曼昆经济学题库chapter22

Money Growth and Inflation

MULTIPLE CHOICE

1. Inflation can be measured by the

a. change in the consumer price index.

b. percentage change in the consumer price index.

c. percentage change in the price of a specific commodity.

d. change in the price of a specific commodity.

ANSWER: b. percentage change in the consumer price index.

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2. Over the last 60 years the average annual U.S. inflation rate was about

a. 2 percent.

b. 3 percent.

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c. 5 percent.

d. 7 percent.

ANSWER: c. 5 percent.

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3. Over the last 60 years the average annual U.S. inflation rate was about

a. 3 percent implying that prices have increased 12-fold.

b. 5 percent implying that prices have increased 12-fold

c. 3 percent implying that prices have increased 18-fold.

d. 5 percent implying that prices increased about 18-fold.

ANSWER: d. 5 percent implying that prices increased about 18-fold.

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4. When prices are falling, economists say that there is

a. disinflation.

Chapter 17/Money Growth and Inflation  457

b. deflation.

c. a contraction.

d. an inverted inflation.

ANSWER: b. deflation.

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5. Which of the following statements about U.S. inflation is false?

a. Low inflation was viewed as a triumph of President Carter's economic policy.

b. There were long periods in the nineteenth century during which prices fell.

c. The U.S. public has viewed inflation of even 7 percent as a major economic problem.

d. The U.S. inflation rate has varied over time, but international data shows even more variation.

ANSWER: a. Low inflation was viewed as a triumph of President Carter's economic policy.

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458  Chapter 17/Money Growth and Inflation

6. Which of the following concerning the history of U.S. inflation is false?

a. Prices rose at an average annual rate of about 5 percent over the last 60 years.

b. There was about an 18-fold increase in the price level over the last 60 years.

c. Inflation in the 1970s was below the average over the last 60 years.

d. The United States has experienced periods of deflation.

ANSWER: c. Inflation in the 1970s was below the average over the last 60 years.

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7. There was hyperinflation

a. during 1880–16 in the United States.

b. in post–World War I Germany.

c. during the 1970s in the United States.

d. All of the above are correct.

ANSWER: b. in post–World War I Germany.

Chapter 17/Money Growth and Inflation  459

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8. Which of the following events in post–World War I Germany likely contributed to the rise of Nazism and World War II?

a. deflation that proved detrimental to farmers

b. an aversion to inflation by policymakers that kept wages stagnant

c. an unexpected drop in inflation that hurt borrowers

d. an extraordinarily high rate of inflation

ANSWER: d. an extraordinarily high rate of inflation

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9. 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.

460  Chapter 17/Money Growth and Inflation

d. All of the above are correct.

ANSWER: d. All of the above are correct.

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10. The quantity theory of money

a. is a fairly recent addition to economic theory.

b. can explain both moderate and hyperinflations.

c. argues that inflation is caused by too little money in the economy.

d. All of the above are correct.

ANSWER: b. can explain both moderate and hyperinflations.

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11. Economists all agree that

a. neither high inflation nor moderate inflation is very costly.

b. both high and moderate inflation are quite costly.

Chapter 17/Money Growth and Inflation  461

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

d. moderate inflation is as costly as high inflation.

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

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

a. increases, so the value of money rises.

b. increases, so the value of money falls.

c. decreases, so the value of money rises.

d. decreases, so the value of money falls.

ANSWER: c. decreases, so the value of money rises.

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13. When the value of money rises, the number of dollars needed to buy a representative basket of goods

462  Chapter 17/Money Growth and Inflation

a. increases, and so the price level rises.

b. increases, and so the price level falls.

c. decreases, and so the price level rises.

d. decreases, and so the price level falls.

ANSWER: d. decreases, and so the price level falls.

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14. When the number of dollars needed to buy a representative basket of goods falls, the value of money

a. rises, and so the price level rises.

b. rises, and so the price level falls.

c. falls, and so the price level rises.

d. falls, and so the price level falls.

ANSWER: b. rises, and so the price level falls.

Chapter 17/Money Growth and Inflation  463

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15. The supply curve of money is vertical because the quantity of money supplied increases

a. when the value of money increases.

b. when the value of money decreases.

c. only if people desire to hold more money.

d. only if the central bank increases the money supply.

ANSWER: d. only if the central bank increases the money supply.

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16. The supply of money is determined by

a. the price level.

b. the Treasury and Congressional Budget Office.

c. the Federal Reserve System.

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d. the demand for money.

ANSWER: c. the Federal Reserve System.

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17. The supply of money increases when

a. the value of money increases.

b. the interest rate increases.

c. the Fed makes open-market purchases.

d. None of the above is correct.

ANSWER: c. the Fed makes open-market purchases.

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

a. shift to the right of the money demand curve.

Chapter 17/Money Growth and Inflation  465

b. shift to the left of the money demand curve.

c. movement to the left along the money demand curve.

d. movement to the right along the money demand curve.

