60) In the long run, an increase in the quantity of money ________ the value of money and
________ the price level.
A) raises; raises
B) does not change; raises
C) raises; lowers
D) lowers; raises
E) lowers; lowers
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
61) Other things remaining the same, if the quantity of money increases by a given
percentage, then in the long run the ________ by the same percentage.
A) price level rises
B) price level falls
C) real interest rate rises
D) real interest rate falls
E) nominal interest rate falls
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
62) The quantity theory of money is a proposition about
A) the Fed’s methods used to change the quantity of money.
B) nominal and real interest rates.
C) the relationship between a change in the quantity of money and the price level.
D) the relationship between inancial assets and currency demanded.
E) the nominal interest rate and the quantity of money demanded.
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
61
63) Suppose that P × Y is $5,000 million a year and the quantity of money is $500 million.
Then the velocity of circulation is
A) 50.
B) 500.
C) 10.
D) 20.
E) 2,500,000.
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
64) If the quantity of money grows at 3 percent per year, velocity does not grow, and real
GDP grows at 2 percent per year, then the inlation rate equals
A) 6 percent.
B) 5 percent.
C) 1 percent.
D) -1 percent.
E) 12 percent.
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
65) If the quantity of money grows at 4 percent a year, velocity grows at 2 percent, and real
GDP grows at 2 percent a year, then the inlation rate equals
A) 6 percent.
B) 2 percent.
C) 0 percent.
D) 8 percent.
E) 4 percent.
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
62
66) Hyperinlation is
A) inlation caused by negative growth in the quantity of money.
B) inlation at a rate that exceeds 50 percent a month.
C) inlation caused by excessive growth in the demand for money.
D) inlation at a rate that exceeds 5 percent a month.
E) only theoretical and has never occurred in the real world.
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
12.3 The Cost of Inlation
1) High inlation
A) leads to a more correct allocation of resources.
B) lowers the price level.
C) decreases uncertainty.
D) makes it easier to use money as a standard of account.
E) makes money function less well as a store of value.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
2) High inlation makes money ________ because ________.
A) function less well as a store of value; it decreases the price level and increases the
buying power of money
B) function better as a store of value; it leads to a more accurate allocation of resources
C) function better as a unit of account; money never loses value but it does gain purchasing
power in some regions
D) function better as a store of value; the money gains value and therefore has greater
purchasing power
E) function less well as a store of value; the money loses value and therefore has less
purchasing power
Skill: Level 3: Using models
Section: Checkpoint 12.3
Status: New
AACSB: Relective thinking
63
3) During an inlationary period, a household with savings of $100,000
A) gains because inlation increases the value of their savings.
B) loses because the inlation increases the after-tax real interest rate.
C) gains because the inlation gives savers more money and so more purchasing power.
D) loses because inlation increases the real tax on the interest paid.
E) neither gains nor loses because inlation does not afect savers.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.3
Status: Revised
AACSB: Relective thinking
4) One efect of inlation is that it is a tax that redistributes goods and services from
A) government to households.
B) investors to savers.
C) government to businesses.
D) households and businesses to the government.
E) businesses to households.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
5) Inlation is known as a ________ because it ________.
A) revenue; is the only source of business income for the government
B) bad thing; allows people to obtain the wrong kind of wealth
C) good thing; keeps the value of goods and services increasing
D) tax; redistributes goods and services from households and businesses to the government
E) tax; redistributes goods and services from the government to households and businesses
Skill: Level 2: Using deinitions
Section: Checkpoint 12.3
Status: New
AACSB: Relective thinking
64
6) Inlation ________ the cost of holding money and ________ the after-tax real interest rate.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) increases; does not change
Skill: Level 2: Using deinitions
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
7) Assume an economy begins with zero inlation, a 25 percent income tax rate, and a real
interest rate of 4 percent. If inlation rises to 4 percent, the nominal interest rate becomes
________ percent and the after-tax real interest becomes ________ percent.
A) 0; 1
B) 8; 2
C) 8; 4
D) 6; 2
E) 8; 6
Skill: Level 3: Using models
Section: Checkpoint 12.3
Status: Old
AACSB: Analytical thinking
8) The “shoe-leather costs” of inlation are the costs from
A) higher prices for all goods, including necessities such as shoes.
B) the government taking a higher percentage of interest income.
C) confusion as people lose track of real costs and beneits.
D) time spent trying to spend money quickly.
E) higher taxes due to higher inlation.
Skill: Level 1: Deinition
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
65
9) The ________ cost of inlation is the result of a(n) ________ in velocity and is so-named
because of ________.
