Question 1

When a government has a budget deficit and has reduced its spending, what other step can be taken to generate more revenue, besides issuing government bonds?

Accepted Answer

A)  reduce unemployment 
B)  raise interest rates 
C)  increasing exports 
D)  raise taxes

Question 2

If nominal wages increase by 4 percent while real wages remain constant, the inflation rate must be

Accepted Answer

A)  -2 percent. 
B)  0 percent. 
C)  2 percent. 
D)  4 percent.

Question 3

Recall the Application about the study by Thomas J. Sargent of hyperinflations after World War I in Germany, Austria, Hungary, and Poland, and how those hyperinflations ended, to answer the following question(s).
-According to this Application, Sargent concluded that hyperinflations were ultimately caused by fiscal policy that was financed by

Accepted Answer

A)  money creation and not taxes. 
B)  taxes and not money creation. 
C)  both money creation and taxes. 
D)  sources other than money creation and taxes.

Question 4

If union leaders believe that the Federal Reserve is a credible inflation fighter, they believe that an increase in nominal wages will

Accepted Answer

A)  increase prices but have no effect on the unemployment rate. 
B)  increase prices and decrease the unemployment rate. 
C)  decrease prices but have no effect on the unemployment rate. 
D)  lead to a recession with rising unemployment rates and rising prices.

Question 5

The quantity equation

Accepted Answer

A)  determines foreign exchange rates. 
B)  describes the amount of required reserves held in banks. 
C)  links money, velocity, prices, and real output. 
D)  links money supply and interest rates.

Question 6

What is meant by the term "velocity of money," and how is the velocity of money calculated?

Accepted Answer

The answer of What is meant by the term "velocity...

Question 7

Suppose that for a given year money growth is 3 percent, real GDP growth is 1 percent, and the inflation rate is 2 percent. According to the growth version of the quantity equation, velocity growth would be

Accepted Answer

A)  0 percent. 
B)  2 percent. 
C)  3 percent. 
D)  4 percent.

Question 8

Suppose the inflation rate is 2 percent this year. If nominal wages increase by 5 percent, real wages will

Accepted Answer

A)  decrease by 5 percent. 
B)  increase by 2 percent. 
C)  increase by 7 percent. 
D)  decrease by 3 percent.

Question 9

The velocity of money refers to the rate of its turnover, or changing hands, in the economy.

Accepted Answer

A) True 
 B)False

Question 10

Assume that last year's inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate remains constant relative to the expected rate, the unemployment rate

Accepted Answer

A)  decreases. 
B)  increases. 
C)  may increase or decrease. 
D)  does not change.

Question 11

Recall the Application about how to estimate the shifts in the natural rate of unemployment to answer the following question(s).
-Recall the Application. If the natural rate of unemployment has been underestimated and is actually higher than is commonly perceived, reducing the unemployment rate to the perceived natural rate will tend to

Accepted Answer

A)  increase anticipated inflation. 
B)  decrease anticipated inflation 
C)  increase unanticipated inflation. 
D)  decrease unanticipated inflation.

Question 12

Suppose that for a given year money growth is 11 percent, real GDP growth is 6 percent, and the inflation rate is 3 percent. According to the growth version of the quantity equation, velocity growth would be

Accepted Answer

A)  -2 percent. 
B)  0.6 percent. 
C)  1.67 percent. 
D)  5 percent.

Question 13

When the expected rate of inflation is added to the real interest rate, the result is called the

Accepted Answer

A)  preferred rate. 
B)  nominal interest rate. 
C)  adjustment rate. 
D)  differential rate.

Question 14

A decrease in the inflation rate is likely to be associated with

Accepted Answer

A)  an increase in the unemployment rate. 
B)  decreased unemployment benefits. 
C)  a decreased in the unemployment rate. 
D)  less unemployment benefits being paid.

Question 15

Rapid inflation results when governments print money to finance large portions of their budget deficits.

Accepted Answer

A) True 
 B)False

Question 16

If the inflation rate unexpectedly increases, it is likely that workers will not fully anticipate some of this sudden increase. This will tend to cause nominal wages to ________ and the belief that real wages have ________.

Accepted Answer

A)  increase; increased 
B)  increase; decreased 
C)  decrease; increased 
D)  decrease; decreased

Question 17

If the velocity of money is 2 and nominal GDP is $10 trillion, then the money supply is

Accepted Answer

A)  $0.2 trillion. 
B)  $5 trillion. 
C)  $8 trillion. 
D)  $12 trillion.

Question 18

Suppose you have $100 to invest for a year and the nominal interest rate is 7 percent. If the inflation rate during the year is 4 percent, at the end of the year your real gain from the investment is approximately

Accepted Answer

A)  $3. 
B)  $4. 
C)  $7. 
D)  $11.

Question 19

If the growth of the money supply is 8 percent per year, velocity decreases by 5 percent, and there is no growth in real GDP, the inflation rate is 3 percent.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following would likely lead to an increase in the natural rate of unemployment?

Accepted Answer

A)  an increase in the number of teenagers in the workforce 
B)  an increase in the length of time during which people can receive unemployment benefits 
C)  a prolonged recession 
D)  all of the above

Exam 16: The Dynamics of Inflation and Unemployment

When a government has a budget deficit and has reduced its spending, what other step can be taken to generate more revenue, besides issuing government bonds?

If nominal wages increase by 4 percent while real wages remain constant, the inflation rate must be

If union leaders believe that the Federal Reserve is a credible inflation fighter, they believe that an increase in nominal wages will

The quantity equation

What is meant by the term "velocity of money," and how is the velocity of money calculated?

Suppose that for a given year money growth is 3 percent, real GDP growth is 1 percent, and the inflation rate is 2 percent. According to the growth version of the quantity equation, velocity growth would be

Suppose the inflation rate is 2 percent this year. If nominal wages increase by 5 percent, real wages will

The velocity of money refers to the rate of its turnover, or changing hands, in the economy.

Assume that last year's inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate remains constant relative to the expected rate, the unemployment rate

Suppose that for a given year money growth is 11 percent, real GDP growth is 6 percent, and the inflation rate is 3 percent. According to the growth version of the quantity equation, velocity growth would be

When the expected rate of inflation is added to the real interest rate, the result is called the

A decrease in the inflation rate is likely to be associated with

Rapid inflation results when governments print money to finance large portions of their budget deficits.

If the inflation rate unexpectedly increases, it is likely that workers will not fully anticipate some of this sudden increase. This will tend to cause nominal wages to and the belief that real wages have .

If the velocity of money is 2 and nominal GDP is $10 trillion, then the money supply is

Suppose you have $100 to invest for a year and the nominal interest rate is 7 percent. If the inflation rate during the year is 4 percent, at the end of the year your real gain from the investment is approximately

If the growth of the money supply is 8 percent per year, velocity decreases by 5 percent, and there is no growth in real GDP, the inflation rate is 3 percent.

Which of the following would likely lead to an increase in the natural rate of unemployment?