ANSWER: d. movement to the right along the money demand curve.

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19. When the money market is drawn with the value of money on the vertical axis, as the price level increases the quantity of money

a. demanded increases.

b. demanded decreases.

c. supplied increases.

d. supplied decreases.

ANSWER: a. demanded increases.

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466  Chapter 17/Money Growth and Inflation

20. When the money market is drawn with the value of money on the vertical axis, as the price level increases, 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.

ANSWER: d. decreases, so the quantity of money demanded increases.

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21. As the price level decreases, the value of money

a. increases, so people want to hold more of it.

b. increases, so people want to hold less of it.

c. decreases, so people want to hold more of it.

d. decreases, so people want to hold less of it.

Chapter 17/Money Growth and Inflation  467

ANSWER: b. increases, so people want to hold less of it.

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22. When the money market is drawn with the value of money on the vertical axis, the money demand curve slopes

a. upward because at higher prices people want to hold more money.

b. downward because at higher prices people want to hold more money.

c. downward because at higher price people want to hold less money.

d. upward, because at higher prices people want to hold less money.

ANSWER: b. downward because at higher prices people want to hold more money.

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23. Which of the following is correct?

a. If the Fed purchases bonds in the open market, then the money supply shifts right. A change in the price level does not shift money supply.

b. If the Fed sells bonds in the open market, then money supply shifts right. A change

468  Chapter 17/Money Growth and Inflation

in the price level does not shift money supply.

c. If the Fed purchases bonds, then the money supply shifts right. An increase in the price level shifts money supply right.

d. If the Fed purchases bonds, then the money supply shifts right. A decrease in the price level shifts money supply right.

ANSWER: a. If the Fed purchases bonds in the open market, then the money supply shifts right. A change in the price level does not shift money supply.

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24. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply shifts the money supply curve to the

a. right, lowering the price level.

b. right, raising the price level.

c. left, raising the price level.

d. left, lowering the price level.

ANSWER: b. right, raising the price level.

Chapter 17/Money Growth and Inflation  469

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25. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply

a. increases the price level and the value of money.

b. increases the price level and decreases the value of money.

c. decreases the price level and increases the value of money.

d. decreases the price level and the value of money.

ANSWER: b. increases the price level and decreases the value of money.

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26. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply causes the equilibrium value of money

a. and equilibrium quantity of money to increase.

b. and equilibrium quantity of money to decrease.

c. to increase, while the equilibrium quantity of money decreases.

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d. to decrease, while the equilibrium quantity of money increases.

ANSWER: d. to decrease, while the equilibrium quantity of money increases.

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27. When the money market is drawn with the value of money on the vertical axis, the value of money increases 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.

ANSWER: c. money demand shifts right or money supply shifts left.

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

a. either money demand or money supply shifts right.

Chapter 17/Money Growth and Inflation  471

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.

ANSWER: d. money demand shifts left or money supply shifts right.

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29. When the money market is drawn with the value of money on the vertical axis, the price level 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.

ANSWER: c. money demand shifts right or money supply shifts left.

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30. When the money market is drawn with the value of money on the vertical axis, if the money supply is increased, then in the long run the price level

a. and the quantity of money demanded increase.

b. increases, but the quantity of money demanded decrease.

c. decreases, but the quantity of money demanded increases.

d. and the quantity of money demanded decreases.

ANSWER: a. and the quantity of money demanded increase.

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31. Open-market purchases by the Fed make the money supply

a. and the value of money increase.

b. increase, which makes the value of money decrease.

c. and the value of money decrease.

d. decrease, which makes the value of money increase.

Chapter 17/Money Growth and Inflation  473

ANSWER: b. increase which makes the value of money decrease.

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32. In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold, which was in use as a medium of exchange. We would predict that this increase in gold

a. raised both the price level and the value of gold in Cairo.

b. raised the price level, but decreased the value of gold in Cairo.

c. lowered the price level, but increased the value of gold in Cairo.

d. lowered both the price level and the value of gold in Cairo.

ANSWER: b. raised the price level, but decreased the value of gold in Cairo.

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33. In the 1970s in response to recessions caused by an increase in the price of oil, the central banks in many countries increased the money supply. The central banks might have done this by

a. selling bonds on the open market, which would have raised the value of money.

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b. purchasing bonds on the open market, which would have raised the value of money.

c. selling bonds on the open market, which would have raised the value of money.

d. purchasing bonds on the open market, which would have lowered the value of money.

ANSWER: d. purchasing bonds on the open market, which would have lowered the value of money.

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34. When the money market is drawn with the value of money on the vertical axis, an increase in the money supply creates an excess

a. supply of money causing people to spend more.

b. supply of money causing people to spend less.

c. demand for money causing people to spend more.

d. demand for money causing people to spend less.

ANSWER: a. supply of money causing people to spend more.

