Money Growth and Inflation 7449
218. If the real interest rate is 6 percent and the price level is falling at a rate of 2 percent, what is the
nominal interest rate?
a. 4 percent
b. 6 percent
c. 8 percent
d. 10 percent
219. The real interest rate is 4 percent and the nominal interest rate is 6 percent. Is there inflation or
deflation? What is the inflation or deflation rate?
a. deflation; 2 percent
b. deflation; 10 percent
c. inflation; 2 percent
d. inflation; 10 percent
7450 Money Growth and Inflation
220. If the nominal interest rate is 15 percent and the inflation rate is 5 percent, then what is the real
interest rate?
a. 10 percent
b. 20 percent
c. 3 percent
d. 5 percent
221. If the nominal interest rate is 8 percent and expected inflation is 2.5 percent, then what is the
real interest rate?
a. 10.5 percent
b. 20 percent
c. 5.5 percent
d. 3.2 percent
Money Growth and Inflation 7451
222. Which of the following combinations of real interest rates and inflation implies a nominal interest
rate of 6 percent?
a. a real interest rate of 3 percent and an inflation rate of 2 percent.
b. a real interest rate of 7 percent and an inflation rate of 1 percent.
c. a real interest rate of 5 percent and an inflation rate of 1 percent.
d. a real interest rate of 6 percent and an inflation rate of 1 percent.
223. Which of the following combinations of nominal interest rates and inflation implies a real interest
rate of 7 percent?
a. a nominal interest rate of 5 percent and an inflation rate of 4 percent.
b. a nominal interest rate of 4 percent and an inflation rate of 3 percent.
c. a nominal interest rate of 8 percent and an inflation rate of 1 percent.
d. a nominal interest rate of 14 percent and an inflation rate of 2 percent.
7452 Money Growth and Inflation
224. In which case below is the real interest rate the highest?
a. the nominal interest rate = 1% and inflation = 3%
b. the nominal interest rate = 6% and inflation = 4%
c. the nominal interest rate = 2% and inflation = –1%
d. the nominal interest rate = 2% and inflation = 1%
225. In which case below does a person’s purchasing power from saving increase the most?
a. the nominal interest rate = 10% and inflation = 8%
b. the nominal interest rate = 9% and inflation = 6%
c. the nominal interest rate = 8% and inflation = 4%
d. the nominal interest rate = 7% and inflation = 2%
Money Growth and Inflation 7453
226. Walter puts money in a savings account at his bank earning 3.5 percent. One year later he takes
his money out and notes that while his money was earning interest, prices rose 1.5 percent.
Walter earned a nominal interest rate of
a. 3.5 percent and a real interest rate of 5 percent.
b. 3.5 percent and a real interest rate of 2 percent.
c. 5 percent and a real interest rate of 3.5 percent
d. 5 percent and a real interest rate of 2 percent
227. Shawn puts money into an account. One year later he sees that he has 6 percent more dollars
and that his money will buy 5 percent more goods.
a. The nominal interest rate was 11 percent and the inflation rate was 5 percent.
b. The nominal interest rate was 6 percent and the inflation rate was 5 percent.
c. The nominal interest rate was 5 percent and the inflation rate was -1 percent.
d. The nominal interest rate was 6 percent and the inflation rate was 1 percent.
7454 Money Growth and Inflation
228. Katarina puts money into an account. One year later she sees that she has 6 percent more
dollars and that her money will buy 4 percent more goods.
a. The nominal interest rate was 10 percent and the inflation rate was 6 percent.
b. The nominal interest rate was 6 percent and the inflation rate was 2 percent.
c. The nominal interest rate was 4 percent and the inflation rate was 2 percent.
d. The nominal interest rate was 10 percent and the inflation rate was 4 percent.
