Deck 12: Inflation and the Quantity Theory of Money

Question 1

The average price for a basket of goods bought by a typical U.S.consumer is measured by the:

A) consumer price index.
B) GDP deflator.
C) producer price index.
D) exchange rate.

Answer 1

consumer price index.

Question 2

The inflation rate is the rate of change of the:

A) value of the dollar.
B) New York Stock Exchange.
C) average level of prices.
D) money supply.

Answer 2

average level of prices.

Question 3

The consumer price index measures the:

A) total price of a basket of goods and services bought by a typical consumer.
B) average price of a basket of goods and services bought by a typical consumer.
C) total price of a basket of goods and services bought by all families in the country.
D) average price of a basket of goods and services bought by all families in the country.

Answer 3

average price of a basket of goods and services bought by a typical consumer.

Question 4

When computing the consumer price index,the Bureau of Labor Statistics takes into account changes in the:

A) type of goods but not the quality of goods purchased by the average consumer.
B) quality of goods but not the type of goods purchased by the average consumer.
C) type of goods and the quality of goods.
D) neither the price nor the quality of the goods.

Question 5

The basket of goods bought by the average consumer:

A) stays about the same throughout time.
B) is changing all the time.
C) uniformly falls in price.
D) uniformly rises in price.

Question 6

Which of the following is NOT a price index often used to measure inflation?

A) consumer price index
B) producer price index
C) net price index
D) GDP deflator

Question 7

The price level at the end of 2011 minus the price level at the end of 2010 is the _____ for the year 2011.

A) inflation rate
B) change in the price level
C) change in gross national product
D) consumer price index

Question 8

If the price level in 2018 is 150 and it rises to 165 in 2019,what is the rate of inflation between 2018 and 2019?

A) 9%
B) 10%
C) 15%
D) 165%

Question 9

As a result of the changing variety and quality of goods that the typical consumer purchases each year,many economists argue that the CPI might:

A) have to be abandoned in favor of a better measure of inflation.
B) not be as good a measure of inflation as the GDP deflator is.
C) understate inflation.
D) overstate inflation.

Question 10

A real price is:

A) an increase in the average level of the price of a good.
B) a decrease in the average level of the price of a good.
C) a price that has been corrected for inflation.
D) the average number of times a dollar is spent on final goods and services in a year.

Question 11

Inflation is an increase in the:

A) value of the dollar.
B) value of the New York Stock Exchange.
C) average level of prices.
D) level of nominal output.

Question 12

Which measure of the average price level most closely corresponds to a student's daily economic activities?

A) consumer price index
B) producer price index
C) GDP deflator
D) household price index

Question 13

The ratio of nominal economic output to real economic output multiplied by 100 is the:

A) consumer price index.
B) GDP deflator.
C) producer price index.
D) exchange rate.

Question 14

A measure of the average price received by suppliers is the:

A) consumer price index.
B) GDP deflator.
C) producer price index.
D) exchange rate.

Question 15

If the price level in 2016 is 140 and it falls to 133 in 2017,what has the economy experienced between 2016 and 2017?

A) 5% inflation
B) 7% inflation
C) 7% deflation
D) 5% deflation

Question 16

Which measure of prices includes all of the final goods and services in a nation's output?

A) consumer price index
B) the GDP deflator
C) producer price index
D) the exchange rate

Question 17

The quantity theory of money predicts that the main cause of inflation is increases in:

A) prices.
B) real output.
C) consumption.
D) the money supply.

Question 18

Inflation refers to an increase in the:

A) relative prices of some goods as compared to other goods.
B) average level of prices.
C) standard of living.
D) average level of nominal output.

Question 19

Inflation is:

A) the average number of times a dollar is spent on final goods and services in a year.
B) when people mistake changes in nominal prices for changes in real prices.
C) a decrease in the average level of prices.
D) an increase in the average level of prices.

Question 20

The consumer price index measures the prices of:

A) all final goods bought by American consumers.
B) a basket of goods bought by a typical American consumer.
C) intermediate as well as final goods.
D) introductory,intermediate,and final goods.

Question 21

When an increase in the money supply is unexpected by firms and workers,real GDP:

A) increases in the short run.
B) decreases in the short run.
C) increases in the long run.
D) decreases in the long run.

