1. For the Fed to fully eliminate the costs of inflation, how low does the inflation rate need to be?
a.
0 percent
b.
3 percent
c.
5 percent
d.
6 percent
2. Which of the following is a cost of inflation?
a.
b.
c.
d.
3. Which of the following is not a cost of inflation identified by economists?
a.
menu costs associated with more frequent adjustment of prices
b.
confusion and inconvenience resulting from a changing value of the unit of account
c.
reduced price flexibility
d.
arbitrary redistributions of wealth associated with dollar-denominated debts
4. Inflation
a.
causes people to spend more time reducing money balances. When inflation is unexpectedly high it
redistributes wealth from lenders to borrowers.
b.
causes people to spend more time reducing money balances. When inflation is unexpectedly high it
redistributes wealth from borrowers to lenders.
c.
causes people to spend less time reducing money balances. When inflation is unexpectedly high it redistributes
wealth from lenders to borrowers.
d.
causes people to spend less time reducing money balances. When inflation is unexpectedly high it redistributes
wealth from borrowers to lenders.
5. If inflation falls,
a.
people choose to put in more effort to keep money balances low. When inflation is unexpectedly low it
redistributes wealth from lenders to borrowers.
b.
people choose to put in more effort to keep money balances low. When inflation is unexpectedly low it
redistributes wealth from borrowers to lenders.
c.
people choose to put in less effort to keep money balances low. When inflation is unexpectedly low it
redistributes wealth from lenders to borrowers.
d.
people choose to put in less effort to keep money balances low. When inflation is unexpectedly low it
redistributes wealth from borrowers to lenders.
6. Higher inflation results in
a.
more frequent price changes and increased variability of relative prices.
b.
more frequent price changes and decreased variability of relative prices.
c.
less frequent price changes and increased variability of relative prices.
d.
less frequent price changes and decreased variability of relative prices.
7. A reduction in inflation would lead to
a.
more frequent price changes and increased variability of relative prices.
b.
more frequent price changes and decreased variability of relative prices.
c.
less frequent price changes and increased variability of relative prices.
d.
less frequent price changes and decreased variability of relative prices.
8. Proponents of zero inflation argue that a successful program to reduce inflation
a.
eventually reduces inflation expectations.
b.
eventually raises real interest rates.
c.
permanently decreases output.
d.
permanently raises unemployment.
9. Proponents of zero inflation argue that reducing inflation has
a.
permanent costs and temporary benefits.
b.
temporary costs and permanent benefits.
c.
permanent costs and benefits.
d.
temporary costs and benefits.
10. A permanent reduction in inflation would
a.
permanently reduce menu costs and permanently lower unemployment.
b.
permanently reduce menu costs and temporarily raise unemployment.
c.
temporarily reduce menu costs and temporarily lower unemployment.
d.
temporarily reduce menu costs and temporarily raise unemployment.
11. A permanent reduction in inflation would
a.
permanently reduce shoeleather costs and permanently lower unemployment
b.
permanently reduce shoeleather costs and temporarily raise unemployment
c.
temporarily reduce shoeleather costs and temporarily lower unemployment
d.
temporarily reduce shoeleather costs and temporarily raise unemployment
12. An individual would suffer lower losses from an unexpectedly higher inflation rate if
a.
she held much currency and owned few bonds.
b.
she held much currency and owned many bonds.
c.
she held little currency and owned few bonds.
d.
she held little currency and owned many bonds.
13. An individual would suffer lower losses or maybe even gain from an unexpectedly higher inflation rate if
a.
she held much currency and on net was a lender.
b.
she held much currency and on net was a borrower.
c.
she held little currency and on net was a lender.
d.
she held little currency and on net was a borrower.
14. An individual would suffer higher losses from an unexpectedly higher inflation rate if
a.
she held much currency and owned few bonds.
b.
she held much currency and owned many bonds.
c.
she held little currency and owned few bonds.
d.
she held little currency and owned many bonds.
15. A permanent reduction in inflation would
a.
permanently reduce the frequency of price changes and permanently lower unemployment.
b.
permanently reduce the frequency of price changes and temporarily raise unemployment.
c.
temporarily reduce the frequency of price changes and temporarily lower unemployment.
d.
temporarily reduce the frequency of price changes and temporarily raise unemployment.
