the vertical axis, if there is a surplus of money then

A) the value of money rises which will make people desire to hold more money.
B) the value of money rises which will make people desire to hold less money.
C) the value of money falls which will make people desire to hold more money.
D) the value of money falls which will make people desire to hold less money.

Question 50

When the money market is drawn with the value of money on the vertical axis, as the price level decreases the quantity of money

A) demanded increases.
B) demanded decreases.
C) supplied increases.
D) supplied decreases.

Question 51

When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of money

A) increases, so the quantity of money demanded increases.
B) increases, so the quantity of money demanded decreases.
C) decreases, so the quantity of money demanded decreases.
D) decreases, so the quantity of money demanded increases.

Question 52

When the money market is drawn with the value of money on the vertical axis, an increase in the money supply creates an excess

A) supply of money, causing people to spend more.
B) supply of money, causing people to spend less.
C) demand for money, causing people to spend more.
D) demand for money, causing people to spend less.

Question 53

When the money market is drawn with the value of money on the vertical axis, as the price level decreases, the value of money

A) increases, so the quantity of money demanded increases.
B) increases, so the quantity of money demanded decreases.
C) decreases, so the quantity of money demanded decreases.
D) decreases, so the quantity of money demanded increases.

Question 54

When the money market is drawn with the value of money on the vertical axis, as the price level increases the quantity of money

A) demanded increases.
B) demanded decreases.
C) supplied increases.
D) supplied decreases.

Question 55

When the money market is drawn with the value of money on the vertical axis, an increase in the money supply shifts the money supply curve to the

A) right, lowering the price level.
B) right, raising the price level.
C) left, raising the price level.
D) left, lowering the price level.

Question 56

When the money market is drawn with the value of money on the vertical axis, the money demand curve slopes

A) upward, because at higher prices people want to hold more money.
B) downward, because at higher prices people want to hold more money.
C) downward, because at higher price people want to hold less money.
D) upward, because at higher prices people want to hold less money.

Question 57

When the money market is drawn with the value of money on the vertical axis, if the money supply rises

A) the price level and the value of money rise.
B) the price level rises and the value of money falls.
C) the price level falls and the value of money rises.
D) the price level and the value of money fall.

Question 58

Suppose the money market, drawn with the value of money on the vertical axis, is in equilibrium. If the money supply increases, then at the old value of money there is an

A) excess demand for money that will result in an increase in spending.
B) excess demand for money that will result in a decrease in spending.
C) excess supply of money that will result in an increase in spending.
D) excess supply of money that will result in a decrease in spending.

Question 59

When the money market is drawn with the value of money on the vertical axis, as the price level increases which of the following increases?

A) the quantity of money demanded and the quantity of money supplied
B) the quantity of money demanded but not the quantity of money supplied
C) the quantity of money supplied but not the quantity of money demanded
D) neither the quantity of money supplied nor the quantity of money demanded

Question 60

When 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 due to adjustments in

A) nominal interest rates.
B) real interest rates.
C) the price level.
D) the money supply.

Question 61

When the money market is drawn with the value of money on the vertical axis, the price level increases if

A) money demand shifts right and decreases if money supply shifts right.
B) money demand shifts right and decreases if money supply shifts left.
C) money demand shifts left and decreases if money supply shifts right.
D) money demand shifts left and decreases if money supply shifts left.

Question 62

The economy of Mainland uses gold as its money. If the government discovers a large reserve of gold on their land

A) the supply of money decreases and the value of money rises.
B) the supply of money increases and the value of money falls.
C) the demand for money increases and the value of money rises.
D) the demand for money decreases and the value of money falls.

Question 63

In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks in many countries increased their money supplies. The central banks might have done this by

A) selling bonds on the open market, which would have raised the value of money.
B) purchasing bonds on the open market, which would have raised the value of money.
C) selling bonds on the open market, which would have raised the value of money.
D) purchasing bonds on the open market, which would have lowered the value of money.

Question 64

The price level falls if either

A) money demand or money supply shifts rightward.
B) money demand shifts rightward or money supply shifts leftward.
C) money demand shifts leftward or money supply shifts rightward.
D) money demand or money supply shifts leftward.

Question 65

In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold, which was in use as a medium of exchange. We would predict that this increase in gold

A) raised both the price level and the value of gold in Cairo.
B) raised the price level, but decreased the value of gold in Cairo.
C) lowered the price level, but increased the value of gold in Cairo.
D) lowered both the price level and the value of gold in Cairo.

