Deck 10: The Goals of Stabilization Policy: Low Inflation and Low Unemployment

Question 1

The "excess" growth rate of the money supply is the growth rate of money

A)plus the long-run growth rate of velocity.
B)minus the long-run growth rate of velocity.
C)plus the long-run growth rate of real GDP.
D)minus the long-run growth rate of real GDP.

Answer 1

minus the long-run growth rate of real GDP.

Question 2

The "quantity equation" states that nominal GDP is equal by the definition of velocity to the money supply ________ velocity.

A)plus
B)minus
C)multiplied by
D)divided by

Answer 2

multiplied by

Question 3

If the nominal interest rate is 10% and expected inflation is 5%,the real expected interest rate is

A)15%.
B)-5%.
C)5%.
D)10%.

Answer 3

5%.

Question 4

In the quantity equation framework for understanding the determinants of long-run inflation,a rise in government spending ________ velocity,putting ________ pressure on inflation.

A)raises,upward
B)raises,downward
C)lowers,upward
D)lowers,downward

Question 5

Over a year,the money supply in a nation grew by 6 percent,while velocity fell by 1 percent and real GDP rose by 2 percent.This results in an inflation over the year of ________ percent.

A)9
B)7
C)5
D)3

Question 6

Rising velocity means that people want to hold ________ nominal money per dollar of nominal GDP,which ________ the inflationary tendency of an increase in the money supply as one way of re-equating the demand and supply of money.

A)more,strengthens
B)more,weakens
C)less,strengthens
D)less,weakens

Question 7

In the quantity equation framework for understanding the determinants of long-run inflation,a drop in consumer confidence ________ velocity,putting ________ pressure on inflation.

A)raises,upward
B)raises,downward
C)lowers,upward
D)lowers,downward

Question 8

In the quantity equation framework for understanding the determinants of long-run inflation,a depreciation of the exchange rate ________ velocity,putting ________ pressure on inflation.

A)raises,upward
B)raises,downward
C)lowers,upward
D)lowers,downward

Question 9

From the quantity equation we find that the rate of inflation is equal by definition to the growth rate of nominal GDP ________ the growth rate of real GDP.

A)minus
B)plus
C)multiplied by
D)divided by

Question 10

Over a year,the money supply in a nation grew by 8 percent,while velocity rose by 2 percent and real GDP rose by 3 percent.This results in an inflation over the year of ________ percent.

A)7
B)9
C)13
D)3

Question 11

According to Gordon,the main losers due to the redistributive effect of the postwar inflation in the United States were

A)households.
B)corporations.
C)government.
D)foreigners.

Question 12

If the market rate of interest is 13%,the growth of nominal GDP 9%,and the growth of real GDP 2%,then

A)the rate of inflation is 11%.
B)the rate of inflation is 4%.
C)the rate of inflation cannot be determined.
D)none of the above

Question 13

The costs imposed by inflation should be lessened in the future because of the following reform that took place during the early 1980s

A)airline deregulation.
B)issuance of indexed government bonds.
C)changing tax laws to ensure that savers are taxed only on real,rather than nominal capital gains.
D)lifting of limits on interest paid on checking and savings accounts.

Question 14

In the United States,the long-run inflation rate can be expressed simply as the growth rate of money

A)plus the long-run growth rate of velocity.
B)minus the long-run growth rate of velocity.
C)plus the long-run growth rate of real GDP.
D)minus the long-run growth rate of real GDP.

Question 15

From the quantity equation we find that the rate of inflation is equal by definition to the growth rate of the money supply ________ the growth rate of velocity ________ the growth rate of real GDP.

A)plus,plus
B)plus,minus
C)minus,plus
D)minus,minus

Question 16

Inflation has no effect on an economy's well-being if

A)it is universally and accurately anticipated.
B)relative prices are unaffected.
C)the nominal rate of interest for both savers and borrowers rises by an amount just equal to the rate of inflation.
D)all of these

Question 17

The costs of inflation depend upon

A)whether it is anticipated or unanticipated.
B)who pays it and who receives it.
C)the future savings rate.
D)none of the above.