Chapter 17/Money Growth and Inflation  475

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35. A decrease in the money supply creates an excess

a. supply of money that is eliminated by rising prices.

b. supply of money that is eliminated by falling prices.

c. demand for money that is eliminated by rising prices.

d. demand for money that is eliminated by falling prices.

ANSWER: d. demand for money that is eliminated by falling prices.

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36. When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal due to adjustments in the

a. the value of money.

b. real interest rates.

c. nominal interest rates.

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d. money supply.

ANSWER: a. the value of money.

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37. 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,

a. the price level will rise.

b. the value of money will rise.

c. money demand will shift left.

d. money demand will shift right

ANSWER: b. the value of money will rise.

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38. When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is a

a. shortage, so the price level will rise.

Chapter 17/Money Growth and Inflation  477

b. shortage, so the price level will fall.

c. surplus, so the price level will rise.

d. surplus, so the price level will fall.

ANSWER: b. shortage, so the price level will fall.

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39. When the money market is drawn with the value of money on the vertical axis, which of the following would shift money demand right?

a. an increase in the price level

b. a decrease in the price level

c. open-market purchases by the central bank

d. None of the above is correct.

ANSWER: d. None of the above is correct.

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478  Chapter 17/Money Growth and Inflation

Use the figure below for the following questions.

40. If the money supply is MS2 and the value of money is 2,

a. the value of money is less than its equilibrium level.

b. the price level is higher than its equilibrium level.

c. money demand is greater than the money supply.

d. the money supply is greater than money demand.

ANSWER: d. the money supply is greater than money demand.

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41. If the money supply is MS2 and the value of money is 2, there is excess

Chapter 17/Money Growth and Inflation  479

a. demand equal to the distance between A and C.

b. demand equal to the distance between A and B.

c. supply equal to the distance between A and C.

d. supply equal to the distance between A and B.

ANSWER: d. supply equal to the distance between A and B.

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42. When the money supply curve shifts from MS1 to MS2,

a. the demand for goods and services decreases.

b. the economy's ability to produce goods and services increases.

c. the equilibrium price level increases.

d. the equilibrium value of money increases.

ANSWER: c. the equilibrium price level increases.

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43. When the money supply curve shifts from MS1 to MS2,

a. the equilibrium value of money decreases.

b. the equilibrium price level decreases.

c. the supply of money has decreased.

d. the demand for goods and services will decrease.

ANSWER: a. the equilibrium value of money decreases.

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44. If the current money supply is located at MS1,

a. there is no excess supply or excess demand if the value of money is 2.

b. the equilibrium is at point C.

c. there is an excess supply of money if the value of money is 1.

d. All of the above are correct.

ANSWER: a. there is no excess supply or excess demand if the value of money is 2.

Chapter 17/Money Growth and Inflation  481

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45. Economic variables whose values are measured in monetary units are called

a. dichotomous variables.

b. nominal variables.

c. classical variables.

d. real variables.

ANSWER: b. nominal variables.

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46. Randy pays $120 for a bag of goods he purchases at the HyValu discount store.

a. The $120 is a real variable; the bag of groceries is a nominal variable.

b. The $120 is a nominal variable; the bag of groceries is a real variable.

c. Both the $120 and the bag of groceries are nominal variables.

d. Both the $120 and the bag of groceries are real variables.

482  Chapter 17/Money Growth and Inflation

ANSWER: b. The $120 is a nominal variable; the bag of groceries is a real variable.

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47. Nominal GDP measures

a. the total quantity of final goods and services produced.

b. the dollar value of the economy's output of final goods and services.

c. the total income received from producing final goods and services in constant dollars.

d. None of the above are correct.

ANSWER: b. the dollar value of the economy's output of final goods and services.

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48. Real GDP measures

a. the total quantity of final goods and services produced.

b. the dollar value of the economy's output of final goods and services.

Chapter 17/Money Growth and Inflation  483

c. the total income received from producing final goods and services at current prices.

d. All of the above are correct.

ANSWER: a. the total quantity of final goods and services produced.

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49. The price level is a

a. relative variable.

b. actual variable.

c. real variable.

d. nominal variable.

ANSWER: d. nominal variable.

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50. The price of a Honda Accord divided by the price of a Honda Civic is a

a. classical variable.

484  Chapter 17/Money Growth and Inflation

b. dichotomous variable.

c. nominal variable.

d. real variable.

ANSWER: d. real variable.

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51. An assistant professor of economics gets a $100 a month raise, but then she figures that with her current monthly salary she can’t buy as many goods as she could last year.

a. Her real and nominal salary have risen.

b. Her real and nominal wage have fallen.

c. Her real wage has risen and her nominal wage has fallen.

d. Her real wage has fallen and her nominal wage has risen.

ANSWER: d. Her real wage has fallen and her nominal wage has risen.