16. Paul Volcker’s inflation reduction efforts
a.
failed to reduce inflation.
b.
failed to reduce expected inflation.
c.
resulted in the highest unemployment rate since the Great Depression.
d.
none of the above are correct.
17. In the early 1980’s the Fed tightened monetary policy. Over the next few years
a.
inflation remained high and unemployment rose.
b.
inflation fell but unemployment rose temporarily.
c.
inflation and unemployment fell.
d.
inflation and unemployment rose.
18. If a central bank were required to target inflation at zero, then when there was a negative aggregate supply shock the
central bank
a.
would have to increase the money supply. This would move unemployment closer to the natural rate.
b.
would have to increase the money supply. This would move unemployment further from the natural rate.
c.
would have to decrease the money supply. This would move unemployment closer to the natural rate.
d.
would have to decrease the money supply. This would move unemployment further from the natural rate.
19. If a central bank were required to target inflation at zero, then when there was an unanticipated increase in aggregate
supply the central bank
a.
would have to increase the money supply. This would move unemployment closer to the natural rate.
b.
would have to increase the money supply. This would move unemployment further from the natural rate.
c.
would have to decrease the money supply. This would move unemployment closer to the natural rate.
d.
would have to decrease the money supply. This would move unemployment further from the natural rate.
20. If a central bank were required to target inflation at zero, then when there was a positive aggregate supply shock the
central bank
a.
would have to increase the interest rate. This would move unemployment closer to the natural rate.
b.
would have to increase the interest rate. This would move unemployment further from the natural rate.
c.
would have to decrease the interest rate. This would move unemployment closer to the natural rate.
d.
would have to decrease the interest rate. This would move unemployment further from the natural rate.
21. If a central bank were required to target inflation at zero, then when there was an unanticipated decrease in aggregate
demand the central bank
a.
would have to increase the money supply. This would move unemployment closer to the natural rate.
b.
would have to increase the money supply. This would move unemployment further from the natural rate.
c.
would have to decrease the money supply. This would move unemployment closer to the natural rate.
d.
would have to decrease the money supply. This would move unemployment further from the natural rate.
22. Some countries have had high inflation for a long time. Others have had low or moderate inflation for a long time.
Which of the following, at least in theory, could explain why some countries would continue to have high inflation?
a.
High inflation countries have relatively small sacrifice ratios and so see no need to reduce inflation.
b.
Inflation reduction works best when it is unexpected, and people in high inflation countries would quickly
anticipate any change in monetary policy.
c.
In a country where inflation has been high for a long time, people are likely to have found ways to limit the
costs.
d.
In a country where inflation has been high for a long time, there are no costs to the inflation.
23. Inflation reduction has the highest cost when the efforts are
a.
credible so that the sacrifice ratio is low.
b.
credible so that the sacrifice ratio is high.
c.
unexpected so that the sacrifice ratio is high.
d.
unexpected so that the sacrifice ratio is low.
24. Inflation reduction has the lowest cost when the efforts are
a.
credible so that the sacrifice ratio is low.
b.
credible so that the sacrifice ratio is high.
c.
unexpected so that the sacrifice ratio is high.
d.
unexpected so that the sacrifice ratio is low.
25. A program to reduce inflation is likely to have higher costs if the sacrifice ratio is
a.
high and the reduction is unexpected.
b.
high and the reduction is expected.
c.
low and the reduction is unexpected.
d.
low and the reduction is expected.
26. A program to reduce inflation is likely to have lower costs if the sacrifice ratio is
a.
high and the reduction is unexpected.
b.
high and the reduction is expected.
c.
low and the reduction is unexpected.
d.
low and the reduction is expected.
27. If inflation were high in some country and lawmakers in that country passed a law requiring the central bank to
maintain a low level of inflation, it is likely that
a.
the short-run Phillips curve would shift right and the cost of disinflation would rise.
b.
the short-run Phillips curve would shift right and the cost of disinflation would fall.
c.
the short-run Phillips curve would shift left and the cost of disinflation would rise.
d.
the short-run Phillips curve would shift left and the cost of disinflation would fall.
