Question 1

Given a nominal interest rate of 6 percent, in which of the following cases would you earn the highest after-tax real rate of interest?

Accepted Answer

A)   Inflation is 3 percent; the tax rate is 25 percent.
B)   Inflation is 1 percent; the tax rate is 50 percent.
C)   Inflation is 1 percent; the tax rate is 55 percent.
D)   Inflation is 4 percent; the tax rate is 10 percent.

Question 2

Hyperinflations are associated with governments printing money to finance expenditures.

Accepted Answer

A) True 
 B)False

Question 3

Based on the quantity equation, if M = 100, V = 3, and Y = 150, then P =

Accepted Answer

A)   1.
B)   1.5.
C)   2.
D)   4.5.

Question 4

When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve buys bonds, then the money supply curve

Accepted Answer

A)   shifts rightward, causing the value of money measured in terms of goods and services to rise.
B)   shifts rightward, causing the value of money measured in terms of goods and services to fall.
C)   shifts leftward, causing the value of money measured in terms of goods and services to rise.
D)   shifts leftward, causing the value of money measured in terms of goods and services to fall.

Question 5

Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 32 percent. Sam's after­tax real rate of interest

Accepted Answer

A)   will be 1.2 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent.
B)   will be 1.2 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent.
C)   will be 1.7 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent.
D)   will be 1.7 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent.

Question 6

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 tha...

Question 7

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

Accepted Answer

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.

Question 8

Most economists believe that monetary neutrality provides

Accepted Answer

A)   a good description of both the long run and the short run.
B)   a good description of neither the long run nor the short run.
C)   a good description of the short run, but not the long run.
D)   a good description of the long run, but not the short run.

Question 9

The classical dichotomy says that two groups of variables are affected by different forces. What are these two groups of variables?

Accepted Answer

nominal va...

Question 10

According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then

Accepted Answer

A)   both the price level and nominal GDP would rise by 5 percent.
B)   the price level would rise by 5 percent and nominal GDP would be unchanged.
C)   the price level would be unchanged and nominal GDP would rise by 5 percent.
D)   both the price level and nominal GDP would be unchanged.

Question 11

When the money market is drawn with the value of money on the vertical axis, if the money supply rises

Accepted Answer

A)   the price level and the value of money rise.
B)   the price level rises and the value of money falls.
C)   the price level falls and the value of money rises.
D)   the price level and the value of money fall.

Question 12

Dollar prices and relative prices are both nominal variables.

Accepted Answer

A) True 
 B)False

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 currency

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

If the Fed were to unexpectedly increase the money supply, creditors would gain at the expense of debtors.

Accepted Answer

A) True 
 B)False

Question 16

If the economy unexpectedly went from inflation to deflation,

Accepted Answer

A)   both debtors and creditors would have reduced real wealth.
B)   both debtors and creditors would have increased real wealth.
C)   debtors would gain at the expense of creditors.
D)   creditors would gain at the expense of debtors.

Question 17

Suppose that monetary neutrality holds. Of the following variables, which ones do not change when the money supply increases?
a. real interest rates
b. inflation
c. the price level
d. real output
e. real wages
f. nominal wages

Accepted Answer

a. real interest rat...

Question 18

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.

Question 19

Wealth is redistributed from creditors to debtors when inflation was expected to be

Accepted Answer

A)   high and it turns out to be high.
B)   low and it turns out to be low.
C)   low and it turns out to be high.
D)   high and it turns out to be low.

Question 20

Most economists believe the principle of monetary neutrality is

Accepted Answer

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.

Exam 22: Money Growth and Inflation

When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve buys bonds, then the money supply curve

Correct AnswerverifiedShow Answer

The classical dichotomy says that two groups of variables are affected by different forces. What are these two groups of variables?

Correct Answerverifiednominal va...View AnswerShow Answer

Most economists believe that monetary neutrality provides

Correct AnswerverifiedShow Answer

Dollar prices and relative prices are both nominal variables.

Correct AnswerverifiedShow Answer

Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 32 percent. Sam's after­tax real rate of interest

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Based on the quantity equation, if M = 100, V = 3, and Y = 150, then P =

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Wealth is redistributed from creditors to debtors when inflation was expected to be

Correct AnswerverifiedShow Answer

Hyperinflations are associated with governments printing money to finance expenditures.

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, if the money supply rises

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedThe inflation tax refers to the fact tha...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Most economists believe the principle of monetary neutrality is

Correct AnswerverifiedShow Answer

If the economy unexpectedly went from inflation to deflation,

Correct AnswerverifiedShow Answer

If the Fed were to unexpectedly increase the money supply, creditors would gain at the expense of debtors.

Correct AnswerverifiedShow Answer

Given a nominal interest rate of 6 percent, in which of the following cases would you earn the highest after-tax real rate of interest?

Correct AnswerverifiedShow Answer

Suppose that monetary neutrality holds. Of the following variables, which ones do not change when the money supply increases? a. real interest rates b. inflation c. the price level d. real output e. real wages f. nominal wages

Correct Answerverifieda. real interest rat...View AnswerShow Answer

According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then

Correct AnswerverifiedShow Answer

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nominal va...
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Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 32 percent. Sam's aftertax real rate of interest

Correct Answer
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The inflation tax refers to the fact tha...
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a. real interest rat...
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