Money Growth and Inflation
Multiple Choice – Section 00: Introduction
1. Over the past 80 years, prices in the U.S. have risen on average about
a. 2 percent per year.
b. 4 percent per year.
c. 3.6 percent per year.
d. 6 percent per year.
2. Over the past 80 years, the overall price level in the U.S. has experienced a(n)
a. 4-fold increase.
b. 10-fold increase.
c. 13-fold increase.
d. 17-fold increase.
3. Over the last 80 years, the average annual U.S. inflation rate was about
a. 3.6 percent, implying that prices have increased 16-fold.
b. 4 percent, implying that prices have increased 17–fold.
c. 4 percent, implying that prices have increased 16–fold.
d. 3.6 percent, implying that prices increased about 17–fold.
4. Inflation can be measured by the
a. change in the consumer price index.
b. percentage change in the consumer price index.
c. percentage change in the price of a specific commodity.
d. change in the price of a specific commodity.
5. Inflation can be measured by the
a. change in the consumer price index. Inflation in the U.S. has averaged about 2.5% over the last
80 years.
b. change in the consumer price index. Inflation in the U.S. has averaged about 4% over the last
80 years.
c. percentage change in the consumer price index. Inflation in the U.S. has averaged about 3.6%
over the last 80 years.
d. percentage change in the consumer price index. Inflation in the U.S. has averaged about 4%
over the last 80 years.
6. Which of the following is not correct?
a. The inflation rate is measured as the percentage change in a price index.
b. For the last 40 or so years, U.S. inflation hasn’t shown much variation from its average rate of
about 2 percent.
c. During the 19th century there were long periods of falling prices in the U.S.
d. Some economists argue that the costs of moderate inflation are not nearly as large as the
general public believes.
7. In which of the following cases was the inflation rate 12 percent over the last year?
a. One year ago the price index had a value of 110 and now it has a value of 120.
b. One year ago the price index had a value of 120 and now it has a value of 132.
c. One year ago the price index had a value of 134 and now it has a value of 150.
d. One year ago the price index had a value of 145 and now it has a value of 163.
8. If the price level increased from 120 to 130, then what was the inflation rate?
a. 1.1 percent.
b. 7.7 percent.
c. 10.0 percent.
d. 8.3 percent.
9. If the price level increased from 120 to 144, then what was the inflation rate?
a. 24 percent.
b. 25 percent.
c. 20 percent.
d. 17 percent.
10. If the price level increased from 200 to 250, then what was the inflation rate?
a. 50 percent
b. 25 percent
c. 20 percent
d. None of the above is correct.
11. If the price level last year was 180 and this year it is 176, then
a. there was inflation of 2.3 percent.
b. there was inflation of 4.0 percent.
c. there was deflation of 2.2 percent.
d. there was deflation of 4.0 percent.
12. When prices are falling, economists say that there is
a. disinflation.
b. deflation.
c. a contraction.
d. an inverted inflation.
13. Deflation
a. increases incomes and enhances the ability of debtors to pay off their debts.
b. increases incomes and reduces the ability of debtors to pay off their debts.
c. decreases incomes and enhances the ability of debtors to pay off their debts.
d. decreases incomes and reduces the ability of debtors to pay off their debts.
14. Between 1880 and 1896 the average level of prices in the U.S. economy
a. fell 23 percent.
b. fell 4 percent.
c. rose 23 percent.
d. rose 50 percent.
15. In the last part of the 1800’s
a. deflation made it harder for farmers to pay off their debt.
b. deflation made it easier for farmers to pay off their debt.
c. inflation made it harder for farmers to pay off their debt.
d. inflation made it easier for farmers to pay off their debt.
16. The term hyperinflation refers to
a. the spread of inflation from one country to others.
b. a decrease in the inflation rate.
c. a period of very high inflation.
d. inflation accompanied by a recession.
17. Which of the following statements about U.S. inflation is not correct?
a. Low inflation was viewed as a triumph of President Carter’s economic policy.
b. There were long periods in the nineteenth century during which prices fell.
c. The U.S. public has viewed inflation rates of even 7 percent as a major economic problem.
d. The U.S. inflation rate has varied over time, but international data show even more variation.
18. Which of the following statements concerning the history of U.S. inflation is not correct?
a. Prices rose at an average annual rate of about 3.6 percent over the last 80 years.
b. There was about a 17-fold increase in the price level over the last 80 years.
c. Inflation in the 1970s was below the average over the last 80 years.
d. The United States has experienced periods of deflation.
19. Which of the following is correct?
a. A period of hyperinflation is a period of extraordinarily low inflation.
b. A period of deflation is any period during which the inflation rate is decreasing.
c. From 2002 to 2012, U.S. inflation averaged about 2.5 percent per year.
d. All of the above are correct.
20. There was hyperinflation during the
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.
