Chapter 22
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____ 1.
Over the past 70 years, prices in the U.S. have risen on average about
a. 2 percent per year.
b. 4 percent per year.
c. 6 percent per year.
d. 8 percent per year.
____ 2.
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.
____ 3.
When prices are falling, economists say that there is
a. disinflation.
b. deflation.
c. a contraction.
d. an inverted inflation.
____ 4.
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.
____ 5.
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.
____ 6.
There was hyperinflation during the
a. period 1880-1896 in the United States.
b. 1970s in the United States.
c. early part of the current century in Zimbabwe.
d. All of the above are correct.
____ 7.
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.
____ 8.
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.
____ 9.
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
____ 10.
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
____ 11.
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.
____ 12.
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.
____ 13.
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.
____ 14.
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.
____ 15.
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.
____ 16.
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.
____ 17.
In the 1970s, in response to recessions caused by an increase in the price of oil, the central
banks in many countries increased their money supplies. The central banks might have done this by
a. selling bonds on the open market, which would have raised the value of money.
b. purchasing bonds on the open market, which would have raised the value of money.
c. selling bonds on the open market, which would have raised the value of money.
d. purchasing bonds on the open market, which would have lowered the value of money.
____ 18.
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.
____ 19.
Economic variables whose values are measured in monetary units are called
a. dichotomous variables.
b. nominal variables.
c. classical variables.
d. real variables.
____ 20.
Economic variables whose values are measured in goods are called
a. dichotomous variables.
b. nominal variables.
c. classical variables.
d. real variables.
____ 21.
The price level is a
a. relative variable.
b. dichotomous variable
c. real variable.
d. nominal variable.
____ 22.
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.
____ 23.
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.
____ 24.
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.
____ 25.
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.
____ 26.
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.
____ 27.
The classical dichotomy argues that changes in the money supply
a. affect both nominal and real variables.
b. affect neither nominal nor real variables.
c. affect nominal variables, but not real variables.
d. do not affect nominal variables, but do affect real variables.
____ 28.
Over time both real GDP and the price level have trended upward. Which of these trends
would the classical dichotomy say could be explained by an upward trend in the money supply?
a. both the upward trend in real GDP and the upward trend in the price level
b. the upward trend in real GDP but not the upward trend in the price level
c. the upward trend in the price level but not the upward trend in real GDP
d. neither the upward trend in the price level nor the upward trend in real GDP
____ 29.
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
____ 30.
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.
____ 31.
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.
____ 32.
Most economists believe the principle of monetary neutrality is
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.
____ 33.
Most economists believe that monetary neutrality provides
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.
____ 34.
Monetary neutrality means that a change in the money supply
a. does not change real variables. Most economists think this is a good description of the
economy in the short run and in the long run.
b. does not change real variables. Most economists think this is a good description of the
economy in the long run but not the short run.
c. does not change nominal variables. Most economists think this is a good description of
the economy in the short-run and the long run.
d. does not change nominal variables. Most economists think this is a good description of
the economy in the long run but not the short run.
____ 35.
The velocity of money is
a. the rate at which the Fed puts money into the economy.
b. the same thing as the long-term growth rate of the money supply.
c. the money supply divided by nominal GDP.
d. the average number of times per year a dollar is spent.
____ 36.
Other things the same, an increase in velocity means that
a. the rate at which money changes hands falls, so the price level rises.
b. the rate at which money changes hands falls, so the price level falls.
c. the rate at which money changes hands rises, so the price level rises.
d. the rate at which money changes hands rises, so the price level falls.
____ 37.
Other things the same, a decrease in velocity means that
a. the rate at which money changes hands falls, so the price level rises.
b. the rate at which money changes hands falls, so the price level falls.
c. the rate at which money changes hands rises, so the price level rises.
d. the rate at which money changes hands rises, so the price level falls.
____ 38.
During the recent financial crisis velocity decreased. This means that the rate at which
money changed hands
a. decreased. Other things the same, a decrease in velocity decreases the price level.
b. decreased. Other things the same, a decrease in velocity increases the price level.
c. increased. Other things the same, an increase in velocity decreases the price level.
d. increased. Other things the same, an increase in velocity increases the price level.
____ 39.
The source of hyperinflations is primarily
a. lower output growth.
b. continuing declines in velocity.
c. increases in money-supply growth.
d. continuing increases in money demand.
____ 40.
Based on past experience, if a country is experiencing hyperinflation, then which of the
following would be a reasonable guess?
a. The country has high money supply growth.
b. Inflation is acting like a tax on everyone who holds money.
c. The government is printing money to finance its expenditures.
d. All of the above are correct.