Question 22

In times of financial panic,we expect the velocity of money to:

A) increase.
B) decrease.
C) remain relatively constant.
D) first increase and then decrease.

Question 23

According to the quantity theory of money,the primary cause of inflation is:

A) the growth rate of the money supply.
B) the growth rate of real GDP.
C) productivity growth.
D) the number of real economic shocks.

Question 24

Why could very high rates of inflation cause velocity to increase?

A) The more people earn,the faster they spend it.
B) The more money loses its value,the faster people try to spend it.
C) The more people earn,the faster prices rise.
D) The more inflation there is,the more there is to buy.

Question 25

Suppose real GDP and velocity of money remain constant.If money supply doubles,then the inflation rate will be:

A) 10%.
B) 50%.
C) 100%.
D) 200%.

Question 26

The quantity theory of money is a theory of:

A) money growth in the United States.
B) inflation.
C) economic growth.
D) the growth of tax burdens.

Question 27

Deflation is a decrease in the:

A) exchange rate.
B) average level of prices.
C) inflation rate.
D) velocity of money.

Question 28

Disinflation is a decrease in the:

A) exchange rate.
B) average level of prices.
C) inflation rate.
D) the velocity of money.

Question 29

The quantity theory states that money is neutral:

A) in both the short run and the long run.
B) only in the short run.
C) only in the long run.
D) neither in the short run nor in the long run.

Question 30

If the growth rate of the money supply decreases from 10% to 5%,which of the following is a prediction of the quantity theory of money?

A) disinflation
B) deflation
C) hyperinflation
D) money illusion

Question 31

Between 1960 and 1990,Argentina's money supply grew at approximately 80%.According to the quantity theory of money,inflation rates in Argentina should have been approximately _____ during this period.

A) 20%
B) 40%
C) 80%
D) 160%

Question 32

In the long run,an increase in the money supply will cause real GDP to:

A) increase.
B) decrease.
C) remain constant.
D) deflate.

Question 33

_____ is a decrease in the average level of prices,whereas _____ is a reduction in the inflation rate.

A) Deflation;disinflation
B) Disinflation;deflation
C) Stagflation;disinflation
D) Deflation;stagflation

Question 34

When economists state that "money is neutral," they mean that the:

A) overall price level has no effect on consumers;only relative prices do.
B) overall price level has no effect on people's inflation expectations.
C) money supply does not affect inflation or nominal GDP.
D) money supply does not affect real GDP or unemployment.

Question 35

According to the quantity theory,what causes inflation in the long run?

A) unemployment
B) unexpected inflation
C) money supply growth
D) aggregate demand shocks

Question 36

According to the quantity theory of money,money growth in the long run:

A) affects both real GDP growth and inflation.
B) affects real GDP growth only.
C) affects inflation only.
D) has no effect on either real GDP growth or inflation.

Question 37

According to Nobel laureate Milton Friedman,"inflation is _____."

A) a good thing
B) found everywhere
C) always present
D) always and everywhere a monetary phenomenon

Question 38

The inflation parable discussed in the text suggests a:

A) short-run relationship between unexpected inflation and output.
B) short-run relationship between expected inflation and output.
C) long-run relationship between unexpected inflation and output.
D) long-run relationship between expected inflation and output.

Question 39

Disinflation occurs when the overall price level:

A) falls.
B) rises at a decreasing rate.
C) rises at an exponential rate.
D) falls at an increasing rate.

Question 40

According to the quantity theory of money,a change in the money supply affects:

A) real GDP in the short run but not in the long run.
B) real GDP in the long run but not in the short run.
C) nominal GDP in the short run but not in the long run.
D) nominal GDP in the long run but not in the short run.

Question 41

How might changes in the money supply be non-neutral in the short run?

A) As the amount of money circulating in the economy changes before prices respond,the purchases of consumers change accordingly,which leads producers to change production levels.
B) When money supply changes in the short run,it will affect nominal,but not real,variables in the short run.
C) As money growth increases at a faster rate,it will cause real GDP to grow at an even faster rate.
D) If producers expect inflation to increase,they will increase supply in order to sell before the arrival of inflation.

Question 42

If people expect an inflation rate of 3% and later it turns out to be 5%,then the real rate of return will be:

A) less than the equilibrium rate.
B) greater than the equilibrium rate.
C) 3%.
D) 5%.