28. An economist would be more likely to argue for reducing inflation if she thought that
a.
the central bank lacked credibility and if bonds were usually not indexed for inflation.
b.
the central bank lacked credibility and if bonds were usually indexed for inflation.
c.
the central bank had credibility and if bonds were usually not indexed for inflation.
d.
the central bank had credibility and if bonds were usually indexed for inflation.
29. If the public correctly perceives that the central bank will reduce inflation, then
a.
the short-run Phillips curve shifts right, and the sacrifice ratio will be higher.
b.
the short-run Phillips curve shifts right, and the sacrifice ratio will be lower.
c.
the short-run Phillips curve shifts left, and the sacrifice ratio will be higher.
d.
the short-run Phillips curve shifts left, and the sacrifice ratio will be lower.
30. If the public correctly perceives that the central bank will reduce inflation, then
a.
the short-run Phillips curve shifts right, and unemployment will rise by more than otherwise.
b.
the short-run Phillips curve shifts right, and unemployment will rise by less than otherwise.
c.
the short-run Phillips curve shifts left, and unemployment will rise by more than otherwise.
d.
the short-run Phillips curve shifts left, and unemployment will rise by less than otherwise.
31. Inflation
a.
leads people to use more resources to reduce money holdings. There is no way it can make labor markets work
more efficiently.
b.
leads people to use more resources to reduce money holdings. However, it can make labor markets work more
efficiently.
c.
leads people to use fewer resources to reduce money holdings. There is no way it can make labor markets
work more efficiently
d.
leads people to use fewer resources to reduce money holdings. However, it can make labor markets work more
efficiently.
32. An economist would be more likely to argue against reducing inflation if she thought that
a.
the central bank lacked credibility and if bonds were usually not indexed for inflation.
b.
the central bank lacked credibility and if bonds were usually indexed for inflation.
c.
the central bank had credibility and if bonds were usually not indexed for inflation.
d.
the central bank had credibility and if bonds were usually indexed for inflation.
33. An economist advising a central bank intending to reduce the inflation rate would likely point out that
a.
the costs of reducing inflation persist and the costs of reducing it do not depend on the public’s inflation
expectations.
b.
the costs of reducing inflation persist, but they are smaller if the public reduces its inflation expectations.
c.
the costs of reducing inflation are temporary and the costs of reducing it do not depend on the public’s
inflation expectations.
d.
the costs of reducing inflation are temporary and the costs are smaller if the public reduces its inflation
expectations.
34. If inflation were reduced, then it is
a.
likely that real incomes would rise more rapidly and labor markets would be more flexible.
b.
likely that real incomes would rise more rapidly but unlikely that labor markets would be more flexible.
c.
likely that labor markets would be more flexible but unlikely that real incomes would rise more rapidly.
d.
unlikely that real incomes would rise more rapidly and unlikely that labor markets would be more flexible.
35. Using the typical estimate of the sacrifice ratio, how much output would be lost in reducing inflation from 3% to 1%?
a.
5%
b.
10%
c.
15%
d.
20%
36. Which costs of inflation could the government take action to reduce without reducing inflation?
a.
shoeleather costs
b.
unintended changes in tax liabilities
c.
menu costs
d.
none of the above is correct.
37. Which costs of inflation could the government reduce without reducing inflation?
a.
arbitrary redistributions of wealth
b.
shoeleather costs
c.
menu costs
d.
none of the above is correct.
38. Which costs of inflation could the government reduce without reducing inflation?
a.
shoeleather and menu costs
b.
menu costs and relative price variability
c.
unintended changes in tax liabilities and arbitrary redistributions of wealth
d.
none of the above is correct.
39. Which of the following things can a government do to lower the costs of inflation?
a.
sell inflation-indexed bonds and rewrite tax laws so that real rather than nominal gains are taxed
b.
sell inflation-indexed bonds but not rewrite tax laws so that real rather than nominal gains are taxed
c.
rewrite tax laws so that real rather than nominal gains are taxed, but not sell inflation-indexed bonds
d.
neither sell inflation-indexed bonds nor rewrite tax laws so that real rather than nominal gains are taxed
40. Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?
a.
Avoid unexpected changes in the inflation rate.
b.
Rewrite the tax laws so that nominal gains were taxed instead of real gains.
c.