____ 41.
The inflation tax
a. is an alternative to income taxes and government borrowing.
b. taxes most those who hold the most money.
c. is the revenue created when the government prints money.
d. All of the above are correct.
____ 42.
The inflation tax refers to
a. the revenue a government creates by printing money.
b. higher inflation which requires more frequent price changes.
c. the idea that, other things the same, an increase in the tax rate raises the inflation rate.
d. taxes being indexed for inflation.
____ 43.
Governments may prefer an inflation tax to some other type of tax because the inflation tax
a. is easier to impose.
b. reduces inflation.
c. falls mainly on high-income individuals.
d. reduces the real cost of government expenditure.
____ 44.
The inflation tax falls mostly heavily on
a. those who hold a lot of currency and accounts for a large share of U.S. government
revenue.
b. those who hold a lot of currency but accounts for a small share of U.S. government
revenue.
c. those who hold little currency and accounts for a large share of U.S. government revenue.
d. those who hold little currency but accounts for a small share of U.S. government revenue.
____ 45.
Printing money to finance government expenditures
a. causes the value of money to rise.
b. imposes a tax on everyone who holds money.
c. is the principal method by which the U.S. government finances its expenditures.
d. None of the above is correct.
____ 46.
Suppose the United States unexpectedly decided to pay off its debt by printing new money.
Which of the following would happen?
a. People who held money would feel poorer.
b. Prices would rise.
c. People who had lent money at a fixed interest rate would feel poorer.
d. All of the above are correct.
____ 47.
The nominal interest rate is 3 percent and the inflation rate is 2 percent. What is the real
interest rate?
a. 6 percent
b. 5 percent
c. 1.5 percent
d. 1 percent
____ 48.
Banks advertise
a. the real interest rate, which is how fast the dollar value of savings grows.
b. the real interest rate, which is how fast the purchasing power of savings grows.
c. the nominal interest rate, which is how fast the dollar value of savings grows.
d. the nominal interest rate, which is how fast the purchasing power of savings grows.
____ 49.
The Fisher effect says that
a. the nominal interest rate adjusts one for one with the inflation rate.
b. the growth rate of the money supply is negatively related to the velocity of money.
c. real variables are heavily influenced by the monetary system.
d. All of the above are correct.
____ 50.
Under the assumptions of the Fisher effect and monetary neutrality, if the money supply
growth rate rises, then
a. both the nominal and the real interest rate rise.
b. neither the nominal nor the real interest rate rise.
c. the nominal interest rate rises, but the real interest rate does not.
d. the real interest rate rises, but the nominal interest rate does not.
____ 51.
Which of the following can a country increase in the long run by increasing its money growth
rate?
a. the nominal wage divided by the price level
b. real output
c. real interest rates
d. None of the above is correct.
____ 52.
Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money
supply growth rate increases
a. the inflation rate and growth of real GDP.
b. the inflation rate but not the growth rate of real GDP.
c. the growth rate of real GDP, but not the inflation rate.
d. neither the inflation rate nor the growth rate of real GDP.
____ 53.
In the 1970s, the U.S. inflation rate reached about
a. 7 percent per year.
b. 10 percent per year.
c. 14 percent per year.
d. 20 percent per year.
____ 54.
Studies have found which of the following economic terms mentioned most often in U.S.
newspapers?
a. Unemployment
b. Productivity
c. Inflation
d. Monetary policy
____ 55.
The idea that inflation by itself reduces people’s purchasing power is called
a. the inflation tax.
b. menu costs.
c. the inflation fallacy.
d. shoeleather costs.
____ 56.
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.
____ 57.
Which of the following statements about inflation is correct?
a. Evidence from studies indicates that, in U.S. newspapers, inflation is mentioned less
frequently than other economic terms, such as unemployment and productivity.
b. People believe the inflation fallacy because they tend to believe too strongly in the
principle of monetary neutrality.
c. Nominal incomes are determined by nominal factors; they are not affected by real factors.
d. Inflation does not in itself reduce people’s real purchasing power.
____ 58.
The inflation tax
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.
____ 59.
The shoeleather cost of inflation refers to
a. the redistributional effects of unexpected inflation.
b. the time spent searching for low prices when inflation rises.
c. the waste of resources used to maintain lower money holdings.
d. the increased cost to the government of printing more money.
____ 60.
Which of the following is an example of menu costs?
a. deciding on new prices
b. printing new price lists
c. advertising new prices
d. All of the above are examples of menu costs.
