5.

3 Inflation

1. 12-a-7 E
Hyperinflation is typically caused by
(A) high tax rates that discourage work effort
(B) continuous expansion of the money supply to finance government budget
deficits
(C) trade surpluses that are caused by strong protectionist policies
(D) bad harvests that lead to widespread shortages
(E) a large decline in corporate profits that leads to a decrease in production

2. 12-a-20 I
Which of the following will most likely lead to a decrease in inflationary
expectations?
(A) A decrease in the marginal propensity to save
(B) A decrease in imports
(C) A decrease in the money supply
(D) An increase in the government budget deficit
(E) An increase in the prices of raw materials

3. 12-a-34 I
Which of the following statements is true of unanticipated inflation?
(A) It decreases the economic well-being of all members of society
proportionately.
(B) It decreases the economic well-being of all members of society equally.
(C) It increases the economic well-being of net creditors.
(D) It increases the economic well-being of net debtors.
(E) It increases the economic well-being of workers with long-term labor
contracts.

4. 12-a-37 I
Policies intended to reduce demand-pull inflation are most likely to increase
which of the following in the short run?
(A) Gross domestic product
(B) The labor force participation rate
(C) The price level
(D) Unemployment
(E) Wage levels

5. 13-a-1 I
Which of the following combinations of economic policies would be most
effective to correct a severe recession?
Taxes Money Supply
(A) Increase Increase
 (B) Increase Decrease
(C) Increase No change
(D) Decrease Increase
(E) Decrease Decrease

6. 13-a-15 E
Crowding out is most likely to occur with which of the following changes?
(A) Decrease in government spending
(B) Increase in budget surplus
(C) Increase in budget deficit
(D) Decrease in the real interest rate
(E) Decrease in trade deficit

7. 13-a-20 E
Which of the following describes a typical business cycle in the correct sequence?
(A) Peak, trough, recession, and expansion
(B) Peak, trough, expansion, and recession
(C) Peak, recession, trough, and expansion
(D) Peak, recession, expansion, and trough
(E) Peak, expansion, trough, and recession

8. 13-a-37 I
An increase in inflationary expectations will most likely affect nominal interest
rates and bond prices in which of the following ways in the short run?
Nominal Interest Rates Bond Prices
(A) Increase No change
(B) Increase Decrease
(C) No change Increase
(D) Decrease Increase
(E) Decrease Decrease

9. 13-a-42 I
Last year both a borrower and a lender expected an inflation rate of 3 percent
when they signed a long-term loan agreement with fixed nominal interest rates of
5 percent. If the actual inflation rate were lower than expected, then which of the
following would be true?
(A) The borrower would benefit.
(B) The lender would benefit.
(C) The nominal interest rate would be lower than expected.
(D) The nominal interest rate would be higher than expected.
(E) The nominal interest rate would increase.

10. 13-a-51 E
Which of the following is a cause of hyperinflation?
 (A) Rapid growth of real gross domestic product
(B) Rapid growth of the money supply
(C) Unanticipated decrease in aggregate demand
(D) Unanticipated increase in aggregate supply
(E) Unanticipated rise in real interest rates

11. 14-a-2 E
Inflation occurs when there is a sustained increase in which of the following?
(A) Real gross domestic product
(B) The average price level
(C) The price of any commodity
(D) Labor productivity
(E) The unemployment rate

12. 14-a-6 E
If the economy is in a severe recession, which of the following policy actions is
most appropriate?
(A) Keeping the money supply constant and reducing budget deficits
(B) Decreasing government spending and taxes by the same amount
(C) Increasing both the money supply and government spending
(D) Increasing both the federal funds rate and taxes
(E) Decreasing the money supply and increasing taxes

13. 14-a-22 E
Which of the following will most likely cause an increase in real output in the
long run?
(A) A decrease in the labor force participation rate
(B) An increase in the velocity of money
(C) An open-market sale of government bonds by the central bank
(D) An increase in immigration from abroad
(E) An increase in the price level

14. 14-a-42 I
An increase in the price level will most likely cause which of the following?
(A) A leftward shift of the aggregate demand curve
(B) An increase in the demand for money
(C) An increase in the real interest rate
(D) A decrease in the nominal interest rate
(E) An increase in the supply of money

15. 15-a-8 I
Which of the following would generate cost-push inflation?
(A) An increase in the price of labor
(B) A decrease in the price of energy
 (C) An increase in household consumption
(D) A decrease in government spending
(E) An increase in the money supply

16. 15-a-11 H
To counter a recession, the central bank might pursue which of the following
actions?
(A) Increasing reserve requirements and selling securities on the open market
(B) Increasing capital gains tax and selling securities on the open market
(C) Decreasing reserve requirements and increasing the discount rate
(D) Decreasing the discount rate and buying securities on the open market
(E) Decreasing the capital gains tax and selling securities on the open market