21. Which country is correctly matched with its 2009 inflation rate?
a. 9 percent inflation in the United States.
b. 3.6 percent inflation in Russia.
c. 59 percent inflation in Venezuela.
d. 9.3 percent inflation in India.
22. In early 2008, the central bank of Zimbabwe announced the inflation rate in that country had
reached
a. 60 percent.
b. 80 percent.
c. 220 percent.
d. 24,000 percent.
23. Economists agree that
a. neither high inflation nor moderate inflation is very costly.
b. both high and moderate inflation are quite costly.
c. high inflation is costly, but they disagree about the costs of moderate inflation.
d. moderate inflation is as costly as high inflation.
Multiple Choice – Section 01: The Classical Theory of Inflation
1. The classical theory of inflation
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.
2. The quantity theory of money
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.
3. To explain the long-run determinants of the price level and the inflation rate, most economists today
rely on the
a. quantity theory of money.
b. price-index theory of money.
c. theory of hyperinflation.
d. disequilibrium theory of money and inflation.
4. When the price level falls, the number of dollars needed to buy a representative basket of goods
a. increases, so the value of money rises.
b. increases, so the value of money falls.
c. decreases, so the value of money rises.
d. decreases, so the value of money falls.
5. When the price level rises, the number of dollars needed to buy a representative basket of goods
a. increases, and so the value of money rises.
b. increases, and so the value of money falls.
c. decreases, and so the value of money rises.
d. decreases, and so the value of money falls
6. If the CPI rises, the number of dollars needed to buy a representative basket of goods
a. increases, and so the value of money rises.
b. increases, and so the value of money falls.
c. decreases, and so the value of money rises.
d. decreases, and so the value of money falls
7. When there is inflation, the number of dollars needed to buy a representative basket of goods
a. increases, and so the value of money rises.
b. increases, and so the value of money falls.
c. decreases, and so the value of money rises.
d. decreases, and so the value of money falls
8. The value of money falls as the price level
a. rises, because the number of dollars needed to buy a representative basket of goods rises.
b. rises, because the number of dollars needed to buy a representative basket of goods falls.
c. falls, because the number of dollars needed to buy a representative basket of goods rises.
d. falls, because the number of dollars needed to buy a representative basket of goods falls.
9. The value of money rises as the price level
a. rises, because the number of dollars needed to buy a representative basket of goods rises.
b. rises, because the number of dollars needed to buy a representative basket of goods falls.
c. falls, because the number of dollars needed to buy a representative basket of goods rises.
d. falls, because the number of dollars needed to buy a representative basket of goods falls.
10. If the number of dollars needed to buy a representative basket of goods falls, the price level
a. falls, so the value of money falls.
b. falls, so the value of money rises.
c. rises, so the value of money falls.
d. rises, so the value of money rises.
11. When inflation rises people will
a. demand more money so the price level rises.
b. demand more money so the price level falls.
c. demand less money so the price level rises.
d. demand less money so the price level falls.
12. Suppose an economy produces only ice cream cones. If the price level rises, the value of
currency
a. rises, because one unit of currency buys more ice cream cones.
b. rises, because one unit of currency buys fewer ice cream cones.
c. falls, because one unit of currency buys more ice cream cones.
d. falls, because one unit of currency buys fewer ice cream cones.
13. If P denotes the price of goods and services measured in terms of money, then
a. 1/P represents the value of money measured in terms of goods and services.
b. P can be regarded as the “overall price level.”
c. an increase in the value of money is associated with a decrease in P.
d. All of the above are correct.
14. If P denotes the price of goods and services measured in terms of money, then
a. 1/P represents the value of money measured in terms of goods and services.
b. P can be interpreted as the inflation rate.
c. the supply of money influences the value of P, but the demand for money does not.
d. All of the above are correct.
15. The supply of money is determined by
a. the price level.
b. the Treasury and Congressional Budget Office.
c. the Federal Reserve System.
d. the demand for money.
16. When we assume that the supply of money is a variable that the central bank controls, we
a. must then assume as well that the demand for money is not influenced by the value of money.
b. must then assume as well that the price level is unrelated to the value of money.
c. are ignoring the fact that, in the real world, households are also suppliers of money.
d. are ignoring the complications introduced by the role of the banking system.
17. With the value of money on the vertical axis, the money supply curve is
a. upward-sloping.
b. downward-sloping.
c. horizontal.
d. vertical.
18. With the value of money on the vertical axis, the money supply curve is
a. upward sloping because people supply a larger quantity of money when the value of money
increases.
b. downward sloping because people supply a larger quantity of money when the value of money
decreases.
c. horizontal because we assume the central bank controls the money supply
d. vertical because we assume the central bank controls the money supply.
19. The supply of money increases when
a. the price level falls.
b. the interest rate increases.
c. the Fed makes open-market purchases.
d. money demand increases.