Question 18

In the United States,the long-run average growth rate of velocity in recent decades has been

A)about 2 percent per year.
B)about 1 percent per year.
C)virtually zero.
D)about -1 percent per year.
E)about -2 percent per year.

Question 19

The real rate of interest

A)is equal to the nominal rate when Y equals YN.
B)is equal to the nominal rate minus the rate of inflation.
C)is equal to the nominal rate plus the rate of inflation.
D)is never negative.

Question 20

The actual real interest rate and the expected real interest rate will be identical if

A)pe = p.
B)pe > p.
C)pe < p.
D)none of the above

Question 21

The U.S.macroeconomic experience of the early to mid-1980s is an example of how

A)reducing inflation comes at the cost of a permanent reduction in real GDP.
B)reducing inflation comes at the cost of a temporary reduction in real GDP.
C)reducing inflation can be done costless by simply increasing the money growth rate.
D)increasing the money growth rate affects inflation alone,and not real GDP.

Question 22

In the late 1980s,Canada embarked on an ambitious policy of reducing inflation to zero.Inflation did come down,while the unemployment rate ________,which ________ the U.S.disinflation experience of the 1980s.

A)rose,runs counter to
B)rose,duplicates
C)remained nearly constant,runs counter to
D)remained nearly constant,duplicates

Question 23

A program of complete indexation would

A)eliminate most of the costs of inflation.
B)increase the sensitivity of the economy to supply shocks.
C)make the role of expectations negligible.
D)all of these

Question 24

Which of the following anti-inflation policies imposes costs on society?

A)price controls
B)indexation
C)reduced growth in nominal demand
D)all of these

Question 25

The classic loser from an unanticipated inflation is

A)the borrower who pays less nominal interest than expected.
B)the borrower who pays more nominal interest than expected.
C)the saver who earns less real interest than expected.
D)the saver who earns more real interest than expected,and so should have saved more.

Question 26

Real income is redistributed from ________ in the case of ________ inflation.

A)creditors to debtors,anticipated
B)creditors to debtors,unanticipated
C)debtors to creditors,anticipated
D)debtors to creditors,unanticipated

Question 27

When the Fisher Effect holds,a one-percentage-point increase in the long-run money growth rate,because it ________ expected inflation,causes ________ in the nominal interest rate in the long run.

A)equally lowers,a one-percentage-point decrease
B)does not change,a one-percentage point decrease
C)does not change,no change
D)equally raises,no change
E)equally raises,a one-percentage-point increase

Question 28

The "Fisher Effect" occurs when a one-percentage-point rise in expected inflation ________ interest rate by one percentage point

A)raises the expected real
B)lowers the expected real
C)raises the nominal
D)lowers the nominal

Question 29

For inflation to have no real effect on the economy,leaving all decisions and their real outcomes unchanged,five conditions must be met.Which of the following incorrectly states one of those conditions?

A)Inflation is universally and accurately anticipated.
B)All savings earn the nominal interest rate,while money earns zero interest.
C)Inflation of P₀ percent raises the nominal interest rate by P₀ above the no-inflation nominal rate.
D)Only real interest income is taxable and only the real cost of borrowing is tax-deductible.
E)Inflation raises the prices of all goods by the same percentage.

Question 30

If short-term government bond rates were indexed

A)such bonds would be a poor hedge against inflation.
B)banks and saving and loan institutions would likely lose deposits.
C)the government would gain from the implied inflation tax.
D)the government would gain from the implied inflation subsidy.

Question 31

A person who purchased a house with a small down payment just before an unanticipated inflation hits has ________ from the decision to be in debt,and has ________ by having an asset in the form of a house.

A)benefited,benefited again
B)benefited,been hurt
C)been hurt,benefited
D)been hurt,been hurt again

Question 32

The textbook uses as its precise definition of hyperinflation an inflation rate

A)below zero.
B)of less than one percent per year.
C)of more than one hundred percent per year.
D)of more than one thousand percent per year.
E)of more than fifty percent per month.

Question 33

"Shoe-leather costs" refer to

A)a cobbler's payment for leather.
B)"rubber costs" on today's shoes.
C)the inconvenience imposed by higher interest rates.
D)financial deregulation of retail business firms.

