EC-202 Test 2 SG (12)

1. The classical theory of inflation a. is also known as the quantity theory of money. b. was developed by some of the earliest economic thinkers. c. is used by most modern economists to explain the long-run determinants of the inflation rate. d. All of the above are correct.

2. To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the a. quantity theory of money. b. price-index theory of money. c. theory of hyperinflation. d. disequilibrium theory of money and inflation.

3. Suppose an economy produces only ice cream cones. If the price level rises, the value of currency a. rises, because one unit of currency buys more ice cream cones. b. rises, because one unit of currency buys fewer ice cream cones. c. falls, because one unit of currency buys more ice cream cones. d. falls, because one unit of currency buys fewer ice cream cones.

4. In the long run, money demand and money supply determine a. the value of money and the real interest rate. b. the value of money but not the real interest rate. c. the real interest rate but not the value of money. d. neither the value of money nor the real interest rate.

5. The supply of money increases when a. the price level falls. b. the interest rate increases. c. the Fed makes open-market purchases. d. money demand increases.

6. Money demand refers to a. the total quantity of financial assets that people want to hold. b. how much income people want to earn per year. c. how much wealth people want to hold in liquid form. d. how much currency the Federal Reserve decides to print.

7. As the price level decreases, the value of money a. increases, so people must hold less money to purchase goods and services. b. increases, so people must hold more money to purchase goods and services. c. decreases, so people must hold more money to purchase goods and services. d. decreases, so people must hold less money to purchase goods and services.

8. When the Consumer Price Index falls from 110 to 100 a. there is inflation of 9.1% and the value of money decreases. b. there is deflation of 9.1% and the value of money increases. c. there is deflation of 10% and the value of money increases. d. there is inflation of 10% and the value of money decreases.

9. When the money market is drawn with the value of money on the vertical axis, as the price level decreases, the value of money a. increases, so the quantity of money demanded increases. b. increases, so the quantity of money demanded decreases. c. decreases, so the quantity of money demanded decreases. d. decreases, so the quantity of money demanded increases.

10. When the money market is drawn with the value of money on the vertical axis, if the Fed sells bonds then a. the money supply and the price level increase. b. the money supply and the price level decrease. c. the money supply increases and the price level decreases. d. the money supply increases and the price level increases.

11. When the money market is drawn with the value of money on the vertical axis, a decrease in the money supply leads people to a. spend more so the value of a dollar rises. b. spend more so the value of a dollar falls. c. spend less so the value of a dollar rises. d. spend less so the value of a dollar falls.

12. When the money market is drawn with the value of money on the vertical axis, the value of money decreases if a. either money demand or money supply shifts right. b. either money demand or money supply shifts left. c. money demand shifts right or money supply shifts left. d. money demand shifts left or money supply shifts right.

13. On a given morning, Franco sold 40 pairs of shoes for a total of $80 at his shoe store. a. The $80 is a real variable. The quantity of shoes is a nominal variable. b. The $80 is a nominal variable. The quantity of shoes is a real variable. c. Both the $80 and the quantity of shoes are nominal variables. d. Both the $80 and the quantity of shoes are real variables.

14. An associate professor of physics gets a $200 a month raise. She figures that with her new monthly salary she can buy more goods and services than she could buy last year. a. Her real and nominal salary have risen. b. Her real and nominal salary have fallen. c. Her real salary has risen and her nominal salary has fallen. d. Her real salary has fallen and her nominal salary has risen.

15. Suppose the price level rises, but the number of dollars you are paid per hour stays the same. This means that your a. nominal wage is higher. b. nominal wage is lower. c. real wage is higher. d. real wage is lower

16. According to the classical dichotomy, which of the following is affected by monetary factors? a. nominal wages b. the price level c. nominal GDP d. All of the above are correct.

17. According to the classical dichotomy, which of the following is influenced by monetary factors? a. real GDP b. unemployment c. nominal interest rates d. All of the above are correct.

18. The principle of monetary neutrality implies that an increase in the money supply will a. increase real GDP and the price level. b. increase real GDP, but not the price level. c. increase the price level, but not real GDP. d. increase neither the price level nor real GDP.

19. Most economists believe the principle of monetary neutrality is a. relevant to both the short and long run. b. irrelevant to both the short and long run. c. mostly relevant to the short run. d. mostly relevant to the long run.

20. The velocity of money is a. the rate at which the Fed puts money into the economy. b. the same thing as the long-term growth rate of the money supply. c. the money supply divided by nominal GDP. d. the average number of times per year a dollar is spent.

21. If M = 3,000, P = 2, and Y = 6,000, what is velocity? a. 1/4 b. 2 c. 4 d. 1

22. If velocity = 4, the quantity of money = 20,000, and the price level = 2.5, then the real value of output is a. 2,000. b. 200,000. c. 12,500. d. 32,000.

23. Based on the quantity equation, if M = 100, V = 3, and Y = 150, then P = a. 1. b. 1.5. c. 2. d. 4.5.

24. If velocity = 5, the price level = 2, and the real value of output is 2,500, then the quantity of money is a. $250. b. $25,000. c. $1,000. d. $6,250.

25. According to the assumptions of the quantity theory of money, if the money supply increases by 5 percent, then a. nominal and real GDP would rise by 5 percent. b. nominal GDP would rise by 5 percent; real GDP would be unchanged. c. nominal GDP would be unchanged; real GDP would rise by 5 percent. d. neither nominal GDP nor real GDP would change

26. The money supply in Muckland is $100 billion. Nominal GDP is $800 billion and real GDP is $200 billion. What are the price level and velocity in Muckland? a. The price level and velocity are both 8. b. The price level is 2 and velocity is 8. c. The price level and velocity are both 4. d. The price level is 4 and velocity is 8.

27. If Y and V are constant and M doubles, the quantity equation implies that the price level a. more than doubles. b. changes but less than doubles. c. doubles. d. does not change

28. The inflation tax refers to a. the revenue a government creates by printing money. b. higher inflation which requires more frequent price changes. c. the idea that, other things the same, an increase in the tax rate raises the inflation rate. d. taxes being indexed for inflation.

29. If the real interest rate is 6 percent and the price level is falling at a rate of 2 percent, what is the nominal interest rate? a. 4 percent b. 6 percent c. 8 percent d. 10 percent

a 30. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases a. the inflation rate and growth of real GDP. b. the inflation rate but not the growth rate of real GDP. c. the growth rate of real GDP, but not the inflation rate. d. neither the inflation rate nor the growth rate of real GDP.

31. The Fisher effect a. says the government can generate revenue by printing money. b. says there is a one for one adjustment of the nominal interest rate to the inflation rate. c. explains how higher money supply growth leads to higher inflation. d. explains how prices adjust to obtain equilibrium in the money market.

32. Higher inflation a. causes firms to change prices less frequently and makes relative prices less variable. b. causes firms to change prices less frequently and makes relative prices more variable. c. causes firms to change prices more frequently and makes relative prices less variable. d. causes firms to change prices more frequently and makes relative prices more variable.

33. Wealth is redistributed from debtors to creditors when inflation is e. high, whether it is expected or not. f. low, whether it is expected or not. g. unexpectedly high. h. unexpectedly low.

34. A decrease in the overall price level (or falling prices) is called ________________. An extraordinarily high rate of inflation is called ____________________

35. During hyperinflations, people desire to hold less money and will go to the bank more frequently. This waste of resources due to the high rate of inflation is known as ________________________.