Money Growth and Inflation 7429
177. During the 2008 financial crisis velocity decreased. This means that the rate at which money
changed hands
a. decreased. Other things the same, a decrease in velocity decreases the price level.
b. decreased. Other things the same, a decrease in velocity increases the price level.
c. increased. Other things the same, an increase in velocity decreases the price level.
d. increased. Other things the same, an increase in velocity increases the price level.
178. There is evidence that the rate at which money changed hands rose during the German
hyperinflation. This means that
a. velocity rose. If monetary neutrality holds the rise in velocity increased the ratio M/P.
b. velocity rose. If monetary neutrality holds the rise in velocity decreased the ratio M/P.
c. velocity fell. If monetary neutrality holds the fall in velocity increased the ratio M/P.
d. velocity fell. If monetary neutrality holds the fall in velocity decreased the ratio M/P.
7430 Money Growth and Inflation
179. Suppose that velocity rises while the money supply stays the same. It follows that
a. P x Y must rise.
b. P x Y must fall.
c. P x Y must be unchanged.
d. the effects on P x Y are uncertain.
180. Suppose that M is fixed. According to the quantity equation, which of the following would make
the price level higher?
a. Y or V rise
b. Y or V fall
c. Y rises or V falls
d. Y falls or V rises
Money Growth and Inflation 7431
181. Suppose that M is fixed but that P falls. According to the quantity equation which of the following
could both by themselves explain the decrease in P?
a. Y rose, V rose
b. Y fell, V fell
c. Y rose, V fell
d. Y fell, V rose
182. Suppose the money supply tripled, but at the same time velocity doubled and real GDP was
unchanged. According to the quantity equation the price level
a. is 1.5 times its old value.
b. is 3 times its old value.
c. is 6 times its old value.
d. is the same as its old value.
183. Suppose over some period of time the money supply tripled, velocity doubled, and real GDP
doubled. According to the quantity equation the price level is now
a. 6 times its old value.
b. 3 times its old value.
c. 1.5 times its old value.
d. 0.75 times its old value.
184. Suppose over some period of time the money supply tripled, velocity was unchanged, and real
GDP doubled. According to the quantity equation the price level is now
a. 6 times its old value.
b. 3 times its old value.
c. 1.5 times its old value.
d. 0.75 times its old value
Money Growth and Inflation 7433
185. During the 1970’s, U.S. inflation averaged 7% each year and real GDP increased. Holding
velocity constant and using the Quantity Equation, we conclude that
a. money growth must have been greater than the growth of real income.
b. money growth must have been less than the growth of real income.
c. prices fell during the 1970’s.
d. output fell during the 1970’s.
186. Suppose the money supply grew at an average annual rate of 8%, velocity was constant, the
nominal interest rate averaged 9%, and output grew at an average annual rate of 3%. According
to the Quantity Theory,
a. inflation averaged 8% per year and the real rate of return was 9%.
b. inflation averaged 11% per year and the real rate of return was 17%.
c. inflation averaged 5% per year and the real rate of return was 4%.
d. inflation averaged 1% per year and the real rate of return was 6%.
7434 Money Growth and Inflation
187. If when the money supply changes, real output and velocity do not change, then a 2 percent
increase in the money supply
a. decreases the price level by 2 percent.
b. decreases the price level by less than 2 percent.
c. increases the price level by less than 2 percent.
d. increases the price level by 2 percent.
188. According to the quantity theory of money, a 3 percent increase in the money supply
a. causes the price level to rise by 3 percent.
b. causes the price level to rise by less than 3 percent.
c. leaves the price level unchanged.
d. causes the price level to fall by 3 percent.
Money Growth and Inflation 7435
189. According to the assumptions of the quantity theory of money, if the money supply increases 5
percent, then
a. both the price level and nominal GDP would rise by 5 percent.
b. the price level would rise by 5 percent and nominal GDP would be unchanged.
c. the price level would be unchanged and nominal GDP would rise by 5 percent.
d. both the price level and nominal GDP would be unchanged.
190. Suppose monetary neutrality holds and velocity is constant. A 4 percent increase in the money
supply
a. increases the price level by more than 4 percent.
b. increases the price level by 4 percent.
c. increases the price level by less than 4 percent.
d. increases real GDP by 4 percent.
7436 Money Growth and Inflation
191. According to the assumptions of the quantity theory of money, if the money supply decreases by
7 percent, then
a. nominal and real GDP would fall by 7 percent.
b. nominal GDP would fall by 7 percent; real GDP would be unchanged.
c. nominal GDP would be unchanged; real GDP would fall by 7 percent.
d. neither nominal GDP nor real GDP would change.
192. Which of the following is not implied by the quantity equation?
a. If velocity is stable and money is neutral, an increase in the money supply creates a
proportional increase in nominal output.
b. If velocity is stable and money is neutral, an increase in the money supply creates a
proportional increase in the price level.
c. With constant money supply and output, an increase in velocity creates an increase in the
price level.
d. With constant money supply and velocity, an increase in output creates a proportional increase
in the price level.
Money Growth and Inflation 7437
193. If money is neutral and velocity is stable, an increase in the money supply creates a proportional
increase in
a. real output only.
b. nominal output only.
c. the price level only.
d. both the price level and nominal output.
194. Which of the following is consistent with the idea that high money supply growth leads to high
inflation?
a. the quantity theory and evidence from four hyperinflations during the 1920’s
b. the quantity theory but not evidence from four hyperinflations during the 1920’s
c. evidence from four hyperinflations during the 1920’s but not the quantity theory
d. neither the quantity theory nor evidence from four hyperinflation during the 1920’s
7438 Money Growth and Inflation
195. The evidence from hyperinflations indicates that money growth and inflation
a. are positively related, which is consistent with the quantity theory of money.
b. are positively related, which is not consistent with the quantity theory of money.
c. are not related in a discernible fashion, which is consistent with the quantity theory of money.
d. are not related in a discernible fashion, which is not consistent with the quantity theory of
money.