229. Darla puts her money into a bank account that earns interest. One year later she sees that the
account has 6 percent more dollars and that her money will buy 7.5 percent more goods.
a. The nominal interest rate was 13.5 percent and the inflation rate was 7.5 percent.
b. The nominal interest rate was 13.5 percent and the inflation rate was 1.5 percent.
c. The nominal interest rate was 6 percent and the inflation rate was –1.5 percent.
d. The nominal interest rate was 6 percent and the inflation rate was 7.5 percent.
Money Growth and Inflation 7455
230. Banks advertise
a. the real interest rate, which is how fast the dollar value of savings grows.
b. the real interest rate, which is how fast the purchasing power of savings grows.
c. the nominal interest rate, which is how fast the dollar value of savings grows.
d. the nominal interest rate, which is how fast the purchasing power of savings grows.
231. If a country experienced deflation, then
a. the nominal interest rate would be greater than the real interest rate.
b. the real interest rate would be greater than the nominal interest rate.
c. the real interest rate would equal the nominal interest rate.
d. nominal GDP would be greater than the money supply.
7456 Money Growth and Inflation
232. When deflation exists,
a. the real interest rate is less than the nominal interest rate.
b. the real interest rate is greater than the nominal interest rate.
c. the real interest rate and inflation are less than the nominal interest rate.
d. prices rise.
233. In the U.S., from the early 1980s through the early 1990s,
a. both inflation and nominal interest rates rose.
b. both inflation and nominal interest rates fell.
c. the inflation rate fell and the nominal interest rate rose.
d. the inflation rate rose and the nominal interest rate fell.
Money Growth and Inflation 7457
234. From the early 1980’s through the 1990’s, the nominal interest rate
a. fell because the Fed got inflation under control.
b. fell because the Fed let inflation get out of control.
c. rose because the Fed got inflation under control.
d. rose because the Fed let inflation get out of control.
235. The Fisher effect says that
a. the nominal interest rate adjusts one for one with the inflation rate.
b. the growth rate of the money supply is negatively related to the velocity of money.
c. real variables are heavily influenced by the monetary system.
d. All of the above are correct.
7458 Money Growth and Inflation
236. Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth
rate rises, then
a. both the nominal and the real interest rate rise.
b. neither the nominal nor the real interest rate rise.
c. the nominal interest rate rises, but the real interest rate does not.
d. the real interest rate rises, but the nominal interest rate does not.
237. Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth
rate falls, then
a. both the nominal and the real interest rate fall.
b. neither the nominal nor the real interest rate fall.
c. the nominal interest rate falls, but the real interest rate does not.
d. the real interest rate falls, but the nominal interest rate does not.
Money Growth and Inflation 7459
238. When money is neutral, which of the following increases when the money supply growth rate
increases?
a. real output growth
b. real interest rates
c. nominal interest rates
d. the money supply divided by the price level
239. Which of the following can a country increase in the long run by increasing its money growth
rate?
a. the nominal wage.
b. real output.
c. real interest rates.
d. the real wage.
7460 Money Growth and Inflation
240. Suppose that monetary neutrality and the Fisher effect both hold and the money supply growth
rate has been the same for a long time. Other things the same a higher money supply growth
would be associated with
a. both higher inflation and higher nominal interest rates.
b. a higher inflation rate, but not higher nominal interest rates.
c. a higher nominal interest rate, but not higher inflation.
d. neither a higher inflation rate nor a higher nominal interest rate.
241. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money
supply growth rate increases
a. the inflation rate and nominal interest rates.
b. the inflation rate, but not nominal interest rates.
c. nominal interest rates, but not the inflation rate.
d. neither the inflation rate nor nominal interest rates.
Money Growth and Inflation 7461
242. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money
supply growth rate increases
a. the inflation rate and real interest rates.
b. the inflation rate, but not real interest rates.
c. real interest rates, but not the inflation rate.
d. neither the inflation rate nor real interest rates.
243. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money
supply growth rate increases
a. the inflation rate and growth of real GDP.
b. the inflation rate but not the growth rate of real GDP.
c. the growth rate of real GDP, but not the inflation rate.
d. neither the inflation rate nor the growth rate of real GDP.