Question 66

If the Fed increases the money supply, then 1/P

A) falls, so the value of money falls.
B) falls, so the value of money rises.
C) rises, so the value of money falls.
D) rises, so the value of money rises.

Question 67

Consider the money market drawn with the value of money on the vertical axis. If money demand is unchanged and the price level rises, then

A) the money supply must have increased, perhaps because the Fed bought bonds.
B) the money supply must have increased, perhaps because the Fed sold bonds.
C) the money supply must have decreased, perhaps because the Fed bought bonds.
D) the money supply must have decreased, perhaps because the Fed sold bonds.

Question 68

The price level rises if either

A) money demand shifts rightward or money supply shifts leftward; this rise in the price level is associated with a rise in the value of money.
B) money demand shifts rightward or money supply shifts leftward; this rise in the price level is associated with a fall in the value of money.
C) money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a rise in the value of money.
D) money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a fall in the value of money.

Question 69

When the money market is drawn with the value of money on the vertical axis, if the Fed sells bonds then

A) the money supply and the price level increase.
B) the money supply and the price level decrease.
C) the money supply increases and the price level decreases.
D) the money supply increases and the price level increases.

Question 70

When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve sells bonds, then the money supply curve

A) shifts right, causing the price level to rise.
B) shifts right, causing the price level to fall.
C) shifts left, causing the price level to rise.
D) shifts left, causing the price level to fall.

Question 71

When the money market is drawn with the value of money on the vertical axis, the value of money increases if

A) either money demand or money supply shifts right.
B) either money demand or money supply shifts left.
C) money demand shifts right or money supply shifts left.
D) money demand shifts left or money supply shifts right.

Question 72

The price level falls. This might be because the Federal Reserve

A) bought bonds which raised the money supply.
B) bought bonds which reduced the money supply.
C) sold bonds which raised the money supply.
D) sold bonds which reduced the money supply.

Question 73

When the money market is drawn with the value of money on the vertical axis, if money demand shifts leftward, then initially there is an

A) excess demand for money which causes the price level to rise.
B) excess demand for money which causes the price level to fall.
C) excess supply of money which causes the price level to rise.
D) excess supply of money which causes the price level to fall.

Question 74

When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve sells bonds, then the money supply curve

A) shifts rightward, causing the value of money measured in terms of goods and services to rise.
B) shifts rightward, causing the value of money measured in terms of goods and services to fall.
C) shifts leftward, causing the value of money measured in terms of goods and services to rise.
D) shifts leftward, causing the value of money measured in terms of goods and services to fall.

Question 75

Which of the following is correct?

A) If the Fed purchases bonds in the open market, then the money supply curve shifts right. A change in the price level does not shift the money supply curve.
B) If the Fed sells bonds in the open market, then the money supply curve shifts right. A change in the price level does not shift the money supply curve.
C) If the Fed purchases bonds, then the money supply curve shifts right. An increase in the price level shifts the money supply curve right.
D) If the Fed sells bonds, then the money supply curve shifts right. A decrease in the price level shifts the money supply curve right.

Question 76

Open-market purchases by the Fed make the money supply

A) increase, which makes the value of money increase.
B) increase, which makes the value of money decrease.
C) decrease, which makes the value of money decrease.
D) decrease, which makes the value of money increase.

Question 77

Suppose there is a surplus in the money market.

A) This could have been created by an increase in the money supply. The value of money will rise.
B) This could have been created by an increase in the money supply. The value of money will fall.
C) This could have been created by a decrease in the money supply. The value of money will rise.
D) This could have been created by a decrease in the money supply. The value of money will fall.

Question 78

When the money market is drawn with the value of money on the vertical axis, the price level decreases if

A) either money demand or money supply shifts right.
B) either money demand or money supply shifts left.
C) money demand shifts right or money supply shifts left.
D) money demand shifts left or money supply shifts right.

Question 79

When the money market is drawn with the value of money on the vertical axis, the price level increases if

A) either money demand or money supply shifts right.
B) either money demand or money supply shifts left.
C) money demand shifts right or money supply shifts left.
D) money demand shifts left or money supply shifts right.

Question 80

A decrease in the money supply creates an excess

A) supply of money that is eliminated by rising prices.
B) supply of money that is eliminated by falling prices.
C) demand for money that is eliminated by rising prices.
D) demand for money that is eliminated by falling prices.