Question 34

Real income is redistributed from ________ in the case of ________ deflation.

A)creditors to debtors,anticipated
B)creditors to debtors,unanticipated
C)debtors to creditors,anticipated
D)debtors to creditors,unanticipated

Question 35

Periods of low or negative inflation are generally ________ to farmers,who are ________ as a group.

A)advantageous,creditors
B)advantageous,debtors
C)harmful,creditors
D)harmful,debtors

Question 36

The expected real interest rate is equal to

A)the nominal interest rate minus the expected rate of inflation.
B)the nominal interest rate plus the expected rate of inflation.
C)the nominal interest rate minus the actual rate of inflation.
D)the nominal interest rate plus the actual rate of inflation.

Question 37

Unanticipated inflation will hurt ________ and help ________.

A)pensioners;borrowers
B)borrowers;pensioners
C)the government;tax payers
D)homeowners;banks

Question 38

Unanticipated inflation will insure that

A)homeowners with outstanding mortgage balances are hurt.
B)homeowners with outstanding mortgage balances are benefited.
C)creditors gain,debtors lose.
D)none of the above

Question 39

When the Federal Reserve raises the growth rate of the money supply to a permanently higher level,this produces ________ in real GDP and ________ in the inflation rate.

A)a permanent increase,a permanent increase
B)a permanent increase,a temporary increase
C)no change,a temporary increase
D)a temporary increase,a temporary increase
E)a temporary increase,a permanent increase

Question 40

Indexation is designed to

A)moderate the costs of inflation,not inflation itself.
B)rapidly reduce inflation.
C)reduce the natural rate of unemployment.
D)rapidly reduce inflationary expectations.

Question 41

If the private sector wishes to hold a constant quantity of real government bonds,inflation requires that the private sector continuously ________ those bonds,so that the government ends up having to pay out interest on net equal to the ________ interest rate times the bonds outstanding.

A)sell,nominal
B)sell,real
C)buy,nominal
D)buy,real

Question 42

Suppose the private sector wishes to hold a constant level of real high-powered money.This means that with an ongoing inflation of p percent,each year the government treasury can obtain goods from the private sector in exchange for ________ p times the existing high-powered money,a government revenue source called ________.

A)creating,seignorage
B)creating,transfer payments
C)collecting,seignorage
D)collecting,transfer payments

Question 43

What is the "inflation tax"?

A)the difference between nominal and real interest rates received on financial assets,due to inflation
B)the fact that our tax system is based on nominal incomes and not real incomes,so that the government collects more taxes due to inflation alone
C)the government obtaining goods in exchange for newly created high-powered money that does not add to the real value of private assets due to the resulting inflation
D)the fact that greater government spending leaves fewer goods available to the private sector,thus lowering their prices.

Question 44

The short-run simulative effect of a government budget deficit on real GDP is stronger with ________ financing,since this ________ the crowding out effect of the deficit.

A)bond,enhances
B)bond,eliminates
C)money,enhances
D)money,eliminates

Question 45

Government deficit financing is made easier by a rise in inflation when inflation ________ the private sector's demand for high-powered money,which the government can ________.

A)lowers,create and spend
B)lowers,obtain through taxation
C)raises,create and spend
D)raises,obtain through taxation

Question 46

In the United States,who determines the combination of bond and money creation that finances the federal budget deficit?

A)the federal government itself
B)the Federal Reserve
C)the private banking system
D)private bond- and money-holders

Question 47

The government budget constraint tells us that to the extent that government expenditures are NOT financed by tax collection,the public ends up holding ________ government bonds and ________ money.

A)more,more
B)more,less
C)fewer,more
D)fewer,less

Question 48

Governments promote long-run inflation when they depend on ________ to finance their expenditures.

A)issuing bonds
B)taxation
C)raising the national debt
D)money creation
E)selling off assets

Question 49

In the early 1980s the government's primary method of combating inflation was

A)price and wage controls.
B)undoing the "self-inflicted" wounds.
C)restrictive monetary policy.
D)indexing bonds to protect savers.