7462 Money Growth and Inflation
244. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money
supply growth rate increases
a. the inflation rate and the nominal interest rate by the same number of percentage points.
b. nominal interest rates but by less than the percentage point increase in the inflation rate.
c. the inflation rate but not the nominal interest.
d. neither the inflation rate nor the nominal interest rate.
245. According to monetary neutrality and the Fisher effect, an increase in the money supply growth
rate eventually increases
a. inflation and nominal interest rates, but does not change real interest rates.
b. inflation, nominal interest rates, and real interest rates.
c. inflation and real interest rates, but does not change nominal interest rates.
d. nominal interest rates and real interest rates, but does not change inflation.
Money Growth and Inflation 7463
246. The Fisher effect
a. says the government can generate revenue by printing money.
b. says there is a one for one adjustment of the nominal interest rate to the inflation rate.
c. explains how higher money supply growth leads to higher inflation.
d. explains how prices adjust to obtain equilibrium in the money market.
247. The Fisher effect is crucial for understanding changes over time in
a. the nominal interest rate.
b. the real interest rate.
c. the inflation rate.
d. the unemployment rate.
7464 Money Growth and Inflation
Multiple Choice – Section 02: The Costs of Inflation
1. In the 1970s, the U.S. inflation rate reached about
a. 7 percent per year.
b. 10 percent per year.
c. 14 percent per year.
d. 20 percent per year.
2. Studies have found which of the following economic terms mentioned most often in U.S.
newspapers?
a. Unemployment
b. Productivity
c. Inflation
d. Monetary policy
Money Growth and Inflation 7465
3. The idea that inflation by itself reduces people’s purchasing power is called
a. the inflation tax.
b. menu costs.
c. the inflation fallacy.
d. shoeleather costs.
4. Which of the following helps to explain why the inflation fallacy is a fallacy?
a. Increases in the price level can be created by increases in money demand.
b. Nominal incomes tend to rise at the same time that the price level is rising.
c. As the price level rises, the value of a dollar falls.
d. Inflation only changes nominal variables.
7466 Money Growth and Inflation
5. Which of the following statements about inflation is correct?
a. Evidence from studies indicates that, in U.S. newspapers, inflation is mentioned less frequently
than other economic terms, such as unemployment and productivity.
b. People believe the inflation fallacy because they tend to believe too strongly in the principle of
monetary neutrality.
c. Nominal incomes are determined by nominal factors; they are not affected by real factors.
d. Inflation does not in itself reduce people’s real purchasing power.
6. Norma complains that she is not receiving the full benefit of her six percent raise, because inflation
is two percent. You tell her that nominal incomes tend to rise with inflation, therefore
a. she really is worse off.
b. her real income increased eight percent.
c. menu costs have reduced her purchasing power.
d. she is committing the inflation fallacy.
Money Growth and Inflation 7467
7. Norma receives an increase in her nominal income. She complains that the current inflation rate of
six percent erodes the real purchasing power of her additional nominal income. This is true
a. only if the increase in her nominal income is less than six percent.
b. only if the increase in her nominal income is more than six percent.
c. since inflation always reduces purchasing power.
d. only if her real income increases.
8. When Haley states that inflation by itself always reduces the real return on her saving, she
a. has expressed the idea of the inflation tax.
b. has expressed the idea behind menu costs.
c. has committed the inflation fallacy.
d. has expressed the idea behind shoeleather costs.
7468 Money Growth and Inflation
9. The inflation tax
a. transfers wealth from the government to households.
b. is the increase in real income taxes due to lack of indexation in income tax rules.
c. is a tax on everyone who holds money.
d. All of the above are correct.
10. People can reduce the inflation tax by
a. reducing savings.
b. increasing deductions on their income tax.
c. reducing cash holdings.
d. None of the above is correct.
11. Shoeleather costs arise when higher inflation rates induce people to
a. spend more time looking for bargains.
b. spend less time looking for bargains.
c. hold more money.
d. hold less money.