True / False
1. The inflation rate is measured as the percentage change in a price index.
a.
True
b.
False
2. U.S. prices rose at an average annual rate of about 3.6 percent over the last 80 years.
a.
True
b.
False
3. The United States has never had deflation.
a.
True
b.
False
4. In United States history there were long periods when most prices fell.
a.
True
b.
False
5. In the 1990s, U.S. prices rose at about the same rate as in the 1970s.
a.
True
b.
False
6. The quantity theory of money can explain hyperinflations but not moderate inflation.
a.
True
b.
False
7. As the price level falls, the value of money falls.
a.
True
b.
False
8. If P represents the price of goods and services measured in money, then 1/P is the value of money measured in terms of
goods and services.
a.
True
b.
False
9. The price level is determined by the supply of, and demand for, money.
a.
True
b.
False
10. When the value of money is on the vertical axis, the money supply curve slopes upward because an increase in the
value of money induces banks to create more money.
a.
True
b.
False
11. When the value of money is on the vertical axis, the money supply curve is vertical and shifts right if the Federal
Reserve buys bonds.
a.
True
b.
False
12. The money demand curve shifts to the left when the Fed buys government bonds.
a.
True
b.
False
13. The money demand curve is downward sloping because as the value of money falls people desire to hold a larger
quantity of money.
a.
True
b.
False
14. When the value of money is on the vertical axis, an increase in the price level shifts money demand to the right.
a.
True
b.
False
15. An increase in money demand would create a surplus of money at the original value of money.
a.
True
b.
False
16. If money demand shifts right, the price level falls.
a.
True
b.
False
17. If the quantity of money supplied is greater than the quantity demanded, then prices should fall.
a.
True
b.
False
18. If the quantity of money demanded is greater than the quantity supplied, then the value of money rises.
a.
True
b.
False
19. An excess supply of money is eliminated by a falling price level
a.
True
b.
False
20. An excess supply of money is eliminated by a decrease in the value of money.
a.
True
b.
False
21. If the Fed increases the money supply, the equilibrium value of money decreases and the equilibrium price level
increases.
a.
True
b.
False
22. If the Fed conducts open market sales, the equilibrium value of money decreases and the equilibrium price level
increases.
a.
True
b.
False
23. Dollar prices and relative prices are both nominal variables.
a.
True
b.
False
24. Nominal GDP measures output of final goods and services in physical terms.
a.
True
b.
False
25. Real GDP measures output of final goods and services in physical units.
a.
True
b.
False
26. 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.
a.
True
b.
False
27. The irrelevance of monetary changes for real variables is called monetary neutrality. Most economists accept
monetary neutrality as a good description of the economy in the long run, but not the short run.
a.
True
b.
False
28. Monetary neutrality means that while real variables may change in response to changes in the money supply, nominal
variables do not.
a.
True
b.
False
29. The quantity equation is M x V = P x Y.
a.
True
b.
False
30. The quantity theory of money implies that if output and velocity are constant, then a 50 percent increase in the money
supply would lead to less than a 50 percent increase in the price level.
a.
True
b.
False
31. For a given level of money and real GDP, an increase in velocity would lead to an increase in the price level.
a.
True
b.
False
32. If the money supply increased by 10% and at the same time velocity decreased by 10%, then according to the quantity
equation there would be no change in the price level.
a.
True
b.
False
33. Hyperinflation is generally defined as inflation that exceeds 50 percent per month.
a.
True
b.
False
34. The source of all four classic hyperinflations was high rates of money growth.
a.
True
b.
False
35. Hyperinflations are associated with governments printing money to finance expenditures.
a.
True
b.
False
36. According to the Fisher effect, if inflation rises then the nominal interest rate rises.
a.
True
b.
False
37. In the long run, an increase in the growth rate of the money supply leads to an increase in the real interest rate, but no
change in the nominal interest rate.
a.
True
b.
False
38. If the real interest rate is 5% and the inflation rate is 3%, then the nominal interest rate is 8%.
a.
True
b.
False
39. One study found that unemployment is the economic term mentioned most often in U.S. newspapers.
a.
True
b.
False
40. Inflation induces people to spend more resources maintaining lower money holdings. The costs of doing this are called
shoeleather costs.
a.
True
b.
False
41. Shoeleather costs and menu costs are both costs of anticipated inflation.
a.
True
b.
False
42. For a given real interest rate, an increase in the inflation rate reduces the after-tax real interest rate.
a.
True
b.
False
43. Inflation necessarily distorts saving when either real interest income or nominal interest income is taxed.
a.
True
b.
False
44. Inflation distorts savings when real interest income, rather than nominal interest income, is taxed.
a.
True
b.
False
45. Suppose the nominal interest rate is 10 percent, the tax rate on interest income is 28 percent, and the inflation rate is 6
percent. Then the after-tax real interest rate is -3.2 percent.
a.
True
b.
False
46. Suppose the nominal interest rate is 5 percent, the tax rate on interest income is 30 percent, and the after-tax real
interest rate is 2.1percent. Then the inflation rate is 2 percent.
a.
True
b.
False
47. Suppose the nominal interest rate is 5 percent, the tax rate on interest income is 30 percent, and the after-tax real
interest rate is 0.8 percent. Then the inflation rate is 2.7 percent.
a.
True
b.
False
48. A person received 4% nominal interest. The inflation rate was –2% and the tax rate was 25%. This person received an
after-tax real interest rate of 5%.
a.
True
b.
False
49. Inflation is costly only if it is unanticipated.
a.
True
b.
False
50. If the Fed were to unexpectedly increase the money supply, creditors would gain at the expense of debtors.
a.
True
b.
False
51. If inflation is higher than expected, then borrowers make nominal interest payments that are less than they expected.
a.
True
b.
False
52. If inflation is higher than expected, then lenders receive interest payments whose real values are less than they
expected.
a.
True
b.
False
53. In the late 1800’s deflation caused farmers to suffer as the fall in crop prices reduced their income and thus their
ability to pay off their debts.
a.
True
b.
False
54. The story The Wizard of Oz can be interpreted as an allegory about U.S. monetary policy in the late 19th century.
a.
True
b.
False
55. Even though monetary policy is neutral in the short run, it may have profound real effects in the long run.
a.
True
b.
False
56. Jimmy Carter, Ronald Reagan, and Gerald Ford are all U.S. presidents whose political careers were helped by
inflation.
a.
True
b.
False
57. The hyperinflation in Zimbabwe ended in April 2009 when the central bank purchased government bonds in open-
market operations.
a.
True
b.
False
58. When the Fed increases the money supply and creates inflation, it erodes the real value of the unit of account and
makes it more difficult for investors to sort successful from unsuccessful firms.
a.
True
b.
False
59. In the presence of inflation in the U.S., accountants incorrectly measure firms’ earnings but the tax code correctly
measures real incomes.
a.
True
b.
False
60. Unexpected and large deflation is desirable, according to the Friedman rule.
a.
True
b.
False