196. Evidence concerning hyperinflation indicates a clear link between the money supply and the price
level for
a. Austria in the 1920’s.
b. Hungary in the 1920’s.
c. Poland in the 1920’s.
d. All of the above are correct.
Money Growth and Inflation 7439
197. The data on hyperinflation show a clear link between the quantity of money and
a. the price level.
b. growth rate of GDP.
c. unemployment rate.
d. velocity.
198. When the money supply and the price level in countries that experienced hyperinflation are
plotted on a graph against time, we see that
a. the price level grew at about the same rate as the money supply.
b. the price level grew at a much faster rate than the money supply.
c. the price level grew at a much slower rate than the money supply.
d. the inflation rate and the money supply growth rate do not appear to be related.
7440 Money Growth and Inflation
199. The source of hyperinflations is primarily
a. lower output growth.
b. continuing declines in velocity.
c. increases in money–supply growth.
d. continuing increases in money demand.
200. Based on past experience, if a country is experiencing hyperinflation, then which of the following
would be a reasonable guess?
a. The country has high money supply growth.
b. Inflation is acting like a tax on everyone who holds money.
c. The government is printing money to finance its expenditures.
d. All of the above are correct.
Money Growth and Inflation 7441
201. The inflation tax
a. is an alternative to income taxes and government borrowing.
b. taxes most those who hold the most money.
c. is the revenue created when the government prints money.
d. All of the above are correct.
202. The inflation tax refers to
a. the revenue a government creates by printing money.
b. higher inflation which requires more frequent price changes.
c. the idea that, other things the same, an increase in the tax rate raises the inflation rate.
d. taxes being indexed for inflation.
203. Governments may prefer an inflation tax to some other type of tax because the inflation tax
a. is easier to impose.
b. reduces inflation.
c. falls mainly on high–income individuals.
d. reduces the real cost of government expenditure.
7442 Money Growth and Inflation
204. The inflation tax falls mostly heavily on
a. those who hold a lot of currency and accounts for a large share of U.S. government revenue.
b. those who hold a lot of currency but accounts for a small share of U.S. government revenue.
c. those who hold little currency and accounts for a large share of U.S. government revenue.
d. those who hold little currency but accounts for a small share of U.S. government revenue.
205. Printing money to finance government expenditures
a. causes the value of money to rise.
b. imposes a tax on everyone who holds money.
c. is the principal method by which the U.S. government finances its expenditures.
d. causes prices to fall.
Money Growth and Inflation 7443
206. Which of the following is correct?
a. The Continental Congress used the inflation tax to help finance the American Revolution.
b. The inflation is today a principal source of revenue for the U.S. government.
c. There is no way a person can avoid the inflation tax.
d. Governments can only raise revenues through taxation.
207. In 2010 the U.S. government was running a large deficit. Some were concerned that pressures
might be put on the Federal Reserve to purchase government bonds to help the government
finance this deficit. If the Fed were to buy government bonds to help the government finance its
expenditures, then
a. the price level would fall, so the value of money would fall.
b. the price level would fall, so the value of money would rise.
c. the price level would rise, so the value of money would fall.
d. the price level would rise, so the value of money would rise.
7444 Money Growth and Inflation
208. Suppose the United States unexpectedly decided to pay off its debt by printing new money.
Which of the following would happen?
a. People who held money would feel poorer.
b. Prices would rise.
c. People who had lent money at a fixed interest rate would feel poorer.
d. All of the above are correct.
209. The claim that increases in the growth rate of the money supply increase nominal interest rates
but not real interest rates is known as the
a. Friedman Effect.
b. Hume Effect.
c. Fisher Effect.
d. the inflation tax.
Money Growth and Inflation 7445
210. The nominal interest rate is 6 percent and the inflation rate is 3 percent. What is the real interest
rate?
a. 9 percent
b. 2 percent
c. 18 percent
d. 3 percent
211. The nominal interest rate is 5 percent and the inflation rate is 2 percent. What is the real interest
rate?
a. 7 percent
b. 2.5 percent
c. 10 percent
d. 3 percent
7446 Money Growth and Inflation
212. If the nominal interest rate is 4 percent and expected inflation is 2.5 percent, then what is the
expected real interest rate?
a. 1.6 percent
b. 10 percent
c. 6.5 percent
d. 1.5 percent
213. If a bank posts a nominal interest rate of 4 percent, and inflation is expected to be 3 percent,
then
a. the expected real interest rate is 7 percent.
b. the expected real interest rate is 1 percent.
c. the expected real interest rate is 1.33 percent.
d. the expected real interest rate is 12 percent.
Money Growth and Inflation 7447
214. The nominal interest rate is 3.5 percent and the inflation rate is 1.5 percent. What is the real
interest rate?
a. 5.25 percent
b. 5 percent
c. 2.3 percent
d. 2 percent
215. The nominal interest rate is 6 percent and the real interest rate is 2.5 percent. What is the
inflation rate?
a. 2.4 percent.
b. 3.5 percent.
c. 8.5 percent.
d. 15 percent.
7448 Money Growth and Inflation
216. The nominal interest rate is 5 percent and the real interest rate is 3 percent. What is the inflation
rate?
a. 8 percent
b. 15 percent
c. 2 percent
d. 1.7 percent
217. If the nominal interest rate is 5 percent and there is a deflation rate of 3 percent, what is the real
interest rate?
a. 8 percent
b. 2 percent
c. 15 percent
d. 1.7 percent