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Chapter 17/Money Growth and Inflation  485

52. Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay makes

a. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased.

b. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage decreased.

c. your real wage increase. If your real wage rose by a greater percentage than the price level, then your nominal wage also increased.

d. your real wage decrease. If your real wage rose by a greater percentage than the price level, then your nominal wage decreased.

ANSWER: a. your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased.

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53. Interest rates stated in the Wall Street Journal are

a. classical variables.

b. dichotomous variables.

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c. nominal variables.

d. real variables.

ANSWER: c. nominal variables.

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. Interest rates adjusted for the effects of inflation are

a. nominal variables.

b. real variables.

c. classical variables.

d. dichotomous variables.

ANSWER: b. real variables.

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55. 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

Chapter 17/Money Growth and Inflation  487

a. velocity concept.

b. Fisher effect.

c. classical dichotomy.

d. Mankiw effect.

ANSWER: c. classical dichotomy.

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56. The classical dichotomy refers to the idea that the supply of money

a. is irrelevant for understanding the determinants of nominal and real variables.

b. determines nominal variables, but not real variables.

c. determines real variables, but not nominal variables.

d. is a determinant of both real and nominal variables.

ANSWER: b. determines nominal variables, but not real variables.

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57. According to the classical dichotomy, which of the following increases when the money supply increases?

a. the real interest rate

b. real GDP

c. the real wage

d. None of the above increases.

ANSWER: d. None of the above increases.

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58. 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.

Chapter 17/Money Growth and Inflation  4

ANSWER: c. nominal interest rates

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59. According to the classical dichotomy, which of the following is influenced by monetary factors?

a. the real wage

b. the real interest rate

c. the nominal wage

d. All of the above are correct.

ANSWER: c. the nominal wage

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60. According to the classical dichotomy, which of the following is not influenced by monetary factors?

a. the price level

b. real GDP

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c. nominal interest rates

d. All of the above are correct.

ANSWER: b. real GDP

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61. According to the classical dichotomy, which of the following is not influenced by monetary factors?

a. nominal GDP and nominal interest rates

b. real wages and real GDP

c. the price level and nominal GDP

d. None of the above are correct.

ANSWER: b. real wages and real GDP

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62. Changes in nominal variables are determined mostly by the quantity of money and the monetary system according to

Chapter 17/Money Growth and Inflation  491

a. both the classical dichotomy and the quantity theory of money.

b. the classical dichotomy, but not the quantity theory of money.

c. the quantity theory of money, but not the classical dichotomy.

d. neither the classical dichotomy nor the quantity theory of money.

ANSWER: a. both the classical dichotomy and the quantity theory of money.

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63. According to the classical dichotomy, when the money supply doubles, which of the following also double?

a. the price level and nominal wages

b. the price level, but not the nominal wage

c. the nominal wage, but not the price level

d. neither the nominal wage nor the price level

ANSWER: a. the price level and nominal wages

492  Chapter 17/Money Growth and Inflation

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. According to the classical dichotomy, when the money supply doubles which of the following double?

a. the price level and nominal GDP

b. the price level and real GDP

c. only real GDP

d. only the price level

ANSWER: a. the price level and nominal GDP

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65. 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.

Chapter 17/Money Growth and Inflation  493

d. increase neither the price level nor real GDP.

ANSWER: c. increase the price level, but not real GDP.

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66. According to the principle of monetary neutrality, a decrease in the money supply will not change

a. nominal GDP.

b. the price level.

c. unemployment.

d. All of the above are correct.

ANSWER: c. unemployment.

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67. Monetary neutrality implies that an increase in the quantity of money will

a. increase employment.

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b. increase the price level.

c. increase the incentive to save.

d. not affect the price level.

ANSWER: b. increase the price level.

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68. 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.

ANSWER: d. mostly relevant to the long run.

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69. According to the classical dichotomy, when the money supply doubles, which of

Chapter 17/Money Growth and Inflation  495

the following also double?

a. the price level

b. nominal wages

c. nominal GDP

d. All of the above are correct.

ANSWER: d. All of the above are correct.

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70. 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.

ANSWER: d. the average number of times per year a dollar is spent.

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71. Velocity is computed as

a. (P  Y)/M.

b. (P  M)/Y.

c. (Y  M)/P.

d. (Y  M)/V.

ANSWER: a. (P  Y)/M.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

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

a. 1.

b. 1.5.

c. 2.

d. None of the above is correct.

Chapter 17/Money Growth and Inflation  497

ANSWER: b. 1.5.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

73. According to the quantity equation, if P = 12, Y = 6, M= 8, then V =

a. 16.

b. 9.

c. 4.

d. None of the above is correct.