Make policy that would discourage firms from issuing indexed bonds.
d.
All of the above are correct.
41. When wages are fixed by contract, inflation reduces
a.
nominal wages; this likely makes labor markets more flexible.
b.
nominal wages; this likely makes labor markets less flexible.
c.
real wages; this likely makes labor markets more flexible.
d.
real wages; this likely makes labor markets less flexible.
42. When wages are set by contract, inflation
a.
reduces real wages; this likely makes labor markets more flexible.
b.
reduces real wages; this likely makes labor markets less flexible.
c.
raises real wages; this likely makes labor markets more flexible.
d.
raises real wages; this likely makes labor markets less flexible.
43. Some economists argue that since inflation
a.
raises the real value of fixed nominal wages, a little inflation may make it easier for labor markets to adjust.
b.
raises the real value of fixed nominal wages, a little inflation may make it harder for labor markets to adjust.
c.
reduces the real value of fixed nominal wages, a little inflation may make it easier for labor markets to adjust.
d.
reduces the real value of fixed nominal wages, a little inflation may make it harder for labor markets to adjust.
44. Some economists believe that there are positives from a little inflation and that it may “grease the wheels”
a.
in the stock market.
b.
in the foreign exchange market.
c.
in the bond market.
d.
in the labor market.
45. Demand for workers in some industry declines. These workers are reluctant to have a cut in their nominal wage.
However,
a.
inflation will raise their real wage and so increase the number of available workers.
b.
inflation will raise their real wage and so decrease the number of available workers
c.
inflation will reduce their real wage and so increase the number of available workers.
d.
inflation will reduce their real wage and so decrease the number of available workers.
46. Economists
a.
agree that the costs of moderate inflation are low and that the cost of reducing inflation is small.
b.
agree that the costs of moderate inflation are low, but disagree about the cost of reducing inflation.
c.
disagree about the costs of moderate inflation, but agree that the cost of reducing inflation is small.
d.
disagree about the costs of moderate inflation and disagree about the cost of reducing inflation.
47. Economists
a.
agree that the costs of moderate inflation are small. The increase in unemployment from reducing inflation
will be smaller if inflation expectations remain high.
b.
agree that the costs of moderate inflation are small. The increase in unemployment from reducing inflation
will be larger if inflation expectations remain high.
c.
disagree about the costs of moderate inflation. The increase in unemployment from reducing inflation will be
smaller if inflation expectations remain high.
d.
disagree about the costs of moderate inflation. The increase in unemployment from reducing inflation will be
larger if inflation expectations remain high.
48. Economists
a.
agree that the costs of reducing inflation to zero are worth the benefits. The increase in unemployment from
reducing inflation will be smaller if inflation expectations remain high.
b.
agree that the costs of reducing inflation to zero are worth the benefits. The increase in unemployment from
reducing inflation will be larger if inflation expectations remain high.
c.
disagree about whether the costs of reducing inflation to zero are worth the benefits. The increase in
unemployment from reducing inflation will be smaller if inflation expectations remain high.
d.
disagree about whether the costs of reducing inflation to zero are worth the benefits. The increase in
unemployment from reducing inflation will be larger if inflation expectations remain high.
49. Economists agree that at least in the short run disinflation
a.
leads to a period of higher unemployment. They also agree that the costs of even moderate inflation is high.
b.
leads to a period of higher unemployment. They disagree about the cost of moderate inflation.
c.
leads to a period of lower unemployment. They also agree that the cost of even moderate inflation is high.
d.
leads to a period of lower unemployment. They disagree about the cost of moderate inflation.
50. Real interest rates
a.
cannot be negative.
b.
can be negative only if inflation is negative.
c.
can be negative only if inflation is zero.
d.
can be negative only if inflation is greater than zero.
51. An added benefit of inflation is that it allows for the possibility of
a.
menu costs.
b.
aggregate supply shocks.
c.
negative real interest rates.
d.
recessions.
52. Zero inflation
a.
might be dangerous because it could lead to rapidly increasing prices.
b.
would limit the flexibility of the labor market and so could at times raise unemployment.
c.
would make it easy for the Central bank to create negative real interest rates.
d.
is impossible to achieve in the real world.