Question 1

If the nominal interest rate is 5 percent and the inflation rate is 2 percent,then what is the real interest rate?

Accepted Answer

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

Question 2

The principle of monetary neutrality implies that an increase in the money supply will

Accepted Answer

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.E) A) and B)
F) C) and D)

Question 3

When the money market is drawn with the value of money on the vertical axis,as the price level increases the quantity of money

Accepted Answer

A)   demanded increases.
B)   demanded decreases.
C)   supplied increases.
D)   supplied decreases.E) A) and B)
F) B) and C)

Question 4

U.S.tax laws allow taxpayers,in computing the amount of tax they owe,to use the real value,as opposed to the nominal value,of

Accepted Answer

A)   both interest income and capital gains.
B)   interest income but not capital gains.
C)   capital gains but not interest income.
D)   neither interest income nor capital gains.E) B) and D)
F) C) and D)

Question 5

The classical theory of inflation

Accepted Answer

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.E) A) and C)
F) None of the above

Question 6

In the fourteenth century,the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold,which was in use as a medium of exchange.We would predict that this increase in gold

Accepted Answer

A)   raised both the price level and the value of gold in Cairo.
B)   raised the price level,but decreased the value of gold in Cairo.
C)   lowered the price level,but increased the value of gold in Cairo.
D)   lowered both the price level and the value of gold in Cairo.E) None of the above
F) A) and C)

Question 7

An associate professor of physics gets a $200 a month raise.She figures that with her new monthly salary she can buy more goods and services than she could buy last year.

Accepted Answer

A)   Her real and nominal salary have risen.
B)   Her real and nominal salary have fallen.
C)   Her real salary has risen and her nominal salary has fallen.
D)   Her real salary has fallen and her nominal salary has risen.E) A) and C)
F) All of the above

Question 8

Yvonne takes out a fixed-interest-rate loan and then inflation turns out to be higher than she had expected it to be.The real interest rate she pays is

Accepted Answer

A)   higher than she had expected,and the real value of the loan is higher than she had expected.
B)   higher than she had expected,and the real value of the loan is lower than she had expected.
C)   lower than she had expected,and the real value of the loan is higher than she had expected.
D)   lower then she had expected,and the real value of the loan is lower than she had expected.E) C) and D)
F) B) and D)

Question 9

The classical dichotomy is useful for analyzing the economy because in the long run nominal variables are heavily influenced by developments in the monetary system,and real variables are not.

Accepted Answer

A) True 
 B)False

Question 10

The quantity theory of money

Accepted Answer

A)   is a fairly recent addition to economic theory.
B)   can explain both moderate inflation and hyperinflation.
C)   argues that inflation is caused by too little money in the economy.
D)   All of the above are correct.E) None of the above
F) A) and B)

Question 11

Inflation necessarily distorts saving when either real interest income or nominal interest income is taxed.

Accepted Answer

A) True 
 B)False

Question 12

Suppose the price level rises,but the number of dollars you are paid per hour stays the same.This means that your

Accepted Answer

A)   nominal wage is higher.
B)   nominal wage is lower.
C)   real wage is higher.
D)   real wage is lower.E) B) and D)
F) None of the above

Question 13

Which of the following statements about inflation is correct?

Accepted Answer

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.E) A) and B)
F) A) and C)

Question 14

There was hyperinflation during the

Accepted Answer

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.E) A) and C)
F) A) and D)

Question 15

Relative-price variability

Accepted Answer

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.E) C) and D)
F) B) and D)

Question 16

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?

Accepted Answer

A)   deflation;2.5 percent
B)   deflation;20.5 percent
C)   inflation;2.5 percent
D)   inflation;20.5 percentE) C) and D)
F) A) and D)

Question 17

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) A) and C)
F) C) and D)

Question 18

Indexing the tax system to take into account the effects of inflation would by itself

Accepted Answer

A)   mean that only real interest earnings are taxed.
B)   mean an end to taxing capital gains.
C)   mean an increase in average tax rates.
D)   All of the above are correct.E) A) and B)
F) A) and C)

Question 19

The nominal interest rate is 3 percent and the inflation rate is 2 percent.What is the real interest rate?

Accepted Answer

A)   6 percent
B)   5 percent
C)   1.5 percent
D)   1 percentE) A) and C)
F) All of the above

Question 20

You put money in the bank.The increase in the dollar value of your savings

Accepted Answer

A)   and the change in the number of goods you can buy with your savings are both nominal variables.
B)   and the change in the number of goods you can buy with your savings are both real variables.
C)   is a nominal variable,but the change in the number of goods you can buy with your savings is a real variable.
D)   is a real variable,but the change in the number of goods you buy with your savings is a nominal variable.E) B) and C)
F) A) and D)

Exam 30: Money Growth and Inflation

An associate professor of physics gets a $200 a month raise.She figures that with her new monthly salary she can buy more goods and services than she could buy last year.

Correct AnswerverifiedShow Answer

Relative-price variability

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The nominal interest rate is 3 percent and the inflation rate is 2 percent.What is the real interest rate?

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The principle of monetary neutrality implies that an increase in the money supply will

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If the nominal interest rate is 5 percent and the inflation rate is 2 percent,then what is the real interest rate?

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Suppose the price level rises,but the number of dollars you are paid per hour stays the same.This means that your

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U.S.tax laws allow taxpayers,in computing the amount of tax they owe,to use the real value,as opposed to the nominal value,of

Correct AnswerverifiedShow Answer

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?

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Indexing the tax system to take into account the effects of inflation would by itself

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You put money in the bank.The increase in the dollar value of your savings

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The quantity theory of money

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Yvonne takes out a fixed-interest-rate loan and then inflation turns out to be higher than she had expected it to be.The real interest rate she pays is

Correct AnswerverifiedShow Answer

Inflation necessarily distorts saving when either real interest income or nominal interest income is taxed.

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There was hyperinflation during the

Correct AnswerverifiedShow Answer

In the fourteenth century,the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold,which was in use as a medium of exchange.We would predict that this increase in gold

Correct AnswerverifiedShow Answer

When the money market is drawn with the value of money on the vertical axis,as the price level increases the quantity of money

Correct AnswerverifiedShow Answer

The classical dichotomy is useful for analyzing the economy because in the long run nominal variables are heavily influenced by developments in the monetary system,and real variables are not.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements about inflation is correct?

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The classical theory of inflation

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