17. 15-a-28 I
Which of the following combinations of policies is designed to decrease inflation?
(A) An increase in taxes and a decrease in the reserve requirement
(B) An increase in taxes and an open-market purchase of government securities
(C) A decrease in taxes and an open-market purchase of government securities
(D) An increase in government spending and a decrease in the discount rate
(E) A decrease in government spending and an open-market sale of government
securities

18. 15-a-49 I
Which of the following best describes the present value of one dollar received one
year from today?
(A) It is worth more than a dollar received today.
(B) It is worth less than a dollar received today.
(C) It has the same value as a dollar received today.
(D) It decreases as interest rates decrease.
(E) It is not affected by changes in interest rates.

19. 15-a-56 I
Automatic stabilizers can do which of the following?
(A) Offset the destabilizing influence of changes in tax revenues
(B) Aid the economy to move away from the full employment output level
(C) Allow policymakers to formulate a set of rules flexible and comprehensive
enough to eliminate discretionary actions
(D) Cause tax revenues to decrease when gross domestic product (GDP)
decreases and to increase when GDP increases
(E) Allow policymakers to prescribe public works programs during inflationary
periods because expenditures for unemployment and welfare have
correspondingly decreased

20. 15-a-60 I
 When purchasing her house, Ms. Jones took out a 15-year mortgage loan from a
local bank at a fixed interest rate of 7 percent. The rate of expected inflation at the
time was 3 percent. If the actual rate of inflation was 4.5 percent, which of the
following is true?
(A) The bank gained because the real rate of interest increased by 1.5%.
(B) The bank gained because the real rate of interest became 3.5%.
(C) The bank lost because the real rate of interest decreased by 1.5%.
(D) Ms. Jones gained because the nominal rate of interest increased by 1.5%.
(E) Ms. Jones lost because the nominal rate of interest became 3.5%.

21. 16-a-11 E
To reduce inflation, the central bank would be most likely to
(A) decrease the reserve requirement
(B) decrease the income tax rates
(C) increase the supply of money
(D) buy government securities
(E) sell government securities

22. 16-a-36 I
In the long run, a fully anticipated increase in the inflation rate will
(A) increase real national output
(B) increase the nominal interest rate
(C) decrease real national output
(D) decrease the real interest rate
(E) shift the long-run Phillips curve to the right

23. 16-a-56 I
In the short run, cost-push inflation can be caused by
(A) printing too much money
(B) increased government spending
(C) negative supply shocks
(D) decreased tariffs
(E) decreased taxes

24. 16-a-59 I
A lender will realize unexpected benefit when the
(A) actual inflation rate is higher than the anticipated inflation rate
(B) actual inflation rate is lower than the anticipated inflation rate
(C) rate of interest is greater than the actual rate of inflation
(D) rate of interest is less than the actual rate of inflation
(E) rate of interest equals the actual rate of inflation

25. 17-a-22 I
If the consumer price index increases from 200 to 240 in a one-year period, then
 the inflation rate is
(A) 16.67 percent
(B) 20 percent
(C) 25 percent
(D) 40 percent
(E) 140 percent

26. 18-a-5 I
Which of the following will most likely result from deflation?
(A) Increased nominal interest rates
(B) Increased business profits
(C) Increased real value of fixed incomes
(D) Decreased purchasing power of cash
(E) Decreased real wealth

27. 18-a-26 E
An ongoing increase in the price of oil will result in
(A) demand-pull inflation
(B) cost-push inflation
(C) expansionary fiscal policy
(D) a decrease in the prices of substitute forms of energy
(E) deflation

28. 18-a-50 E
An increase in the expected inflation rate will cause the
(A) short-run Phillips curve to shift to the left
(B) short-run Phillips curve to shift to the right
(C) long-run Phillips curve to shift to the left
(D) long-run Phillips curve to shift to the right
(E) actual inflation rate to fall below the expected inflation rate

29. 18-a-57 I
Which of the following statements about inflation is true?
(A) The expected inflation rate is the difference between nominal and real interest
rates.
(B) Low expected inflation rates lead to high inflation rates.
(C) Lenders lose from expected inflation.
(D) Lenders gain from unexpected inflation.
(E) Workers lose from expected inflation.

Answer: 1 B, 2 C, 3 D, 4 D, 5 D, 6 C, 7 C, 8 B, 9 B, 10 B, 11 B, 12 C, 13 D, 14 B, 15 A, 16
D, 17 E, 18 B, 19 D, 20 C, 21 E, 22 B, 23 C, 24 B, 25 B, 26 C, 27 B, 28 B, 29 A