ANSWER: b. 9.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

74. Last year Tealandia produced 50,000 bags of green tea, which sold at 4 units each of Tealandia’s currency—the Leaf. Tealandia’s money supply was 10,000. What was the velocity of money in Tealandia?

a. 20

b. 5

498  Chapter 17/Money Growth and Inflation

c. 1/20

d. 1/5

ANSWER: a. 20

TYPE: M DIFFICULTY: 1 SECTION: 17.1

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

a. 800, 4

b. 600, 3

c. 400, 2

d. 200, 1

ANSWER: a. 800, 4

TYPE: M DIFFICULTY: 2 SECTION: 17.1

76. Assuming that V is constant, the quantity equation implies that an increase in M could result in

Chapter 17/Money Growth and Inflation  499

a. an increase in the price level.

b. an increase in real GDP.

c. an increase in nominal GDP.

d. any of the above.

ANSWER: d. any of the above.

TYPE: M DIFFICULTY: 2 SECTION: 17.1

77. If Y and V are constant, and M doubles, the quantity equation implies that the price level

a. more than doubles.

b. less than doubles.

c. doubles.

d. might do any of the above; more information is needed.

ANSWER: c. doubles.

500  Chapter 17/Money Growth and Inflation

TYPE: M DIFFICULTY: 1 SECTION: 17.1

78. If Y and M are constant, and V doubles, the quantity equation implies that the price level

a. less than doubles.

b. doubles.

c. more than doubles.

d. might do any of the above; more information is needed.

ANSWER: b. doubles.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

79. If V and M are constant, and Y doubles, the quantity equation implies that the price level

a. falls to half its original level.

b. does not change.

c. doubles.

Chapter 17/Money Growth and Inflation  501

d. more than doubles.

ANSWER: a. falls to half its original level.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

80. If velocity and output were nearly constant,

a. the inflation rate would be much higher than the money supply growth rate.

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

c. the inflation rate would be much lower than the money supply growth rate.

d. any of the above would be possible.

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

TYPE: M DIFFICULTY: 1 SECTION: 17.1

81. The money supply in Freedonia is $100 billion. Nominal GDP is $800 billion and real GDP is $200 billion. What are the price level and velocity in Freedonia?

a. Velocity is 2 and the price level is 1.

502  Chapter 17/Money Growth and Inflation

b. Velocity is 4 and the price level is 8.

c. Velocity is 8 and the price level is 4.

d. There is insufficient information to answer the question.

ANSWER: c. Velocity is 8 and the price level is 4.

TYPE: M DIFFICULTY: 2 SECTION: 17.1

82. The money supply in Freedonia is $200 billion. Nominal GDP is $800 billion and real GDP is $400 billion. The central bank of Freedonia has instituted a policy of zero inflation. Assuming that velocity is stable, if real GDP grows by 10 percent this year, how will the central bank of Freedonia change the money supply this year?

a. It will not change the money supply at all.

b. It will reduce the money supply by 10 percent.

c. It will increase the money supply by 10 percent.

d. It will increase the money supply by 2.5 percent.

ANSWER: c. It will increase the money supply by 10 percent.

Chapter 17/Money Growth and Inflation  503

TYPE: M DIFFICULTY: 2 SECTION: 17.1

83. The money supply in Freedonia is $200 billion. Nominal GDP is $800 billion and real GDP is $400 billion. Assuming that velocity is stable, if real GDP grows by 10 percent this year, and if the money supply does not change this year, then

a. the inflation rate will be zero.

b. nominal GDP will grow by 10 percent.

c. nominal GDP will stay the same.

d. none of the above are correct.

ANSWER: c. nominal GDP will stay the same.

TYPE: M DIFFICULTY: 3 SECTION: 17.1

84. The money supply in Freedonia is $200 billion. Nominal GDP is $800 billion and real GDP is $400 billion. Assuming that velocity is stable, if real GDP grows by 10 percent this year, and if the money supply does not change this year, then the

a. inflation rate will be zero.

b. price level will fall by 9.09 percent.

504  Chapter 17/Money Growth and Inflation

c. price level will rise by 10 percent.

d. None of the above is correct.

ANSWER: b. price level will fall by 9.09 percent.

TYPE: M DIFFICULTY: 3 SECTION: 17.1

85. Velocity in the country of Nemedia is always stable. In 2001, the money supply was $100 billion and real GDP was $300 billion. In 2002, the money supply increased by 10 percent, real GDP increased by 5 percent and nominal GDP equaled $660 billion. By how much did the price level increase between 2001 and 2002?

a. 10 percent

b. 9.5 percent

c. 4.76 percent

d. There is not enough information to answer the question.

ANSWER: c. 4.76 percent

TYPE: M DIFFICULTY: 3 SECTION: 17.1

Chapter 17/Money Growth and Inflation  505

86. Velocity in the country of Shem is always stable. In 2002, the money supply was $200 billion and the GDP price deflator was four times as high as it was in the base year. In 2003, the money supply increased to $240 billion, the price level increased by 15 percent, and nominal GDP equaled $1,200 billion. By how much did real GDP increase between 2002 and 2003?

a. 20 percent

b. 4.35 percent

c. 2.17 percent

d. There is not enough information to answer the question.