Question 50

A needed reform in the U.S.income tax system that would reduce the costs of inflation is to

A)go back to taxing nominal wage and salary income.
B)start taxing real wage and salary income.
C)go back to taxing nominal interest income.
D)tax real interest income.

Question 51

Presidents running for re-election are tempted to urge the Federal Reserve to ________ the rate of money growth in order to reap the political benefits of ________.

A)reduce,permanently lower inflation
B)reduce,temporarily lower inflation
C)increase,temporarily lower inflation
D)increase,temporarily higher real GDP
E)increase,permanently higher real GDP

Question 52

Government deficit financing is made easier by a p-percentage-point rise in inflation if it raises the nominal interest rate by ________ than p percentage points,and the private sector wishes to hold ________ quantity of real government bonds.

A)less,a lower
B)less,the same
C)more,a lower
D)more,the same

Question 53

When the misery index is used to judge macroeconomic conditions,reducing inflation by one percentage point

A)has no effect at all on how we judge the economy's performance.
B)is of less benefit to the economy than reducing the unemployment rate by one percentage point.
C)gives the same benefit to the economy as reducing the unemployment rate by one percentage point.
D)is of greater benefit to the economy than reducing the unemployment rate by one percentage point.

Question 54

A legitimate objection to the government issuance of "indexed" bonds is that they

A)are more of a drain on the Treasury than conventional bonds.
B)can encourage inflation and weaken policy resistance to it.
C)discourage saving when inflation is reduced.
D)further discourage the use of money and thus increase shoe-leather costs.

Question 55

Less-developed nations may have trouble with ________ financing of their deficits,and the only alternative creates the problem of ________.

A)money,high inflation
B)money,indebtedness to foreign nations
C)bond,high inflation
D)bond,indebtedness to foreign nations

Question 56

The textbook cites an estimate of the "sacrifice ratio" in the United States of approximately

A)one-third.
B)one-half.
C)one.
D)three.
E)six.

Question 57

Suppose the U.S.public holds $1 trillion in government bonds,all with an 8 percent nominal interest rate.If the Federal Reserve can hold that nominal rate constant,what inflation rate would make the government's net interest expense exactly zero?

A)16 percent
B)8 percent
C)0 percent
D)-8 percent

Question 58

When Okun's "misery index" is used to judge macroeconomic conditions,inflation is being considered

A)not to be a macroeconomic problem at all.
B)a less serious macroeconomic problem than unemployment.
C)just as serious a macroeconomic problem as unemployment.
D)a more serious macroeconomic problem than unemployment.

Question 59

The three sources of government revenue are taxes,the ________ of government bonds,and the ________ of high-powered money.

A)issuance,collection
B)issuance,issuance
C)buying back,collection
D)buying back,issuance

Question 60

In nations where conventional taxes are difficult to collect,the inflation tax is ________,which tends to ________ the inflation rates of those nations.

A)also difficult to collect,aggravate
B)also difficult to collect,hold down
C)a realistic alternative,aggravate
D)a realistic alternative,hold down

Question 61

The natural unemployment rate is ________ unemployment rates.

A)the sum of the turnover and cyclical
B)the sum of the turnover and mismatch
C)the sum of the structural and cyclical
D)the sum of the structural,cyclical,and frictional
E)the cyclical minus the mismatch

Question 62

The "key ingredient" in ending a hyperinflation is to

A)allow the money supply to grow more rapidly.
B)reduce the enormous budget deficit.
C)require wage contracts to be indexed more frequently.
D)devalue the nation's currency in the foreign exchange market.

Question 63

Higher inflation is particularly damaging to the real value of

A)wages.
B)financial assets.
C)physical assets.
D)government tax revenues.

Question 64

If a rise in anticipated inflation produces for some reason a less-than-equal rise in the nominal interest rate,this ________ the costs of anticipated inflation by ________ saving.

A)reduces,encouraging
B)reduces,discouraging
C)increases,encouraging
D)increases,discouraging

Question 65

The "nominal" interest rate is the

A)rate actually quoted in financial markets.
B)rate actually quoted in financial markets minus the expected inflation rate.
C)rate actually quoted in financial markets plus the expected inflation rate.
D)rate actually quoted in financial markets divided by the expected inflation rate.

