Questions for Money Growth and Inflation

Questions for Money Growth and Inflation:

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.

2. In which of the following cases was the inflation rate 10 percent over the last year?

a. / One year ago the price index had a value of 110 and now it has a value of 120.
b. / One year ago the price index had a value of 120 and now it has a value of 132.
c. / One year ago the price index had a value of 126 and now it has a value of 140.
d. / One year ago the price index had a value of 145 and now it has a value of 163.

3. If the price level increased from 120 to 126, then what was the inflation rate?

a. / 3 percent
b. / 5 percent
c. / 6 percent
d. / None of the above is correct.

4. If the price level increased from 120 to 150, then what was the inflation rate?

a. / 30 percent
b. / 25 percent
c. / 20 percent
d. / None of the above is correct.

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

a. / disinflation.
b. / deflation.
c. / a contraction.
d. / an inverted inflation.

6. Deflation

a. / increases incomes and enhances the ability of debtors to pay off their debts.
b. / increases incomes and reduces the ability of debtors to pay off their debts.
c. / decreases incomes and enhances the ability of debtors to pay off their debts.
d. / decreases incomes and reduces the ability of debtors to pay off their debts.

7. The term hyperinflation refers to

a. / the spread of inflation from one country to others.
b. / a decrease in the inflation rate.
c. / a period of very high inflation.
d. / inflation accompanied by a recession.

8. 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.

9. The quantity theory of money

a. / is a fairly recent addition to economic theory.
b. / can explain both moderate inflation and hyperinflation.
c. / argues that inflation is caused by too little money in the economy.
d. / All of the above are correct.

10. 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.

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

a. / increases, and so the value of money rises.
b. / increases, and so the value of money falls.
c. / decreases, and so the value of money rises.
d. / decreases, and so the value of money falls

12. If the CPI rises, the number of dollars needed to buy a representative basket of goods

a. / increases, and so the value of money rises.
b. / increases, and so the value of money falls.
c. / decreases, and so the value of money rises.
d. / decreases, and so the value of money falls

13. 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.

14. The supply of money is determined by

a. / the price level.
b. / the Treasury and Congressional Budget Office.
c. / the Federal Reserve System.
d. / the demand for money.

15. When we assume that the supply of money is a variable that the central bank controls, we

a. / must then assume as well that the demand for money is not influenced by the value of money.
b. / must then assume as well that the price level is unrelated to the value of money.
c. / are ignoring the fact that, in the real world, households are also suppliers of money.
d. / are ignoring the complications introduced by the role of the banking system.

16. 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.

17. 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.

18. Money demand depends on

a. / the price level and the interest rate.
b. / the price level but not the interest rate.
c. / the interest rate but not the price level.
d. / neither the price level nor the interest rate.

19. 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.

20. As the price level rises, 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.

21. 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.

22. 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.

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

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.

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

a. / dichotomous variables.
b. / nominal variables.
c. / classical variables.
d. / real variables.

25. Economic variables whose values are measured in goods are called

a. / dichotomous variables.
b. / nominal variables.
c. / classical variables.
d. / real variables.

26. The price level is a

a. / relative variable.
b. / dichotomous variable
c. / real variable.
d. / nominal variable.

27. 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 measured in constant dollars.
d. / None of the above is correct.

28. 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.

29. On a Sunday morning, Tom sold 300 cups of coffee for a total of $750.

a. / The $750 is a nominal variable. The 300 cups of coffee is a real variable.
b. / The $750 is a real variable. The 300 cups of coffee is a nominal variable.
c. / Both the $750 and the 300 cups of coffee are nominal variables.
d. / Both the $750 and the 300 cups of coffee are real variables.

30. The payments you make on your automobile loan are given in terms of dollars. As prices rise you notice you give up fewer goods to make your payments.

a. / The dollar amount you pay is a nominal value. The number of goods you give up is a real value.
b. / The dollar amount you pay is a real value. The number of goods you give up is a nominal value.
c. / Both the dollar amount you pay and the goods you give up are nominal values.
d. / Both the dollar amount you pay and the goods you give up are real values.

31. 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.

32. You find that to attract a sufficient number of workers you have to pay them more dollars. Given the price of your output you determine you are paying your workers more in goods than before. Which of the following has risen?

a. / The real and nominal value of the wages you pay.
b. / The real but not the nominal value of wages you pay.
c. / The nominal but not the real value of the wages you pay.
d. / Neither the real nor the nominal value of the wages you pay.

33. Suppose each good costs $5 per unit and Megan holds $40. What is the real value of the money she holds?

a. / $40. If the price of goods rises, to maintain the real value of her money holdings she need to hold more dollars.
b. / 8 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars.
c. / $40. If the price of goods rises, to maintain the real value of her money holdings she need to hold fewer dollars.
d. / 8 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold fewer dollars.

34. Interest rates adjusted for the effects of inflation

a. / and inflation are nominal variables.
b. / and inflation are real variables.
c. / are real variables; inflation is a nominal variable.
d. / are nominal variables; inflation is a real variable.

35. 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

a. / velocity concept.
b. / Fisher effect.
c. / classical dichotomy.
d. / Mankiw effect.

36. 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.

37. 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.

38. 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.

39. 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.

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

a. / nominal wages
b. / unemployment
c. / real GDP
d. / All of the above are correct.

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

a. / the price level
b. / real GDP
c. / nominal interest rates
d. / All of the above are correct.

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

a. / unemployment
b. / the price level
c. / nominal interest rates
d. / All of the above are correct.

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

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.

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

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

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

a. / the price level and nominal GDP
b. / the price level and real GDP
c. / only real GDP
d. / only the price level

46. 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.

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

a. / increase employment.
b. / increase the price level.
c. / increase the incentive to save.
d. / not increase any of the above.

48. Most economists believe the principle of monetary neutrality is