Question 1

When prices are falling, economists say that there is

Accepted Answer

deflation.

Question 2

Economists all agree that

Accepted Answer

high inflation is costly, but disagree about the costs of moderate inflation.

Question 3

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

Accepted Answer

decreases, so the value of money rises.

Question 4

The supply of money is determined by

Accepted Answer

the Federal Reserve System.

Question 5

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

Accepted Answer

movement to the right along the money demand curve.

Question 6

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,

Accepted Answer

the value of money will rise.

Question 7

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

Accepted Answer

money demand shifts right or money supply shifts left.

Question 8

The price level is a

Accepted Answer

nominal variable.

Question 9

The idea that nominal variables are heavily influenced by the quantity of money and that money is largely irrelevant for understanding the determinants of real variables is called the

Accepted Answer

classical dichotomy.

Question 10

Based on the quantity equation, if M = 100, V = 3, and Y = 200, then P =

Accepted Answer

1.5

Question 11

According to the quantity equation if P = 4 and Y= 800, which of the following pairs could M and V be?

Accepted Answer

800, 4

Question 12

If velocity and output were nearly constant,

Accepted Answer

the inflation rate would be about the same as the money supply growth rate.

Question 13

Suppose that over some period the money supply tripled, velocity was unchanged, and real GDP doubled. According to the quantity equation the price level is now

Accepted Answer

1.5 times its old value.

Question 14

If the nominal interest rate is 5 percent and there is a deflation rate of 2 percent, what is the real interest rate?

Accepted Answer

7 percent

Question 15

Suppose that monetary neutrality and the Fisher effect both hold and the money supply growth rate has been the same for a long time. Other things the same a higher money supply growth would be associated with

Accepted Answer

both higher inflation and higher nominal interest rates.

Question 16

For a given real interest rate, an increase in inflation makes the after-tax real interest rate

Accepted Answer

decrease, which discourages savings.

Question 17

Wealth is redistributed from debtors to creditors when inflation is

Accepted Answer

unexpectedly low.

Question 18

True or False: The quantity theory of money can explain hyperinflations but not moderate inflation.

Accepted Answer

False

Question 19

True or False: When the value of money is on the vertical axis, the money supply curve slopes upward because an increase in the value of money induces banks to create more money.

Accepted Answer

False

Question 20

True or False: The source of all four classic hyperinflations was high rates of money growth.

Accepted Answer

True

Question 21

True or False: In the long run, an increase in the growth rate of the money supply leads to an increase in the real interest rate, but no change in the nominal interest rate.

Accepted Answer

False

Question 22

True or False: In the long run, an increase in the growth rate of the money supply leads to an increase in the real interest rate, but no change in the nominal interest rate.

Accepted Answer

False

Question 23

Wages and prices are many times higher today than they were 30 years ago, yet people do not work a lot more hours or buy fewer goods. How can this be?

Accepted Answer

Inflation has raised the general price level. An increase in the general price level has no effect on real variables in the long run. Wages are higher, but so are prices. Prices are higher, but so are wages and incomes. In the long run, people change their behavior in response to changes in real variables, not nominal ones.

Question 24

What is the inflation tax, and how might it explain the creation of inflation by a central bank?

Accepted Answer

The inflation tax refers to the fact that inflation is a tax on money. When prices rise, the value of money currently held is reduced. Hence, when a government raises revenue by printing money, it obtains resources from households by taxing their money holdings through inflation rather than by sending them a tax bill. In countries where governments are unable or unwilling to raise revenues by raising taxes explicitly, the inflation tax may be an alternative source of revenue.

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