Question 43

When we examine data from different countries,higher money growth has consistently been associated with:

A) deflation.
B) disinflation.
C) hyperinflation.
D) higher inflation.

Question 44

Money illusion is:

A) the average number of times a dollar is spent on final goods and services in a year.
B) mistaking changes in nominal prices for changes in real prices.
C) a decrease in the average level of prices.
D) an increase in the average level of prices.

Question 45

According to the quantity theory of money,an increase in the money supply will cause the price level to:

A) remain relatively constant since money is neutral.
B) increase by about the same percentage as the money supply.
C) increase by a greater percentage than the money supply.
D) increase by a smaller percentage than the money supply.

Question 46

The argument that "money is neutral in the long run" means that an increase in the money supply can:

A) increase real GDP only temporarily.
B) decrease real GDP only temporarily.
C) increase real GDP permanently.
D) decrease real GDP permanently.

Question 47

When the expected rate of inflation is higher than the actual rate of inflation,wealth is:

A) redistributed at random.
B) not redistributed at all.
C) redistributed from borrowers to lenders.
D) redistributed from lenders to borrowers.

Question 48

According to the quantity theory of money,a nation that increases its money supply by 30% should expect its price level to increase by approximately:

A) 15%.
B) 30%.
C) 45%.
D) 60%.

Question 49

Which one of the following is NOT a cost of inflation?

A) wasted resources associated with price confusion
B) higher tax burdens if tax brackets are not adjusted for inflation
C) wealth redistribution from private citizens to the government
D) an automatic decrease in real wages throughout the period of inflation.

Question 50

The argument that "inflation is always and everywhere a monetary phenomenon" is consistent with:

A) the theory of price confusion.
B) the quantity theory of money.
C) the theory of money illusion.
D) the Fisher effect.

Question 51

The "inflation parable" in the text refers to the fact that an unexpected change in the money supply affects:

A) real GDP only in the long run.
B) real GDP only in the short run.
C) real GDP in both the short run and the long run.
D) only inflation in the short run.

Question 52

According to the quantity theory of money,the major cause of inflation in the long run is an increase in:

A) the standard of living.
B) the velocity of money.
C) the growth rate of real GDP.
D) the growth rate of the money supply.

Question 53

Which of these statements is NOT correct?

A) If your nominal wages rise at a rate higher than the inflation rate,you have received a "real" pay raise.
B) If your nominal wages rise at exactly the rate of inflation,your purchasing power over time remains constant.
C) If your nominal wages rise at 4% while inflation rises at 5%,you have essentially received a "pay cut."
D) If deflation occurs,you will receive a "real" pay raise regardless of what happens to your nominal wage.

Question 54

In the long run,money:

A) always increases real GDP.
B) will not affect prices.
C) will lift the standard of living for everyone in a nation.
D) is neutral with respect to quantity produced.

Question 55

All else equal,according to the quantity theory of money,an increase in the velocity of money will cause:

A) deflation.
B) disinflation.
C) hyperinflation.
D) higher inflation.

Question 56

Suppose the average level of prices increased from 100 to 110 between 2007 and 2008,and from 110 to 115 between 2008 and 2009.Between 2008 and 2009,there was:

A) deflation.
B) hyperinflation.
C) disinflation.
D) inflation in the real price of everything.

Question 57

Episodes of hyperinflation are caused by:

A) severe recessions.
B) extreme economic booms.
C) extremely high rates of money growth.
D) moderately high rates of real GDP growth.

Question 58

If,in an economic panic,people decide to hold their money rather than spend it,the velocity of money will:

A) remain relatively constant.
B) increase.
C) decrease.
D) become unpredictable.

Question 59

In the quantity theory of money,growth of _____ is the cause of inflation.

A) the money supply
B) velocity
C) real GDP
D) the CPI

Question 60

According to the quantity theory,which of the following could cause the price level to decrease?

A) The population spends less money.
B) The population spends money faster.
C) Nominal GDP rises.
D) The government spends more.

Question 61

Inflation tends to cause nominal wages to:

A) increase.
B) decrease.
C) remain constant.
D) become more difficult to predict.

Question 62

The primary reason we think of inflation as bad even when wages rise with it is that it:

A) makes things more expensive for consumers.
B) leads to lower real wages.
C) distorts the information delivered by prices.
D) increases the velocity of money.

