Question 1

The price level rises if either

Accepted Answer

A)   money demand or money supply shifts rightward.
B)   money demand shifts rightward or money supply shifts leftward.
C)   money demand shifts leftward or money supply shifts rightward.
D)   money demand or money supply shifts leftward.E) None of the above
F) A) and B)

Question 2

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

Question 3

Suppose the nominal interest rate is 5 percent, the tax rate on interest income is 30 percent, and the after-tax real interest rate is 2.1percent. Then the inflation rate is 2 percent.

Accepted Answer

A) True 
 B)False

Question 4

If the price level last year was 180 and this year it is 176, then

Accepted Answer

A)   there was inflation of 2.3 percent.
B)   there was inflation of 4.0 percent.
C)   there was deflation of 2.2 percent.
D)   there was deflation of 4.0 percent.E) None of the above
F) All of the above

Question 5

If the Fed conducts open market sales, the equilibrium value of money decreases and the equilibrium price level increases.

Accepted Answer

A) True 
 B)False

Question 6

Inflation induces people to spend more resources maintaining lower money holdings. The costs of doing this are called shoeleather costs.

Accepted Answer

A) True 
 B)False

Question 7

You put money into an account and earn a real interest rate of 5 percent. Inflation is 2 percent, and your marginal tax rate is 35 percent. What is your after-tax real rate of interest?

Accepted Answer

A)   5.25 percent
B)   3.05 percent
C)   2.55 percent
D)   1.25 percentE) B) and C)
F) None of the above

Question 8

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 an

Accepted Answer

A)   excess demand for money, so the price level will rise.
B)   excess demand for money, so the price level will fall.
C)   excess supply of money, so the price level will rise.
D)   excess supply of money, so the price level will fall.E) A) and B)
F) A) and C)

Question 9

Over the past 80 years, the overall price level in the U.S. has experienced a(n)

Accepted Answer

A)   4-fold increase.
B)   10-fold increase.
C)   13-fold increase.
D)   17-fold increase.E) B) and D)
F) All of the above

Question 10

You observe people going to the bank more frequently. Other things the same this could result from

Accepted Answer

A)   an increase in inflation which increases money demand.
B)   an increase in inflation which reduces money demand.
C)   a decrease in inflation which increases money demand.
D)   a decrease in inflation which reduces money demand.E) None of the above
F) B) and C)

Question 11

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) A) and B)
F) All of the above

Question 12

Wealth is redistributed from debtors to creditors when inflation is

Accepted Answer

A)   high, whether it is expected or not.
B)   low, whether it is expected or not.
C)   unexpectedly high.
D)   unexpectedly low.E) None of the above
F) B) and D)

Question 13

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

Accepted Answer

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 levelE) A) and B)
F) A) and D)

Question 14

If the nominal interest rate is 8 percent and expected inflation is 2.5 percent, then what is the real interest rate?

Accepted Answer

A)   10.5 percent
B)   20 percent
C)   5.5 percent
D)   3.2 percentE) None of the above
F) C) and D)

Question 15

The data on hyperinflation show a clear link between the quantity of money and

Accepted Answer

A)   the price level.
B)   growth rate of GDP.
C)   unemployment rate.
D)   velocity.E) A) and C)
F) B) and D)

Question 16

Given a nominal interest rate of 8 percent, in which of the following cases would you earn the highest after-tax real interest rate?

Accepted Answer

A)   Inflation is 5 percent; the tax rate is 40 percent.
B)   Inflation is 4 percent; the tax rate is 30 percent.
C)   Inflation is 3 percent; the tax rate is 45 percent.
D)   Inflation is 2 percent; the tax rate is 50 percent.E) A) and C)
F) All of the above

Question 17

The inflation tax

Accepted Answer

A)   transfers wealth from the government to households.
B)   is the increase in real income taxes due to lack of indexation in income tax rules.
C)   is a tax on everyone who holds money.
D)   All of the above are correct.E) B) and C)
F) B) and D)

Question 18

In early 2008, the central bank of Zimbabwe announced the inflation rate in that country had reached

Accepted Answer

A)   60 percent.
B)   80 percent.
C)   220 percent.
D)   24,000 percent.E) None of the above
F) B) and C)

Question 19

The nominal interest rate is 5 percent and the inflation rate is 2 percent. What is the real interest rate?

Accepted Answer

A)   7 percent
B)   2.5 percent
C)   10 percent
D)   3 percentE) None of the above
F) A) and B)

Question 20

If money demand shifts right, the price level falls.

Accepted Answer

A) True 
 B)False

Exam 30: Money Growth and Inflation

The inflation tax

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If the Fed conducts open market sales, the equilibrium value of money decreases and the equilibrium price level increases.

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

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You observe people going to the bank more frequently. Other things the same this could result from

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Wealth is redistributed from debtors to creditors when inflation is

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Suppose the nominal interest rate is 5 percent, the tax rate on interest income is 30 percent, and the after-tax real interest rate is 2.1percent. Then the inflation rate is 2 percent.

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

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The price level rises if either

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Over the past 80 years, the overall price level in the U.S. has experienced a(n)

Correct AnswerverifiedShow Answer

The nominal interest rate is 5 percent and the inflation rate is 2 percent. What is the real interest rate?

Correct AnswerverifiedShow Answer

Inflation induces people to spend more resources maintaining lower money holdings. The costs of doing this are called shoeleather costs.

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The data on hyperinflation show a clear link between the quantity of money and

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Given a nominal interest rate of 8 percent, in which of the following cases would you earn the highest after-tax real interest rate?

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If money demand shifts right, the price level falls.

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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 an

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

If the price level last year was 180 and this year it is 176, then

Correct AnswerverifiedShow Answer

If the nominal interest rate is 8 percent and expected inflation is 2.5 percent, then what is the real interest rate?

Correct AnswerverifiedShow Answer

In early 2008, the central bank of Zimbabwe announced the inflation rate in that country had reached

Correct AnswerverifiedShow Answer

You put money into an account and earn a real interest rate of 5 percent. Inflation is 2 percent, and your marginal tax rate is 35 percent. What is your after-tax real rate of interest?

Correct AnswerverifiedShow Answer

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