Question 1

If the nominal interest rate is 5 percent and there is a deflation rate of 3 percent, what is the real interest rate?

Accepted Answer

A)   8 percent
B)   2 percent
C)   15 percent
D)   1.7 percent

Question 2

Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 32 percent. Sam's after­tax real rate of interest

Accepted Answer

A)   will be 1.2 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent.
B)   will be 1.2 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent.
C)   will be 1.7 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent.
D)   will be 1.7 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent.

Question 3

When the money market is drawn with the value of money on the vertical axis, an increase in the money supply causes the equilibrium value of money

Accepted Answer

A)   and equilibrium quantity of money to increase.
B)   and equilibrium quantity of money to decrease.
C)   to increase, while the equilibrium quantity of money decreases.
D)   to decrease, while the equilibrium quantity of money increases.

Question 4

During the 1970's, U.S. inflation averaged 7% each year and real GDP increased. Holding velocity constant and using the Quantity Equation, we conclude that

Accepted Answer

A)   money growth must have been greater than the growth of real income.
B)   money growth must have been less than the growth of real income.
C)   prices fell during the 1970's.
D)   output fell during the 1970's.

Question 5

If the nominal interest rate is 15 percent and the inflation rate is 5 percent, then what is the real interest rate?

Accepted Answer

A)   10 percent
B)   20 percent
C)   3 percent
D)   5 percent

Question 6

Monetary neutrality means that while real variables may change in response to changes in the money supply, nominal variables do not.

Accepted Answer

A) True 
 B)False

Question 7

Monetary neutrality implies that an increase in the quantity of money will

Accepted Answer

A)   increase employment.
B)   increase the price level.
C)   increase the incentive to save.
D)   increase the real interest rate.

Question 8

The inflation tax refers to

Accepted Answer

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.

Question 9

Most economists believe the principle of monetary neutrality is

Accepted Answer

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.

Question 10

Wealth is redistributed from creditors to debtors when inflation was expected to be

Accepted Answer

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.

Question 11

High and unexpected inflation has a greater cost

Accepted Answer

A)   for those who borrow than for those who save.
B)   for those who hold a little money than for those who hold a lot of money.
C)   for those who have fixed nominal wages than for those who have nominal wages that adjust with inflation.
D)   All of the above are correct.

Question 12

James took out a fixed-interest-rate loan when the CPI was 200. He expected the CPI to increase to 206 but it actually increased to 204. The real interest rate he paid is

Accepted Answer

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

Question 13

In the long run, money demand and money supply determine

Accepted Answer

A)   the price level and the real interest rate.
B)   the price level but not the real interest rate.
C)   the real interest rate but not the price level.
D)   neither the price level nor the real interest rate.

Question 14

In which case below is the real interest rate the highest?

Accepted Answer

A)   the nominal interest rate = 1% and inflation = 3%
B)   the nominal interest rate = 6% and inflation = 4%
C)   the nominal interest rate = 2% and inflation = -1%
D)   the nominal interest rate = 2% and inflation = 1%

Question 15

For a given real interest rate, a decrease in the inflation rate would

Accepted Answer

A)   decrease the after-tax real interest rate and so decrease saving.
B)   decrease the after-tax real interest rate and so increase saving.
C)   increase the after-tax real interest rate and so decrease saving.
D)   increase the after-tax real interest rate and so increase saving.

Question 16

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.

Question 17

What assumptions are necessary to argue that the quantity equation implies that increases in the money supply lead to proportional changes in the price level?

Accepted Answer

We must suppose that V is rela...

Question 18

If money demand shifts right, the price level falls.

Accepted Answer

A) True 
 B)False

Question 19

Suppose every good costs $8 per unit and Molly holds $120. What is the real value of the money she holds?

Accepted Answer

A)   $120. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars.
B)   $120. If the price of goods rises, to maintain the real value of her money holdings she needs to hold fewer dollars.
C)   15 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars.
D)   15 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold fewer dollars.

Question 20

According to the classical dichotomy, which of the following is influenced by monetary factors?

Accepted Answer

A)   nominal wages
B)   unemployment
C)   real GDP
D)   All of the above are correct.

Exam 17: Money Growth and Inflation

In the long run, money demand and money supply determine

Correct AnswerverifiedShow Answer

Wealth is redistributed from creditors to debtors when inflation was expected to be

Correct AnswerverifiedShow Answer

During the 1970's, U.S. inflation averaged 7% each year and real GDP increased. Holding velocity constant and using the Quantity Equation, we conclude that

Correct AnswerverifiedShow Answer

If the nominal interest rate is 15 percent and the inflation rate is 5 percent, then what is the real interest rate?

Correct AnswerverifiedShow Answer

If money demand shifts right, the price level falls.

Correct AnswerverifiedShow Answer

Monetary neutrality means that while real variables may change in response to changes in the money supply, nominal variables do not.

Correct AnswerverifiedShow Answer

Most economists believe the principle of monetary neutrality is

Correct AnswerverifiedShow Answer

For a given real interest rate, a decrease in the inflation rate would

Correct AnswerverifiedShow Answer

Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 32 percent. Sam's after­tax real rate of interest

Correct AnswerverifiedShow Answer

If the nominal interest rate is 5 percent and there is a deflation rate of 3 percent, what is the real interest rate?

Correct AnswerverifiedShow Answer

Monetary neutrality implies that an increase in the quantity of money will

Correct AnswerverifiedShow Answer

The inflation tax refers to

Correct AnswerverifiedShow Answer

James took out a fixed-interest-rate loan when the CPI was 200. He expected the CPI to increase to 206 but it actually increased to 204. The real interest rate he paid is

Correct AnswerverifiedShow Answer

When the money market is drawn with the value of money on the vertical axis, an increase in the money supply causes the equilibrium value of money

Correct AnswerverifiedShow Answer

According to the classical dichotomy, which of the following is influenced by monetary factors?

Correct AnswerverifiedShow Answer

In which case below is the real interest rate the highest?

Correct AnswerverifiedShow Answer

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

Suppose every good costs $8 per unit and Molly holds $120. What is the real value of the money she holds?

Correct AnswerverifiedShow Answer

What assumptions are necessary to argue that the quantity equation implies that increases in the money supply lead to proportional changes in the price level?

Correct AnswerverifiedWe must suppose that V is rela...View AnswerShow Answer

High and unexpected inflation has a greater cost

Correct AnswerverifiedShow Answer

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Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 32 percent. Sam's aftertax real rate of interest

Correct Answer
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We must suppose that V is rela...
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