A) tax; decrease; the government collecting more tax revenue on all goods and services
including basic items like shoes
B) shoe leather; increase; the higher prices for all goods and services including basic items
like shoes
C) confusion; increase; the shoe leather that is wasted by people running around trying to
spend money quickly
D) shoe leather; increase; the shoe leather that is wasted by people running around trying
to spend money quickly
E) shoe leather; decrease; the shoe leather that is wasted in people running around trying
to spend money quickly
Skill: Level 1: Deinition
Section: Checkpoint 12.3
Status: New
AACSB: Relective thinking
10) Shoe-leather costs of inlation arise from the
A) increasing costs of apparel (clothes and shoes) as inlation rises.
B) increase of velocity as inlation rises.
C) decline in the use of money as a unit of account.
D) increasing costs of agricultural products as inlation rises.
E) confusion that results from higher inlation.
Skill: Level 1: Deinition
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
11) Because the inlation rate is so high Wanda refuses to carry cash. Even though it is a
bother, she now goes to the ATM twice as often to get the cash she needs. Wanda’s actions
are an example of the
A) shoe-leather costs of inlation.
B) tax costs of inlation.
C) confusion costs of inlation.
D) uncertainty costs of inlation.
E) tax distorting costs of inlation.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
66
12) If inlation is making it diicult for people to estimate the true marginal beneits and
true marginal costs of activities, inlation is leading to
A) tax costs.
B) shoe-leather costs.
C) confusion costs.
D) uncertainty costs.
E) increased economic growth.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
13) Uncertainty costs arise from inlation because inlation makes long-term planning
________ so people respond by ________ investment.
A) more diicult; increasing
B) more diicult; decreasing
C) less diicult; not changing
D) more diicult; not changing
E) less diicult; increasing
Skill: Level 1: Deinition
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
14) Inlation is a tax because as the government ________ the quantity of money, the price
level ________, and the purchasing power of households’ money ________.
A) increases; rises; increases
B) decreases; falls; decreases
C) increases; rises; decreases
D) decreases; rises; decreases
E) does not change; rises; increases
Skill: Level 1: Deinition
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
67
15) Which of the following is NOT a cost of inlation?
A) tax cost
B) confusion cost
C) uncertainty cost
D) unemployment cost
E) shoe-leather cost
Skill: Level 1: Deinition
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
16) Which of the following is NOT a cost of inlation?
A) tax costs
B) confusion costs
C) uncertainty costs
D) government spending costs
E) shoe-leather costs
Skill: Level 1: Deinition
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
17) Becky holds $30,000 as money. After a year during which inlation was 5 percent a year,
the inlation tax over that year was
A) $500.
B) $1,000.
C) $1,500.
D) $3,000.
E) $5.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.3
Status: Old
AACSB: Analytical thinking
68
18) Suppose a country has a real interest rate of 4 percent and an inlation rate of 3
percent. If the income tax rate is 20 percent, then the after-tax real interest rate is
A) 2.6 percent.
B) 4.0 percent.
C) 5.6 percent.
D) 7.0 percent.
E) 1.4 percent.
Skill: Level 3: Using models
Section: Checkpoint 12.3
Status: Old
AACSB: Analytical thinking
19) Shoe-leather costs arise from inlation because the velocity of circulation of money
________ as the inlation rate ________.
A) increases; falls
B) decreases; rises
C) increases; rises
D) does not change; rises
E) does not change; falls
Skill: Level 1: Deinition
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
20) A consequence of hyperinlation is that people
A) who make ixed-payment loans to others receive higher payments as inlation increases.
B) spend time trying to keep their money holdings near zero.
C) receive higher real wage hikes, which increases their purchasing power for goods and
services.
D) want to lend funds because interest rates are so high.
E) increase the quantity of money demanded.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
69
21) The uncertainty costs of inlation cause people to
A) increase their demand for money.
B) increase investment causing economic growth to decrease.
C) focus on the short run, which decreases investment and slows growth.
D) focus on the long run, which increases investment and speeds growth.
E) incur more shoe leather costs.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
22) The uncertainty costs of inlation cause ________ because ________.
A) a decrease in investment and slower growth; people increase their demand for money
B) an increase in investment and faster growth; people decrease their demand for money
C) a decrease in investment and slower growth; people focus on the short run and not the
long run
D) a decrease in investment and slower growth; people focus on the long run and not the
short run
E) an increase in investment and faster growth; people focus on the short run and not the
long run
Skill: Level 3: Using models
Section: Checkpoint 12.3
Status: New
AACSB: Relective thinking
23) The costs of inlation ________ when inlation is more rapid and ________ when inlation is
more unpredictable.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) increase; do not change
E) do not change; increase
Skill: Level 2: Using deinitions
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
70