Deck 8: Inflation

Question 1

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)a or b

Answer 1

E

Question 2

In 2004,the movie Spiderman 2 generated about $40 million on its opening day.In 1992,Batman Returns generated $35 million on its opening day.If the CPI in 2006 is 100;in 2004,it is 93.7;and in 1992,69.5,__________ is the larger single-day grossing movie,with __________ in revenues in 2006 dollars.

A)Spiderman 2;$57.5
B)Batman Returns;$47.1
C)Batman Returns;$50.3
D)Spiderman 2;$40.0
E)Not enough information is given.

Answer 2

C

Question 3

Fiat money has value because:

A)people believe it has value.
B)of social convention.
C)it is backed by gold.
D)it has intrinsic value.
E)a and b are correct.

Answer 3

E

Question 4

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 the above

Question 5

__________ are(is)the most liquid asset.

A)Gold
B)Small savings accounts
C)Short-term treasury bills
D)Currency
E)Copper

Question 6

Often,when discussing inflation,we use the "core rate of inflation," which excludes __________ from its calculation.

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

Question 7

Money that has no value except as money is called __________ money.

A)bonded
B)commodity
C)fiat
D)intrinsic
E)none of the above

Question 8

A country on the silver standard uses:

A)coins.
B)fiat money.
C)bond money.
D)commodity money.
E)none of the above

Question 9

Today,the Wendy's cheeseburger is on the 99-cent menu.If the CPI in 1979 was 36 and the CPI in 2006 was 100,what is the price of a 2006 cheeseburger in 1979 dollars?

A)$35
B)$2.75
C)$0.03
D)$0.36
E)none of the above

Question 10

Inflation is calculated as:

A)the overall price level.
B)the rate of change of the price level.
C)the percentage change in the price level.
D)the difference in the price level.
E)a and b

Question 11

In the United States,money is backed by:

A)oil.
B)gold.
C)silver.
D)nothing.
E)none of the above

Question 12

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

A) .
B) .
C) .
D) .
E) .

Question 13

Alternative forms of money include:

A)frequent flier miles.
B)gift cards.
C)debit cards.
D)PayPal.
E)all of the above

Question 14

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

Question 15

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 16

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 17

Silver,gold,and chocolate are examples of:

A)fiat money.
B)commodity money.
C)backed money.
D)government money.
E)none of the above

Question 18

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)a and c

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 36 and the CPI in 2006 was 100,what is the price of a 1979 cheeseburger in 2006 dollars?

A)$0.99
B)$43.00
C)$1.19
D)$0.02
E)$0.15

Question 20

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 21

In the quantity equation,the value
Is:

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

Question 22

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

A) .
B) .
C) .
D) .
E) .

Question 23

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 24

Using the quantity equation,if
,Pt = 1.1,and
,then the velocity of money is:

A)10.
B)9.1.
C)11.
D)909.
E)0.10.

Question 25

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 the above

Question 26

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 the above

Question 27

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 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

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 30

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 31

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 the above

Question 32

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 33

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 the above

Question 34

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

A)inflation
B)money
C)productivity
D)investment
E)a and b

Question 35

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

A) .
B)
C)
D) .
E) .

Question 36

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 37

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 38

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 39

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

A) ;velocity is constant
B) ;velocity always equals one
C) ;velocity is constant
D) ;velocity is variable
E) ;velocity is constant

Question 40

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 41

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

A)is eradicated.
B)is spread equally to the borrower and lender.
C)is passed from the lender to the borrower.
D)is passed from the borrower to the lender.
E)none of the above

Question 42

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 43

Suppose you put $100 dollars in the bank on January 1,2007.If the annual nominal interest rate is 5 percent and the inflation rate is 5 percent,you will be able to buy __________ on January 1,2008.

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

Question 44

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

A) .
B) .
C) .
D) .
E)none of the above

Question 45

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 46

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)none of the above

Question 47

Positive 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 48

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 49

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 50

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 51

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 52

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 53

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 54

Suppose you put $100 dollars in the bank on January 1,2007.If the annual nominal interest rate is 5 percent and the inflation rate is 2 percent,you will be able to buy __________ on January 1,2008.

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

Question 55

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

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

Question 56

Let r denote the real interest rate,i denote the nominal interest rate,and
Denote the rate of inflation.The equation
Is called:

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

Question 57

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 the above
E)none of the above

Question 58

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 59

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 the above
E)none of the above

Question 60

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)a and d

Question 61

A government that relies on seignorage to finance excess government expenditures is the foundation for the 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 62

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

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

Question 63

The cure for hyperinflation is:

A)reducing money growth.
B)reducing government spending.
C)lower taxes.
D)all of the above
E)a and b

Question 64

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 65

The U.S.dollar is backed by the belief that it has value.

Question 66

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 67

In the quantity equation,the value
is the real GDP.

Question 68

One problem with 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 69

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

A)higher taxes.
B)reducing government spending.
C)reducing money growth.
D)all of the above
E)none of the above

Question 70

If all price setters are not convinced that high inflation rates will end soon,there is:

A)price staggering.
B)a transfer of wealth from one group to the other.
C)substantial menu costs.
D)a coordination problem.
E)negative real interest rates.

Question 71

The coordination problem is difficult to solve because:

A)policymakers cannot make unified decisions.
B)aggregate price-setting behavior has built-in inflation inertia.
C)individual price-setting behavior economywide has built-in inflation inertia.
D)central banks are controlled by many different interests.
E)all of the above

Question 72

Money neutrality is the proposition that changes in money have no real effect on the economy.

Question 73

According to the quantity theory of money,the price level is determined by the ratio of the effective quantity of money to the volume of goods.

Question 74

Short-term treasury bills are the most liquid form of asset.

Question 75

The velocity of money is defined as the average number of times a dollar is used in a transaction over the course of year.

Question 76

With unanticipated inflation,

A)creditors are hurt unless they have an indexed contract,because they get less than they expected in real terms.
B)creditors with indexed contracts gain,because they receive 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)debtors with an indexed contract are hurt,because they pay 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 77

The revenue governments obtain from printing money is called:

A)issuing debt.
B)the inflation tax.
C)raising taxes.
D)government expenditures.
E)none of the above

Question 78

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)increasing its debt.
C)lowering interest rates.
D)privatization.
E)a and b

Question 79

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 80

The core rate of inflation is calculated using all goods except vehicles and housing.