Question 66

Investment and saving decisions are assumed by economists to depend on the ________ interest rate.

A)expected nominal
B)nominal
C)expected real
D)real

Question 67

Which of the following would NOT reduce the natural rate of unemployment?

A)a tax cut
B)an increase in government expenditures
C)wage or price controls
D)all of the above

Question 68

If a worker receives 6 percent higher nominal wages over a year in which inflation is 2 percent,the worker's real wages have

A)risen by 8 percent.
B)risen by 4 percent.
C)risen by 3 percent.
D)fallen by 3 percent.
E)fallen by 4 percent.

Question 69

For inflation to have no real effect on the economy,leaving all decisions and their real outcomes unchanged,five conditions must be met.Which of the following incorrectly states one of those conditions?

A)Inflation is universally and accurately anticipated.
B)All savings and money earn the nominal interest rate.
C)Inflation of P₀ percent lowers the nominal interest rate by P₀ below the no-inflation nominal rate.
D)Only real interest income is taxable and only the real cost of borrowing is tax-deductible.
E)Inflation raises the prices of all goods by the same percentage.

Question 70

For inflation to have no real effect on the economy,leaving all decisions and their real outcomes unchanged,five conditions must be met.Which of the following incorrectly states one of those conditions?

A)Inflation is universally and accurately anticipated.
B)All savings and money earn the nominal interest rate.
C)Inflation of P₀ percent raises the nominal interest rate by P₀ above the no-inflation nominal rate.
D)Only nominal interest income is taxable and only the nominal cost of borrowing is tax-deductible.
E)Inflation raises the prices of all goods by the same percentage.

Question 71

The turnover view of unemployment stresses that

A)most job vacancies have skill requirements not possessed by the unemployed.
B)many job vacancies are located in different areas of the country than are the unemployed.
C)there exist incentives for workers to refuse to accept jobs.
D)there exists racial/and or sex discrimination against some workers.

Question 72

If an increase in expected inflation equally raises the nominal interest rate,the expected real interest rate ________ and thus investment demand ________.

A)rises,increases
B)rises,decreases
C)is unchanged,is unchanged
D)falls,increases
E)falls,decreases

Question 73

The most basic cause of unemployment in the United States is that

A)the natural rate of unemployment is much higher than zero.
B)we are most of the time producing a real GDP below the natural real GDP.
C)we are suffering from low productivity growth.
D)we are converting from a predominantly industrial to a predominantly service-based economy.
E)policymakers are constantly trying to hold down inflation.

Question 74

The "expected real" interest rate is the

A)rate actually quoted in financial markets.
B)rate actually quoted in financial markets minus the expected inflation rate.
C)rate actually quoted in financial markets plus the expected inflation rate.
D)rate actually quoted in financial markets divided by the expected inflation rate.

Question 75

It is estimated that a 10 percent inflation in the United States would bear a shoe-leather cost of approximately ________ percent of GDP.

A)15
B)6
C)2
D)0.25

Question 76

Which of the following is NOT one of the "unholy trinity" of events that interact to fuel an explosive hyperinflation?

A)supply shocks
B)monetary accommodation
C)exchange rate appreciation
D)frequent wage indexation

Question 77

In the 1980s,the federal government gradually ________ interest-rate ceiling on deposits at commercial banks and thrift institutions,which has ________ the costs of inflation.

A)imposed,lowered
B)imposed,reduced
C)lifted,lowered
D)lifted,reduced

Question 78

The "shoe-leather" cost of a fully anticipated inflation is

A)the inconvenience of holding less cash.
B)the higher prices of imported raw materials due to currency depreciation.
C)the extra time spent on shopping in order to beat price increases.
D)the effort of changing posted prices on price tags and producing new price lists and catalogs.

Question 79

Unemployment due to the normal processes of quitting and searching for jobs is called ________ unemployment.

A)turnover
B)mismatch
C)cyclical
D)natural

Question 80

Supply shocks are a potential source of higher inflation,unless the government counters with ________ policy that ________ the money growth rate.

A)extinguishing,reduces
B)extinguishing,increases
C)neutral,leaves unchanged
D)accommodative,reduces
E)accommodative,increases