ANSWER: b. 4.35 percent

TYPE: M DIFFICULTY: 3 SECTION: 17.1

87. Velocity in the country of Aquilonia is always stable. In 2002, the money supply was $100 billion, nominal GDP was $500 billion, and the real interest rate was 3 percent. In 2003, the money supply was $105 billion and real GDP did not change from its level in 2002. The nominal interest rate in 2003 was approximately

a. 3 percent.

506  Chapter 17/Money Growth and Inflation

b. 5 percent.

c. 8 percent.

d. 11 percent.

ANSWER: c. 8 percent.

TYPE: M DIFFICULTY: 3 SECTION: 17.1

88. Which of the following is not implied by the quantity equation?

a. If velocity is stable, an increase in the money supply creates a proportional increase in nominal output.

b. If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in the price level.

c. With constant money supply and output, an increase in velocity creates an increase in the price level.

d. With constant money supply and velocity, an increase in output creates a proportional increase in the price level.

ANSWER: d. With constant money supply and velocity, an increase in output creates a

Chapter 17/Money Growth and Inflation  507

proportional increase in the price level.

TYPE: M DIFFICULTY: 3 SECTION: 17.1

. If money is neutral and velocity is stable, an increase in the money supply creates a proportional increase in

a. real output.

b. nominal output.

c. the price level.

d. Both b and c are correct.

ANSWER: d. Both b and c are correct.

TYPE: M DIFFICULTY: 2 SECTION: 17.1

90. The evidence gained from studying hyperinflation indicates that

a. the rate of inflation is not closely related to the rate at which the money supply changes.

b. nominal interest rates are independent of the money supply.

508  Chapter 17/Money Growth and Inflation

c. inflation rates parallel money supply growth rates.

d. None of the above is correct.

ANSWER: c. inflation rates parallel money supply growth rates.

TYPE: M DIFFICULTY: 2 SECTION: 17.1

91. The evidence from hyperinflations indicates that money growth and inflation

a. moved together, which supports the quantity theory

b. moved together, which does not support the quantity theory.

c. did not move closely with each other, which supports the quantity theory.

d. did not move closely with each other, which does not support the quantity theory.

ANSWER: a. moved together, which supports the quantity theory

TYPE: M DIFFICULTY: 1 SECTION: 17.1

92. The inflation tax

a. is an alternative to income taxes and government borrowing.

Chapter 17/Money Growth and Inflation  509

b. taxes most those who hold the most money.

c. is the revenue created when the government prints money.

d. All of the above are correct.

ANSWER: d. All of the above are correct.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

93. Governments may prefer an inflation tax to some other kind of tax since the inflation tax

a. is easier to impose.

b. reduces inflation.

c. falls mainly on high-income individuals.

d. reduces the real cost of government expenditure.

ANSWER: a. is easier to impose.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

510  Chapter 17/Money Growth and Inflation

94. Printing money to finance government expenditures

a. causes the value of money to rise.

b. imposes a tax on everyone who holds money.

c. is the principle method by which the U.S. government finances its expenditures.

d. None of the above is correct.

ANSWER: b. imposes a tax on everyone who holds money.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

95. Which of the following is correct?

a. The Continental Congress used the inflation tax to help finance the American Revolution.

b. The inflation tax has been a principle source of revenue for the U.S. government.

c. There is no way a person can avoid the inflation tax.

d. None of the above is correct.

Chapter 17/Money Growth and Inflation  511

ANSWER: a. The Continental Congress used the inflation tax to help finance the American Revolution.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

96. Suppose that the United States unexpectedly decided to pay off its debt by printing new money. Which of the following would happen?

a. People who held money would feel poorer.

b. Prices would rise.

c. People who owned U.S.-government bonds would feel poorer.

d. All of the above are correct.

ANSWER: d. All of the above are correct.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

97. The claim that increases in the growth rate of the money supply increase nominal but not real interest rates is known as the

a. Friedman Effect,

512  Chapter 17/Money Growth and Inflation

b. Hume Effect.

c. Fisher Effect.

d. None of the above are correct.

ANSWER: c. Fisher Effect.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

98. The nominal interest rate is 3 percent and the inflation rate is 2 percent. What is the real interest rate?

a. 6 percent.

b. 5 percent.

c. 1 percent.

d. 3/2 percent.

ANSWER: c. 1 percent.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

Chapter 17/Money Growth and Inflation  513

99. The nominal interest rate is 6 percent and the real interest rate is 2 percent. What is the inflation rate?

a. 3 percent

b. 4 percent.

c. 8 percent.

d. 12 percent.

ANSWER: b. 4 percent.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

100. Greta puts money in a savings account at her bank earning 4.5 percent. One year later she takes her money out and notes that while her money was earning interest, prices rose 2.5 percent. Greta now has

a. 4.5 percent more money with which she can purchase 7 percent more goods.

b. 4.5 percent more money with which she can purchase 2 percent more goods.

c. 7 percent more money with which she can purchase 7 percent more goods.

