109
Barro
Chapter 11
TRUE/FALSE
1. The real rate of interest is the nominal rate of interest less the expected inflation rate.
2. The real return on money is zero.
3. An increase in the money growth rate affects household consumption, C.
4. In the market clearing model, an increase in the money growth rate leads to an increase in the inflation
rate.
5. In the market clearing model an increase in the money growth rate leads to a decrease in the nominal
interest rate.
6. Inflation is a measure of the growth of prices in the volatile food and energy categories.
7. Households with rational expectations have no errors in their predictions.
8. Expected and actual inflation are equal in a model with rational expectations.
9. Deflation occurs when the inflation rate slows down, but remains positive.
10. Data show a strong negative relationship between the inflatin rate and the growth rate of nominal
currency.
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MULTIPLE CHOICE
1. The actual inflation rate is:
a.
the change in the price level divided by
the original price level.
c.
the original price level divided by the new
price level.
b.
The original price level divided the change
in price level.
d.
the new price level divided by the original
price level.
2. If the price level last year was 110 and this year is 118, then the inflation rate between last period and
this period was:
a.
7.3%.
c.
8%
b.
7%.
d.
6.8%.
3. If the price level last year was 135 and this year is 142, then the inflation rate between last period and
this period was:
a.
4.9%.
c.
5.1%
b.
7%.
d.
5.2%.
4. If the price level last year was 106 and this year is 102, then the inflation rate between last period and
this period was:
a.
-3.8%
c.
3.8%
b.
4%.
d.
-3.9%.
5. The unexpected inflation rate is:
a.
the expected inflation rate less the actual
inflation rate.
c.
the actual inflation rate less the expected
inflation rate.
b.
the expected inflation rate divided by the
actual inflation rate.
d.
the actual inflation rate divided by the
expected inflation rate.
6. If the expected inflation rate is 5% and the actual inflation rate is 4%, then the unexpected inflation
rate is:
a.
1%.
c.
-1%.
b.
9%.
d.
1.25%.
7. If the expected inflation rate is 3% and the actual inflation rate is 5%, then the unexpected inflation
rate is:
a.
2%.
c.
-2%.
b.
8%.
d.
1.67%.
8. If the expected inflation rate is 5% and the unexpected inflation rate is 4%, then the actual inflation
rate is:
a.
1%.
c.
-1%.
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b.
9%.
d.
1.25%.
9. If the expected inflation rate is 3% and the unexpected inflation rate is -2%, then the actual inflation
rate is:
a.
2%.
c.
-2%.
b.
1%.
d.
1.67%.
10. The real interest rate is
a.
the nominal interest rate plus the expected
inflation rate.
c.
the nominal interest rate less the expected
inflation.
b.
the nominal interest rate divided by the
expected inflation rate.
d.
the expected inflation rate divided by the
nominal rate of interest.
11. If the nominal interest rate is 5% and the expected inflation rate is 2%, then the expected real rate of
interest is:
a.
7%.
c.
2.5%.
b.
3%
d.
-3%.
12. If the nominal interest rate is 2% and the actual inflation rate is 5%, then the actual real rate of interest
is:
a.
7%.
c.
2.5%.
b.
3%
d.
-3%.
13. When the real interest rate, r, can differ from the nominal interest rate, i, then:
a.
money demand depends on the real rate of
interest.
c.
consumption depends on the nominal rate
of interest.
b.
consumption depends on the real rate of
interest.
d.
money demand no longer depends on any
interest rate.
14. An indexed bond is one:
a.
that pays a real rate of interest.
c.
that is indexed to the expected inflation
rate.
b.
that is indexed to the economic growth
rate.
d.
that pays a nominal rate of interest.
15. The data on countries around the world show that:
a.
the inflation rate is positively related to
the growth of currency.
c.
the inflation rate is inversely related to the
growth of currency.
b.
the inflation rate is unrelated to the growth
in currency.
d.
countries with high currency growth rates
have higher real GDP.
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16. The nominal rate of interest on money is:
a.
zero.
c.
minus the inflation rate.
b.
real rate of return on money less the
inflation rate.
d.
all of the above.
17. The nominal rate of interest on money is:
a.
positive.
c.
minus the inflation rate.
b.
real rate of return on money plus the
inflation rate.
d.
all of the above.
18. The real rate of interest on money is:
a.
zero.
c.
minus the inflation rate.
b.
the nominal rate of return on money plus
the inflation rate.
d.
all of the above.
19. If the interest rate is 5% and the inflation rate is 3%, then the nominal rate of return on money is:
a.
2%.
c.
5%
b.
3%
d.
zero.
20. If the interest rate is 5% and the inflation rate is 3%, then the real rate of return on money is:
a.
2%.
c.
-3%
b.
3%
d.
zero.
21. If the interest rate is 6% and the inflation rate is 2%, then the nominal rate of return on money is:
a.