____ 61.
When inflation rises, firms make
a. more frequent price changes. This raises their menu costs.
b. more frequent price changes. This reduces their menu costs.
c. less frequent price changes. This raises their menu costs.
d. less frequent price changes. This reduces their menu costs.
____ 62.
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.
____ 63.
Market economies rely on which of the following to allocate scarce resources?
a. government
b. consumers
c. relative prices
d. real interest rates
____ 64.
If there is inflation, then a firm that has kept its price fixed for some time will have a
a. high relative price. Relative-price variability rises as the inflation rate rises.
b. high relative price. Relative-price variability falls as the inflation rate rises.
c. low relative price. Relative-price variability rises as the inflation rate rises.
d. low relative price. Relative-price variability falls as the inflation rate rises.
____ 65.
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.
____ 66.
Higher inflation makes relative prices
a. more variable, making it more likely that resources will be allocated to their best use.
b. more variable, making it less likely that resources will be allocated to their best use.
c. less variable, making it more likely that resources will be allocated to their best use.
d. less variable, making it less likely that resources will be allocated to their best use.
____ 67.
In the U.S., people are required to pay taxes on
a. nominal interest earnings, irrespective of their real interest earnings.
b. real interest earnings, irrespective of their nominal interest earnings.
c. real capital gains, irrespective of their nominal capital gains.
d. All of the above are correct.
____ 68.
In the U.S., taxes on capital gains are computed using
a. nominal gains. This is one way by which higher inflation discourages saving.
b. nominal gains. This is one way by which higher inflation encourages saving.
c. real gains. This is one way by which higher inflation discourages saving.
d. real gains. This is one way by which higher inflation encourages saving.
____ 69.
You bought some shares of stock and, over the next year, the price per share increased by 5
percent, as did the price level. Before taxes, you experienced
a. both a nominal gain and a real gain, and you paid taxes on the nominal gain.
b. both a nominal gain and a real gain, and you paid taxes only on the real gain.
c. a nominal gain, but no real gain, and you paid taxes on the nominal gain.
d. a nominal gain, but no real gain, and you paid no taxes on the transaction.
____ 70.
When deciding how much to save, people care most about
a. after-tax nominal interest rates.
b. after-tax real interest rates.
c. before-tax real interest rates.
d. before-tax nominal interest rates.
____ 71.
You bought some shares of stock and, over the next year, the price per share increased by 5
percent and the price level increased by 8 percent. Before taxes, you experienced
a. both a nominal gain and a real gain, and you paid taxes on the nominal gain.
b. both a nominal gain and a real gain, and you paid taxes only on the real gain.
c. a nominal gain and a real loss, and you paid taxes on the nominal gain.
d. a nominal gain and a real loss, and you paid no taxes on the transaction.
____ 72.
Which of the following is correct? Inflation
a. impedes financial markets in their role of allocating resources.
b. reduces the purchasing power of the average consumer.
c. generally increases after-tax real interest rates.
d. is most costly when anticipated.
____ 73.
Wealth is redistributed from debtors to creditors when inflation was expected to be
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.
____ 74.
Wealth is redistributed from creditors to debtors when inflation was expected to be
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.
____ 75.
Wealth is redistributed from creditors to debtors when inflation is
a. high, whether it is expected or not.
b. low, whether it is expected or not.
c. unexpectedly high.
d. unexpectedly low.
____ 76.
Wealth is redistributed from debtors to creditors when inflation is
a. high, whether it is expected or not.
b. low, whether it is expected or not.
c. unexpectedly high.
d. unexpectedly low.
____ 77.
High and unexpected inflation has a greater cost
a. for those who save than for those who borrow.
b. for those who hold a little money than for those who hold a lot of money.
c. for those whose wages increase by as much as inflation than those who are paid a fixed
nominal wage.
d. for savers in low income tax brackets than for savers in high income tax brackets.
____ 78.
Which movie is an allegory about late 19th century monetary policy?
a. The Wizard of Oz
b. Mary Poppins
c. It’s a Wonderful Life
d. Trading Places
____ 79.
In order to maintain stable prices, a central bank must
a. maintain low interest rates.
b. keep unemployment low.
c. tightly control the money supply.
d. sell indexed bonds.
____ 80.
Which of the following is accurate?
a. Monetary policy is neutral in both the short run and the long run.
b. Though monetary policy is neutral in the long run, it may have effects on real variables in
the short run.
c. Monetary policy has profound effects on real variables in both the short run and the long
run.
d. Monetary policy has profound effects on real variables in the long run, but is neutral in the
short run.