Question 63

High volatility in the inflation rate can result in:

A) improper allocation of resources.
B) sudden changes in output.
C) low volatility in the CPI.
D) deflation.

Question 64

When people suffer from money illusion,an increase in the money supply:

A) raises real GDP in the short run.
B) lowers real GDP in the short run.
C) has no effect on real GDP in the short run but raises real GDP in the long run.
D) lowers real GDP in the long run.

Question 65

When the money supply and the demand for goods increase at the same time:

A) producers understand how to react,but consumers are confused.
B) consumers act rationally,but producers cannot read the market signals.
C) the government is able to clarify how the markets will be affected.
D) both consumers and producers can often become confused.

Question 66

Money illusion is a condition in which people:

A) see money as an illusion for value.
B) expect the value of money will illusively surge.
C) mistakenly confuse changes in nominal GDP for changes in real GDP.
D) mistakenly confuse changes in nominal prices for changes in real prices.

Question 67

Suppose you are forced to take a pay cut of 5% when the economy is experiencing overall deflation of 5%.If in response to your pay cut you also reduce your consumption by 5%,then economists would say:

A) you made a rational decision.
B) you are exhibiting money illusion.
C) your real wage decreased by 5%.
D) the quantity theory of money held.

Question 68

Inflation hurts the economy because:

A) it raises all prices in the economy.
B) it affects the ability of market prices to send signals about the value of resources.
C) all can perfectly see the increases in prices.
D) higher prices reduce real output.

Question 69

Because of money illusion,inflation usually confuses:

A) consumers.
B) workers.
C) firms.
D) consumers,workers,and firms.

Question 70

Which of the following is an example of money illusion assuming that inflation is 5%?

A) You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend.
B) You receive a 5% raise at your part-time job but do not increase or decrease your spending.
C) You do not receive a raise at your part-time job but cut out some expenses as you notice some prices rising.
D) You receive a 10% raise at your part-time job and start spending extra money on entertainment every weekend.

Question 71

Mistaking changes in nominal prices for changes in real prices is called a:

A) nominal illusion.
B) real illusion.
C) price illusion.
D) money illusion.

Question 72

Money illusion occurs when people:

A) become irrational about money use.
B) become rationally ignorant about money.
C) mistake changes in prices for changes in quality.
D) mistake changes in nominal prices for changes in real prices.

Question 73

When an economy experiences volatile and unpredictable hyperinflation:

A) people will decrease their borrowing.
B) people will increase their lending.
C) borrowing and lending won't be affected.
D) it causes a breakdown of financial intermediation.

Question 74

Which of the following is a problem with deflation?

A) It raises the real cost of debt repayment.
B) Stopping it will cause a recession.
C) It causes people to pay more taxes.
D) There is no problem with deflation;falling prices are good for the economy.

Question 75

When changes in nominal prices are confused with changes in real prices,people experience:

A) consumer bias.
B) inflationary delusion.
C) cyclical price confusion.
D) money illusion.

Question 76

Money illusion occurs when people:

A) correctly see changes in nominal prices.
B) correctly see changes in real prices.
C) see changes in real prices and mistake them for changes in nominal prices.
D) see changes in nominal prices and mistake them for changes in real prices.

Question 77

High and volatile inflation:

A) causes the price of goods and services to deviate from the market price.
B) increases the purchasing power of money and income.
C) creates high supply of goods and services.
D) destroys the ability of market prices to send signals about the value of resources and opportunities.

Question 78

Jordan loaned Taylor $1,200 on March 15,2009.Taylor returned $1,260 on March 14,2010.Inflation was 2% over the 1-year period.What is the real interest rate that Taylor paid?

A) 2%
B) 3%
C) 5%
D) 7%

Question 79

Which of the following is NOT a cost of inflation?

A) price confusion
B) declining wages
C) money illusion
D) inflation tax

Question 80

The concept of money illusion refers to:

A) people who do not understand the purchasing power of money and therefore spend it faster than they can earn it.
B) consumers with inflation-indexed wages seeing a rise in prices and believing that their purchasing power has been compromised.
C) consumers paying prices that are higher than normal and not feeling bad about it because it's happening to everyone just the same.
D) an unobserved change in relative prices.