514  Chapter 17/Money Growth and Inflation

d. 7 percent more money with which she can purchase 2 percent fewer goods.

ANSWER: b. 4.5 percent more money with which she can purchase 2 percent more goods.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

101. Arnold puts money into an account. One year later he checks and sees that he has 5 percent more dollars and that his money will buy 6 percent more goods.

a. The nominal interest rate was 11 percent and the inflation rate was 5 percent.

b. The nominal interest rate was 6 percent and the inflation rate was 5 percent.

c. The nominal interest rate was 5 percent and the inflation rate was –1 percent.

d. None of the above is correct.

ANSWER: c. The nominal interest rate was 5 percent and the inflation rate was –1 percent.

TYPE: M DIFFICULTY: 2 SECTION: 17.1

102. If a country had deflation,

Chapter 17/Money Growth and Inflation  515

a. the nominal interest rate would be greater than the real interest rate.

b. the real interest rate would be greater than the nominal interest rate.

c. the real interest rate would equal the nominal interest rate.

d. None of the above are necessarily correct.

ANSWER: b. the real interest rate would be greater than the nominal interest rate.

TYPE: M DIFFICULTY: 2 SECTION: 17.1

103. The Fisher effect says that

a. the nominal interest rate adjusts one for one with the inflation rate.

b. the growth rate of the money supply determines the inflation rate.

c. real variables are heavily influenced by the monetary system.

d. All of the above are correct.

ANSWER: a. the nominal interest rate adjusts one for one with the inflation rate.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

516  Chapter 17/Money Growth and Inflation

104. In the long run when money is neutral, which of the following increases when the money supply growth rate increases?

a. real output growth

b. real interest rates

c. nominal interest rates

d. the money supply divided by the price level

ANSWER: c. nominal interest rates

TYPE: M DIFFICULTY: 2 SECTION: 17.1

105. Which of the following can a country increase in the long run by increasing its money growth rate?

a. the nominal wage divided by the price level

b. real output

c. real interest rates

d. None of the above is correct.

Chapter 17/Money Growth and Inflation  517

ANSWER: d. None of the above is correct.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

106. If the money supply growth rate permanently increased from 5 percent to 25 percent, we would expect that inflation and nominal interest rates would both

a. increase by more than 20 percentage points.

b. increase by 20 percentage points.

c. increase, but by less than 20 percentage points.

d. None of the above is correct.

ANSWER: b. increase by 20 percentage points.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

107. If the money supply growth rate permanently increased from 3 percent to 13 percent, we would expect that

a. inflation would increase by 10 percent, and the nominal interest rate would increase by less than 10 percent.

518  Chapter 17/Money Growth and Inflation

b. the inflation rate would increase by less than 10 percent, and the nominal interest rate would increase by 10 percent.

c. both the inflation rate and the nominal interest rate would increase by 10 percent.

d. both the inflation rate and the nominal interest rate would increase by less than 10 percent.

ANSWER: c. both the inflation rate and the nominal interest rate would increase by 10 percent.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

108. Suppose that velocity and output are constant, and that the quantity theory and Fisher effect are both correct. If nominal interest rates are 6 percent and inflation is 2.5 percent, it follows that the

a. money supply growth rate is 2.5 percent.

b. real interest rate is 8.5 percent.

c. real interest rate is 2.5 percent.

d. money supply growth rate is 6 percent.

Chapter 17/Money Growth and Inflation  519

ANSWER: a. money supply growth rate is 2.5 percent.

TYPE: M DIFFICULTY: 2 SECTION: 17.1

109. Suppose that velocity and output are constant and that the quantity theory and Fisher effect are both correct. If nominal interest rates are 5 percent and money growth is 3 percent it follows that the real interest rate is

a. 2 percent and nominal wages are rising.

b. 2 percent and real wages are rising.

c. 8 percent and real wages are rising.

d. 8 percent and nominal wages are rising.

ANSWER: a. 2 percent and nominal wages are rising.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

110. An increase in the money supply growth rate increases

a. inflation, nominal interest rates, and real interest rates.

b. inflation and nominal interest rates, but does not change real interest rates.

520  Chapter 17/Money Growth and Inflation

c. inflation and real interest rates, but does not change nominal interest rates.

d. nominal and real interest rates, but does not change inflation.

ANSWER: b. inflation and nominal interest rates, but does not change real interest rates.

TYPE: M DIFFICULTY: 2 SECTION: 17.1

111. Inflation is positively correlated with

a. nominal wage growth and nominal interest rates.

b. neither nominal wage growth nor nominal interest rates.

c. nominal wage growth, but not nominal interest rates.

d. the nominal interest rate, but not nominal wage growth.

ANSWER: a. nominal wage growth and nominal interest rates.

