Question 1

The graph shown displays various price and output levels in an economy.  What does the "Y" on the x-axis stand for?

Accepted Answer

A)   Full employment level of output
B)   Current level of GDP
C)   Observed level of output
D)   Future target goal for outputE) None of the above
F) All of the above

Question 2

If an economy produces 3,000 units of output when the price level is $2 and the velocity of money is 12, what is the money supply?

Accepted Answer

A)   $1,000
B)   $500
C)   $2,000
D)   $4,000E) C) and D)
F) None of the above

Question 3

Which of the following is not associated with predictable inflation?

Accepted Answer

A)   Menu costs
B)   Shoe-leather costs
C)   Tax distortions
D)   Labor costsE) B) and C)
F) C) and D)

Question 4

Tax distortion refers to the cost of inflation that comes from:

Accepted Answer

A)   the money, time, and opportunity used to change prices to keep pace with inflation.
B)   the time, money, and effort one has to spend managing cash in the face of inflation.
C)   the higher taxes one must pay when earning a greater dollar amount, even though real purchasing power hasn't changed.
D)   the labor costs associated with inflation.E) B) and C)
F) None of the above

Question 5

If the nominal interest rate is higher than the real interest rate, then inflation must be:

Accepted Answer

A)   zero.
B)   higher than the nominal rate of interest.
C)   positive.
D)   negative.E) All of the above
F) B) and D)

Question 6

Applying contractionary monetary policy when the inflation rate is near zero could cause:

Accepted Answer

A)   inflation.
B)   stagflation.
C)   deflation.
D)   Monetary policy does not affect prices when the inflation rate is near zero.E) A) and D)
F) A) and B)

Question 7

During a bout of hyperinflation, suppose the country of Weimar announces it will be rolling out a new currency, the Weimar Mark, which is worth 1 million Marks. Neutrality of money suggests this change will:

Accepted Answer

A)   not influence prices in the overall economy.
B)   dramatically decrease real wealth.
C)   only change core inflation.
D)   None of these are true.E) None of the above
F) A) and B)

Question 8

The graph shown displays various price and output levels in an economy. 1 B)  E 2 C)  E 3 D)  E 4" class="answers-bank-image d-inline" rel="preload" > Which point on the graph would represent a recession?

Accepted Answer

A)   E 1
B)   E 2
C)   E 3
D)   E 4E) B) and D)
F) B) and C)

Question 9

The classical theory of inflation illustrates the relationship between which elements? I. The money supply
II)  Spending
III)  Savings
IV)  Output
V, Investment
VI)  The overall price level

Accepted Answer

A)   I, IV, and VI
B)   II, III, and VI
C)   I, IV, and V
D)   II, III, and VE) A) and B)
F) A) and C)

Question 10

The quantity theory of money explicitly states that:

Accepted Answer

A)   the value of money is determined by the overall quantity of money in existence.
B)   real GDP is determined by the money supply.
C)   the money supply is determined by the price level.
D)   there is no relationship between the value of money and the quantity of money in existence.E) B) and C)
F) A) and D)

Question 11

Tax distortions happen because tax laws only take _______ into consideration.

Accepted Answer

A)   nominal income
B)   real income
C)   nominal output
D)   real outputE) All of the above
F) A) and B)

Question 12

If an economy produces 2,500 units of output when the money supply is $500 and the velocity of money is 10, what is the price level?

Accepted Answer

A)   $1
B)   $5
C)   $2
D)   $10E) C) and D)
F) All of the above

Question 13

According to the quantity theory of money, the Fed could combat inflation by:

Accepted Answer

A)   decreasing the supply of money.
B)   increasing the supply of money.
C)   reducing taxes.
D)   increasing taxes.E) A) and C)
F) B) and C)

Question 14

Deflation is a problem because it:

Accepted Answer

A)   increases the value of debt, making it harder to pay it back.
B)   increases the time it takes for monetary policy to be effective.
C)   increases shoe-leather costs.
D)   reduces the effectiveness of fiscal policy in stimulating the economy.E) B) and D)
F) B) and C)

Question 15

According to the quantity theory of money, an increase in the money supply leads to a(n)  _______ in prices, as _______ dollar bills are spent on _______ goods and services.