2%.
c.
8%
b.
4%
d.
zero.
22. If the interest rate is 6% and the inflation rate is 2%, then the real rate of return on money is:
a.
2%.
c.
-2%
b.
4%
d.
zero.
23. In the market clearing model money growth is modeled as:
a.
random.
c.
via the purchase of bonds.
b.
lump-sum transfers.
d.
all of the above.
24. Lump sum transfers for money growth implies:
a.
we need to analyze how transfer affects
GDP.
c.
we need to analyze how transfers affect
capital.
b.
we do not have to analyze how households
d.
we need to model how households adjust
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adjust their behavior to attract transfers.
their behavior to attract transfers.
25. The expected rate of inflation is:
a.
the real rate of interest less the nominal
rate of interest.
c.
the nominal rate of interest plus the real
rate of interest.
b.
the nominal interest rate on nominal bonds
less the interest rate on indexed bonds.
d.
the interest rate on indexed bonds less the
nominal interest rate on nominal bonds.
26. An increase in the money growth rate in the market clearing model causes:
a.
an increase in the nominal interest rate.
c.
an increase in the price level.
b.
a decrease in money demand.
d.
all of the above.
27. An increase in the money growth rate in the market clearing model causes:
a.
an increase in the nominal interest rate.
c.
a decrease in the price level.
b.
an increase in money demand.
d.
all of the above.
28. An increase in the money growth rate in the market clearing model causes:
a.
a decrease in the nominal interest rate.
c.
an increase in consumption.
b.
a decrease in money demand.
d.
all of the above.
29. An increase in the money growth rate in the market clearing model causes:
a.
a decrease in the nominal interest rate.
c.
an increase in the price level.
b.
an increase in consumption.
d.
all of the above.
30. An increase in the money growth rate in the market clearing model causes:
a.
an increase in the nominal interest rate.
c.
an increase in the inflation rate.
b.
a decrease in money demand.
d.
all of the above.
31. An increase in the money growth rate in the market clearing model causes:
a.
a decrease in the nominal interest rate.
c.
an increase in the inflation rate.
b.
an increase in money demand.
d.
all of the above.
32. The growth rate of real money balances is:
a.
the growth rate of nominal money less the
inflation rate.
c.
the growth rate of nominal money plus the
inflation rate.
b.
the growth rate of nominal money divided
by the inflation rate.
d.
the inflation rate divided by the growth
rate of nominal money.
33. When the rate of growth rate of money is constant:
a.
the inflation rate equals the growth rate of
money.
c.
real money balance are fixed over time.
b.
the nominal interest rate is the real rate of
interest plus the growth rate of money.
d.
all of the above.
34. When the rate of growth rate of money is constant:
a.
the inflation rate equals the growth rate of
money.
c.
real money balance are declining.
b.
the nominal interest rate rises.
d.
all of the above.
35. When the rate of growth rate of money is constant:
a.
the inflation rate is growing.
c.
real money balance are declining.
b.
the nominal interest rate is the real rate of
interest plus the growth rate of money.
d.
all of the above.
36. When the rate of growth rate of money is constant:
a.
the inflation rate is growing.
c.
real money balance are constant over time.
b.
the nominal interest rate is declining.
d.
all of the above.
37. Real revenue from printing money is approximately:
a.
the nominal interest rate times real money
balances.
c.
the real interest rate times nominal money
balances.
b.
the money growth rate times real money
balances.
d.
the money growth rate times nominal
money balances.
38. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to
5%, then we would expect the nominal interest rate to be:
a.
10%.
c.
zero.
b.
7%.
d.
2%.
39. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to
5%, then we would expect the inflation rate to be:
a.
10%.
c.
5%.
b.
7%.
d.
2%.
40. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to
5%, then we would expect real money balances to:
a.
fall.
c.
remain unchanged.
b.
increase.
d.
to fluctuate.
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41. If the inflation rate is 2% and the nominal interest rate is 4% and the money growth rate increases to
3%, then we would expect the nominal interest rate to be:
a.
6%.
c.
5%.
b.
zero.
d.
2%.
42. If the inflation rate is 2% and the nominal interest rate is 4% and the money growth rate increases to
5%, then we would expect the inflation rate to be:
a.
6%.
c.
5%.
b.
7%.
d.
2%.
43. A decrease in the money growth rate in the market clearing model causes:
a.
a decrease in the nominal interest rate.
c.
a decrease in the price level.
b.
an increase in money demand.
d.
all of the above.
44. A decrease in the money growth rate in the market clearing model causes:
a.
a decrease in the nominal interest rate.
c.
an increase in the price level.
b.
a decrease in money demand.
d.
all of the above.
45. A decrease in the money growth rate in the market clearing model causes:
a.
an increase in the nominal interest rate.
c.
an increase in the price level.
b.
an increase in money demand.
d.
all of the above.