TYPE: M DIFFICULTY: 1 SECTION: 17.1

112. If your salary increased by 6 percent and prices increased by 2 percent, your real wage rose by

Chapter 17/Money Growth and Inflation  521

a. 4 percent.

b. 4.8 percent

c. 5.8 percent

d. 8 percent

ANSWER: a. 4 percent.

TYPE: M DIFFICULTY: 1 SECTION: 17.2

113. The inflation tax

a. transfers wealth from the government to households.

b. is the increase in income taxes due to lack of indexation.

c. is a tax on everyone who holds money.

d. All of the above are correct.

ANSWER: c. is a tax on everyone who holds money.

TYPE: M DIFFICULTY: 1 SECTION: 17.2

522  Chapter 17/Money Growth and Inflation

114. People can avoid the inflation tax by

a. reducing savings.

b. not filing a tax return.

c. reducing cash holdings.

d. None of the above are correct.

ANSWER: c. reducing cash holdings.

TYPE: M DIFFICULTY: 1 SECTION: 17.2

115. The shoeleather cost of inflation refers to

a. the fall in real income associated with inflation.

b. the time spent searching for low prices when inflation rises.

c. the waste of resources used to maintain lower money holdings.

d. the increased cost to the government of printing more money.

ANSWER: c. the waste of resources used to maintain lower money holdings.

Chapter 17/Money Growth and Inflation  523

TYPE: M DIFFICULTY: 1 SECTION: 17.2

116. Shoeleather costs refer to

a. the cost of more frequent price changes induced by higher inflation.

b. the distortion in resource allocation created by distortions in relative prices due to inflation.

c. resources used to maintain lower money holdings when inflation is high.

d. the distortion in incentives created by inflation by taxes that do not adjust for inflation.

ANSWER: c. resources used to maintain lower money holdings when inflation is high.

TYPE: M DIFFICULTY: 1 SECTION: 17.2

117. When people use more resources to reduce their money holdings because of high inflation, this is an example of

a. inflation-induced tax distortions.

b. relative-price variability costs.

524  Chapter 17/Money Growth and Inflation

c. shoeleather costs.

d. menu costs.

ANSWER: c. shoeleather costs.

TYPE: M DIFFICULTY: 1 SECTION: 17.2

118. The cost of changing price tags and price listings is known as

a. inflation-induced tax distortions.

b. relative-price variability costs.

c. shoeleather costs.

d. menu costs.

ANSWER: d. menu costs.

TYPE: M DIFFICULTY: 1 SECTION: 17.2

119. Menu costs refers to

a. resources used by people to maintain lower money holdings when inflation is high.

Chapter 17/Money Growth and Inflation  525

b. the distortion in resource allocation created by uncertainty concerning relative price changes created by inflation.

c. the distortion in incentives created by inflation when taxes do not adjust for inflation.

d. the cost of more frequent price changes induced by higher inflation.

ANSWER: d. the cost of more frequent price changes induced by higher inflation.

TYPE: M DIFFICULTY: 1 SECTION: 17.2

120. Monica buys a bond for $750 and then sells it later for $950. Monica’s gain is a

a. net gain.

b. Fisher.

c. capital gain.

d. All of the above are correct.

ANSWER: c. capital gain.

TYPE: M DIFFICULTY: 1 SECTION: 17.2

526  Chapter 17/Money Growth and Inflation

TRUE/FALSE

1. U.S. prices rose at an average annual rate of about 5 percent over the last 60 years.

ANSWER: T TYPE: TF DIFFICULTY: 1 SECTION: 17.0

2. The United States has never had deflation.

ANSWER: F TYPE: TF DIFFICULTY: 1 SECTION: 17.0

3. In the 1990s, U.S. prices rose at about the same rate as in the 1970s.

ANSWER: F

TYPE: TF DIFFICULTY 1 SECTION 30.0

4.The quantity theory of money can explain hyperinflations but not moderate inflation.

ANSWER: F TYPE: TF DIFFICULTY: 1 SECTION: 17.1

5. If P represents the price of goods and services measured in money, then 1/P is the value of money measured in terms of goods and services.

ANSWER: T TYPE: TF DIFFICULTY: 1 SECTION: 17.1

Chapter 17/Money Growth and Inflation  527

6. When the value of money is on the vertical axis, an increase in the price level shifts money demand to the right.

ANSWER: F TYPE: TF DIFFICULTY: 1 SECTION: 17.1

7. The money supply curve shifts to the left when the Fed buys government bonds.

ANSWER: F TYPE: TF DIFFICULTY: 1 SECTION: 17.1

8. 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.

ANSWER: F TYPE: TF DIFFICULTY: 1 SECTION: 17.1

9. If the Fed increases the money supply, the equilibrium value of money decreases and the equilibrium price level must increase.

ANSWER: T TYPE: TF DIFFICULTY: 1 SECTION: 17.1

10. A rising price level eliminates an excess supply of money.

ANSWER: T TYPE: TF DIFFICULTY: 1 SECTION: 17.1