Accepted Answer

A)   increase; more; the same number of
B)   increase; the same number of; more
C)   decrease; more; the same number of
D)   decrease; the same number of; moreE) A) and D)
F) All of the above

Question 16

The quantity theory of money relies on which variable to remain constant?

Accepted Answer

A)   The velocity of money
B)   The money supply
C)   The price level
D)   UnemploymentE) A) and C)
F) B) and C)

Question 17

If the nominal interest rate is higher than the inflation rate, the value of your savings:

Accepted Answer

A)   will increase.
B)   will decrease.
C)   should remain about the same.
D)   cannot be determined without knowing its starting balance.E) A) and C)
F) All of the above

Question 18

Which of these is not a reason why economies should aim for 2 to 3 percent inflation?

Accepted Answer

A)   It helps firms to more easily adjust real wages
B)   It allows a margin of error for those deciding on the money supply
C)   It allows the Fed to more easily engage in expansionary monetary policy
D)   It increases the real wage of workersE) None of the above
F) A) and C)

Question 19

Suppose the annual nominal interest rate is 7 percent and the inflation rate is 7 percent. If you deposit $1,000, at the end of the year:

Accepted Answer

A)   your purchasing power will have increased.
B)   your purchasing power will have stayed the same.
C)   your savings will have a nominal decrease.
D)   your purchasing power will have decreased.E) B) and D)
F) A) and B)

Question 20

If an economy produces 1,000 units of output when the price level is $1 and the money supply is $500, what is the velocity of money?

Accepted Answer

A)   2
B)   500
C)   50
D)   5E) A) and C)
F) A) and B)

Exam 16: Inflation

Which of these is not a reason why economies should aim for 2 to 3 percent inflation?

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Tax distortions happen because tax laws only take _______ into consideration.

Correct AnswerverifiedShow Answer

The graph shown displays various price and output levels in an economy. What does the "Y" on the x-axis stand for?

Correct AnswerverifiedShow Answer

Which of the following is not associated with predictable inflation?

Correct AnswerverifiedShow Answer

Applying contractionary monetary policy when the inflation rate is near zero could cause:

Correct AnswerverifiedShow Answer

If an economy produces 1,000 units of output when the price level is $1 and the money supply is $500, what is the velocity of money?

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Suppose the annual nominal interest rate is 7 percent and the inflation rate is 7 percent. If you deposit $1,000, at the end of the year:

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The graph shown displays various price and output levels in an economy. Which point on the graph would represent a recession?

Correct AnswerverifiedShow Answer

The quantity theory of money relies on which variable to remain constant?

Correct AnswerverifiedShow Answer

Tax distortion refers to the cost of inflation that comes from:

Correct AnswerverifiedShow Answer

According to the quantity theory of money, an increase in the money supply leads to a(n) _______ in prices, as _______ dollar bills are spent on _______ goods and services.

Correct AnswerverifiedShow Answer

The classical theory of inflation illustrates the relationship between which elements? I. The money supply II) Spending III) Savings IV) Output V, Investment VI) The overall price level

Correct AnswerverifiedShow Answer

If an economy produces 2,500 units of output when the money supply is $500 and the velocity of money is 10, what is the price level?

Correct AnswerverifiedShow Answer

During a bout of hyperinflation, suppose the country of Weimar announces it will be rolling out a new currency, the Weimar Mark, which is worth 1 million Marks. Neutrality of money suggests this change will:

Correct AnswerverifiedShow Answer

Deflation is a problem because it:

Correct AnswerverifiedShow Answer

If an economy produces 3,000 units of output when the price level is $2 and the velocity of money is 12, what is the money supply?

Correct AnswerverifiedShow Answer

If the nominal interest rate is higher than the real interest rate, then inflation must be:

Correct AnswerverifiedShow Answer

If the nominal interest rate is higher than the inflation rate, the value of your savings:

Correct AnswerverifiedShow Answer

According to the quantity theory of money, the Fed could combat inflation by:

Correct AnswerverifiedShow Answer

The quantity theory of money explicitly states that:

Correct AnswerverifiedShow Answer

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According to the quantity theory of money, an increase in the money supply leads to a(n) ___ in prices, as _ dollar bills are spent on _____ goods and services.

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