SECTION I SHORT-ANSWER QUESTIONS

Question 1

Suppose that velocity and output are constant and that the quantity

theory and the Fisher effect both hold. What happens to inflation, real

interest rates, and nominal interest rates when the money supply

growth rate increases from 5 percent to 10 percent?

Question 2

The idea that firms incur actual costs when they change prices is

known as _____. Firms in countries with lower inflation rates will

change price _____ frequently compared to those countries where

inflation is higher

Question 3

Does an increase in the inflation rate increase or decrease the amount of

money people choose to hold at any given price level? What would an

increase in the inflation rate do to money demand? What would this change

in money demand do to the price level?

Question 4

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 _____.

Question 5

Suppose the Fed sells government bonds. Use a graph of the money

market to show what this does to the value of money.

Question 6
Using separate graphs, demonstrate what happens to the money supply,

money demand, the value of money, and the price level if:

a. the Fed increases the money supply.

b. people decide to demand less money at each value of money.

c. the increased ATM accessibility reduces the quantity of money

demanded at each value of money.

Question 7

If the inflation rate was 10%, and the tax rate was 25%, and you deposited

money in a bank account that paid 14%, what is after tax real interest rate?

Question 8

If velocity is 6, real output is 10,000, and M is 20,000 what would the price

level be? If M increases to 25,000 but V and Y do not change, what

happens to the price level? Are the change in the money supply and the

change in the price level proportional?

Question 9

Inflation distorts relative prices. What does this mean and why does it

impose a cost on society?

Question 10

List and define any six of the costs of high inflation.

SECTION II MULTIPLE CHOICE QUESTIONS

Question 1 When prices are falling, economists say that there is

a. disinflation.

b. deflation.

c. a contraction.
d. an inverted inflation.

Question 2 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.

Question 3 If the price index in some country were falling over time,

economists would say that country had

a. Disinflation.

b. A contraction.

c. Deflation.

d. An inverted inflation.

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

a. shifts rightward, causing the price level to rise.

b. shifts rightward, causing the price level to fall.

c. shifts leftward, causing the price level to rise.

d. shifts leftward, causing the price level to fall.

Question 5 Which of the following is consistent with the idea that high

money supply growth leads to high inflation?

that.

b. The quantity theory and data from classic hyperinflations that.

c. Evidence from classic hyperinflations that.

d. Neither the quantity theory nor evidence from classic hyperinflations

that.

Question 6 Which of the following is correct?

a. The classical dichotomy separates real and nominal variables.

b. Monetary neutrality is the proposition that changes in the money

supply do not change real variables.

c. When studying long-run changes in the economy, the neutrality of

money offers a good description of how the world works.

d. All of the above are correct.

Question 7 If velocity = 5, the price level = 1.5, and the real value of

output is 2,500, then the quantity of money is

a. 333.33.

b. 750.00.

c. 1,050.00.

d. 8,333.33.

Question 8 The money supply in Muckland is $100 billion. Nominal

GDP is $800 billion and real GDP is $400 billion. What are the

price level and velocity in Muckland?

a. The price level and velocity are both 8.

b. The price level and velocity are both 4.

c. The price level is 4 and velocity is 8.

Question 9 Which of the following is correct?

a. If the Fed purchases bonds in the open market, then the money

supply curve shifts right. A change in the price level does not shift

the money supply curve.

b. If the Fed sells bonds in the open market, then the money supply

curve shifts right. A change in the price level does not shift the

money supply curve.

c. If the Fed purchases bonds, then the money supply curve shifts right.

An increase in the price level shifts the money supply curve right.

d. If the Fed sells bonds, then the money supply curve shifts right. A

decrease in the price level shifts the money supply curve right.

Question 10 Which of the following is not implied by the quantity

equation?

a. If velocity is stable, an increase in the money

supply creates a proportional increase in nominal

output.

b. If velocity is stable and money is neutral, an

increase in the money supply creates a

proportional increase in the price level.

c. With constant money supply and output, an

increase in velocity creates an increase in the

price level.

d. With constant money supply and velocity, an

increase in output creates a proportional increase

in the price level.

Question 11 Which of the following is correct?

then the money supply curve shifts right. A

change in the price level does not shift the money

supply curve.

b. If the Fed sells bonds in the open market, then

the money supply curve shifts right. A change in

the price level does not shift the money supply

curve.

c. If the Fed purchases bonds, then the money

supply curve shifts right. An increase in the price

level shifts the money supply curve right.

d. If the Fed sells bonds, then the money supply

curve shifts right. A decrease in the price level

shifts the money supply curve right.

Question 12 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

Question 13 The nominal interest rate is 4.5 percent and the inflation

rate is 0.9 percent. What is the real interest rate?

a. 5.4 percent

b. 5 percent

c. 4.1 percent

d. 3.6 percent

Question 14 Which of the following helps to explain why the inflation

fallacy is a fallacy?
 a. Increases in the price level can be created by increases in money

demand.

b. Nominal incomes tend to rise at the same time that the price level is

rising.

c. As the price level rises, the value of a dollar falls.

d. Inflation only changes nominal variables.

Question 15 Shoeleather costs arise when higher inflation rates induce

people to

a. spend more time looking for bargains.

b. spend less time looking for bargains.

c. hold more money.

d. hold less money.

Question 16 People go to the bank more frequently to reduce currency

holdings when inflation is high. The sacrifice of time and

convenience that is involved in doing that is referred to as

a. inflation-induced tax distortion.

b. relative-price-variability cost.

c. shoeleather cost.

d. menu cost.

Question 17 The real interest rate is 8 percent and the nominal interest

rate is 10.5 percent. Is there inflation or deflation? What is the

inflation or deflation rate?

a. deflation; 2.5 percent

b. deflation; 20.5 percent

c. inflation; 2.5 percent

Question 18 Menu costs refers to

a. resources used by people to maintain lower

money holdings when inflation is high.

b. resources used to price shop during times of

high inflation.

c. the distortion in incentives created by inflation

when taxes do not adjust for inflation.

d. the cost of more frequent price changes induced

by higher inflation.

Question 19 Relative-price variability

a. rises with inflation, leading to an improved

allocation of resources.

b. rises with inflation, leading to a misallocation of

resources.

c. falls with inflation, leading to an improved

allocation of resources.

d. falls with inflation, leading to a misallocation of

resources.

Question 20 When inflation rises, people

a. make less frequent trips to the bank and firms

make less frequent price changes.

b. make less frequent trips to the bank while firms

make more frequent price changes.

c. make more frequent trips to the bank while firms

make less frequent price changes.

d. make more frequent trips to the bank and firms

make more frequent price changes.