Question 1

Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, then

Accepted Answer

A)  both the nominal and the real interest rate rise.
B)  neither the nominal nor the real interest rate rise.
C)  the nominal interest rate rises, but the real interest rate does not.
D)  the real interest rate rises, but the nominal interest rate does not.E) B) and C)
F) A) and B)

Question 2

When inflation rises, the nominal interest rate

Accepted Answer

A)  rises, and people desire to hold more money.
B)  rises, and people desire to hold less money.
C)  falls, and people desire to hold more money.
D)  falls, and people desire to hold less moneyE) A) and C)
F) A) and B)

Question 3

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

Accepted Answer

A)  nominal interest rates.
B)  real interest rates.
C)  the price level.
D)  the money supply.E) B) and C)
F) None of the above

Question 4

During the 1970's, U.S. inflation averaged 7% each year and real GDP increased. Holding velocity constant and using the quantity equation, we conclude that

Accepted Answer

A)  money growth must have been greater than the growth of real income.
B)  money growth must have been less than the growth of real income.
C)  prices fell during the 1970's.
D)  output fell during the 1970's.E) B) and D)
F) C) and D)

Question 5

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

Accepted Answer

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.E) A) and B)
F) A) and C)

Question 6

Your spouse complains that her 6% raise this year will not keep up with the increase in prices. In other words, she is unable to buy the same basket of goods with her 6% raise. Therefore, she believes that her

Accepted Answer

A)  nominal income and real income increased.
B)  nominal income increased, but their real income decreased.
C)  nominal income and real income decreased.
D)  nominal income decreased, but their real income increased.E) A) and D)
F) B) and C)

Question 7

Velocity is computed as the

Accepted Answer

A)  price level times real GDP divided by the money supply.
B)  price level times the money supply divided by real GDP.
C)  real GDP times the money supply divided by the price level.
D)  real GDP times the money supply divided by the rate at which money changes hands.E) A) and D)
F) All of the above

Question 8

Open-market purchases by the Fed make the money supply

Accepted Answer

A)  increase, which makes the value of money increase.
B)  increase, which makes the value of money decrease.
C)  decrease, which makes the value of money decrease.
D)  decrease, which makes the value of money increase.E) C) and D)
F) A) and B)

Question 9

Which of the following combinations of nominal interest rates and inflation implies a real interest rate of 7 percent?

Accepted Answer

A)  a nominal interest rate of 5 percent and an inflation rate of 4 percent.
B)  a nominal interest rate of 4 percent and an inflation rate of 3 percent.
C)  a nominal interest rate of 8 percent and an inflation rate of 1 percent.
D)  a nominal interest rate of 14 percent and an inflation rate of 2 percent.E) A) and B)
F) B) and D)

Question 10

If inflation is higher than what was expected,

Accepted Answer

A)  creditors receive a lower real interest rate than they had anticipated.
B)  creditors pay a lower real interest rate than they had anticipated.
C)  debtors receive a higher real interest rate than they had anticipated.
D)  debtors pay a higher real interest rate than they had anticipated.E) B) and C)
F) B) and D)

Question 11

When the money supply and the price level in countries that experienced hyperinflation are plotted on a graph against time, we see that

Accepted Answer

A)  the price level grew at about the same rate as the money supply.
B)  the price level grew at a much faster rate than the money supply.
C)  the price level grew at a much slower rate than the money supply.
D)  the inflation rate and the money supply growth rate do not appear to be related.E) A) and B)
F) A) and C)

Question 12

Walter puts money in a savings account at his bank earning 3.5 percent. One year later he takes his money out and notes that while his money was earning interest, prices rose 1.5 percent. Walter earned a nominal interest rate of

Accepted Answer

A)  3.5 percent and a real interest rate of 5 percent.
B)  3.5 percent and a real interest rate of 2 percent.
C)  5 percent and a real interest rate of 3.5 percent
D)  5 percent and a real interest rate of 2 percentE) All of the above
F) B) and D)

Question 13

If people had been expecting prices to rise but in fact prices fell, then who among the following would benefit?

Accepted Answer

A)  lenders and people holding a lot of currency
B)  lenders but not people holding a lot of currency
C)  people holding a lot of currency but not lenders
D)  neither lenders nor people holding a lot of currencyE) All of the above
F) B) and D)

Question 14

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

Accepted Answer

A)  decrease, which encourages savings.
B)  decrease, which discourages savings.
C)  increase, which encourages savings.
D)  increase, which discourages savings.E) A) and B)
F) A) and C)

Question 15

If the price level increased from 120 to 144, then what was the inflation rate?

Accepted Answer

A)  24 percent.
B)  25 percent.
C)  20 percent.
D)  17 percent.E) A) and B)
F) None of the above

Question 16

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 _____.

Accepted Answer

The answer of During hyperinflations, people desire to hold less...

Question 17

The theory that most economists rely on to explain inflation is called the __________.

Accepted Answer

The answer of The theory that most economists rely on...

Question 18

You put money into an account that earns an 8 percent nominal interest rate. The inflation rate is 5 percent, and your marginal tax rate is 10 percent. What is your after-tax real rate of interest?

Accepted Answer

A)  2.2 percent
B)  2.7 percent
C)  11.7 percent
D)  7.7 percentE) All of the above
F) A) and B)

Question 19

According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also

Accepted Answer

A)  either a rise in output or a rise in velocity.
B)  either a rise in output or a fall in velocity.
C)  either a fall in output or a rise in velocity.
D)  either a fall in output or a fall in velocity.E) None of the above
F) All of the above

Question 20

The price level is determined by the supply of, and demand for, money.

Accepted Answer

A) True 
 B)False

Exam 30: Money Growth and Inflation

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

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

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If inflation is higher than what was expected,

Correct AnswerverifiedShow Answer

According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also

Correct AnswerverifiedShow Answer

The theory that most economists rely on to explain inflation is called the __________.

Correct AnswerverifiedShow Answer

When the money supply and the price level in countries that experienced hyperinflation are plotted on a graph against time, we see that

Correct AnswerverifiedShow Answer

Which of the following combinations of nominal interest rates and inflation implies a real interest rate of 7 percent?

Correct AnswerverifiedShow Answer

If the price level increased from 120 to 144, then what was the inflation rate?

Correct AnswerverifiedShow Answer

During the 1970's, U.S. inflation averaged 7% each year and real GDP increased. Holding velocity constant and using the quantity equation, we conclude that

Correct AnswerverifiedShow Answer

Walter puts money in a savings account at his bank earning 3.5 percent. One year later he takes his money out and notes that while his money was earning interest, prices rose 1.5 percent. Walter earned a nominal interest rate of

Correct AnswerverifiedShow Answer

Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, then

Correct AnswerverifiedShow Answer

If people had been expecting prices to rise but in fact prices fell, then who among the following would benefit?

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You put money into an account that earns an 8 percent nominal interest rate. The inflation rate is 5 percent, and your marginal tax rate is 10 percent. What is your after-tax real rate of interest?

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When inflation rises, the nominal interest rate

Correct AnswerverifiedShow Answer

Open-market purchases by the Fed make the money supply

Correct AnswerverifiedShow Answer

Your spouse complains that her 6% raise this year will not keep up with the increase in prices. In other words, she is unable to buy the same basket of goods with her 6% raise. Therefore, she believes that her

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Velocity is computed as the

Correct AnswerverifiedShow Answer

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 _____.

Correct AnswerverifiedShow Answer

The price level is determined by the supply of, and demand for, money.

Correct AnswerverifiedShow Answer

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