46. A decrease in the money growth rate in the market clearing model causes:
a.
an increase in the nominal interest rate.
c.
a decrease in the price level.
b.
a decrease in money demand.
d.
all of the above.
47. A decrease in the money growth rate in the market clearing model causes:
a.
a decrease in the nominal interest rate.
c.
a decrease in the inflation rate.
b.
an increase in money demand.
d.
all of the above.
48. A decrease in the money growth rate in the market clearing model causes:
a.
an increase in the nominal interest rate.
c.
an increase in the inflation rate.
b.
a decrease in money demand.
d.
all of the above.
49. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate decreases to
2%, then we would expect the inflation rate to be:
a.
8%.
c.
5%.
b.
7%.
d.
2%.
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50. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to
2%, then we would expect the nominal interest rate to be:
a.
4%.
c.
5%.
b.
7%.
d.
2%.
51. Inflation is
a.
a continuing upward movement in the
price level.
c.
a continuing upward movement in the
prices of oil and food.
b.
a one-time upward movement in the price
level.
d.
a continuing upward movement in the
price of labor.
52. Deflation is
a.
a one-time downward movement in the
price level.
c.
a declining, but positive, rate of inflation.
b.
a continuing downward movement in the
price level.
d.
a continuing upward movement in the
price of labor.
53. From 2000 to 2006, the rate of change of prices in Japan was -0.2% per year. This is an example of
a.
inflation.
c.
deflation.
b.
hyperinflation.
d.
disinflation.
54. Cross-country data on inflation rates shows a strong and positive association with the
a.
disinflation rate for the previous period.
c.
growth rate of nominal currency.
b.
nominal and real interest rates.
d.
growth rate of real currency.
55. Households which form rational expectations will
a.
exhibit procyclical patterns in their errors
over time.
c.
exhibit deflationary patterns in their errors
over time.
b.
exhibit countercyclical patterns in their
errors over time.
d.
not exhibit a systematic pattern of errors
over time.
56. If the inflation rate between last year and this year is 5%, and the price level last year was 125, then the
price level this year is
a.
131.25.
c.
120.00.
b.
130.00.
d.
100.00.
57. If the inflation rate between last year and this year is -5%, and the price level last year was 125, then
the price level this year is
a.
100.00.
c.
120.00.
b.
118.75.
d.
131.25.
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58. Households with rational expectations will
a.
make accurate predictions each period.
c.
make procyclical errors in their
predictions.
b.
have no errors in their predictions.
d.
have errors in their predictions.
59. If the nominal interest rate is 7% and the expected inflation rate is 4%, then the
a.
expected real interest rate is 3%.
c.
actual nominal interest rate is 3%.
b.
actual real interest rate is 3%.
d.
expected nominal interest rate is 4%.
60. The Livingston survey
a.
asks about 500 randomly-chosen
households for their forecasts of the CPI.
c.
uses prices on indexed bonds to calculate
inflation expectations.
b.
asks about 50 economists for their
forecasts of the CPI.
d.
uses the real interest rate to calculate
estimates of the nominal interest rate.
61. If the interest rate on a regular Treasury bond is 8% and the interest rate on an indexed bond is 3%,
then the
a.
real interest rate is 5%.
c.
expected inflation rate is 5%.
b.
real interest rate is 8%.
d.
expected inflation rate is 8%.
62. If the interest rate on a regular Treasury bond is 7% and the interest rate on an indexed bond is 3%,
then the
a.
expected inflation rate is 10%.
c.
expected inflation rate is 5%.
b.
real interest rate is 7%.
d.
real interest rate is 3%..
63. In a model with a nonzero rate of inflation, the real rate of return from owning capital
a.
equals the real interest rate.
c.
equals the nominal interest rate.
b.
is greater than the real interest rate.
d.
is greater than the nominal interest rate.
64. In a model with a nonzero rate of inflation, real money demanded depends on
a.
the real interest rate.
c.
the nominal interest rate.
b.
the real depreciation rate.
d.
the nominal depreciation rate.
65. If the inflation rate equals 5% and the total real rate of return from owning capital equals 2%, then the
a.
the depreciation rate equals 2%.
c.
nominal interest rate equals 2%.
b.
real interest rate equals 2%.
d.
nominal interest rate is greater than 2%.
SHORT ANSWER
1. Derive the relationship between nominal and real interest rates.
2. After allowing for inflation expectations why does real money demand still depend on the nominal rate
of interest?
3. What advantages are there to modeling money growth as lump-sum transfers?
4. What happens in the market clearing model when the money growth rate increases?
5. What is the government revenue from printing money?
6. If households have rational expectations, would they ever make errors in predicting inflation? Explain
briefly.
7. In a model with nonzero inflation, what is the equilibrium relation between the interest rate and the
rate of return from owning capital?