Chapter

Money Growth and Inflation

1. The price level that equates the quantity of money demanded with the quantity of
money supplied is called the
a. equilibrium price level.
b. natural price level.
c. relative price level.
d. commodity price level.

2. Real economic variables measure

a. value in the prices of some certain base year.
b. value in the prices of the current year.
c. nominal values adjusted for the current interest rate.
d. nominal values adjusted for the current money supply.

3. According to the equation of exchange, money times velocity equals

a. nominal GDP.
b. real GDP.
c. inflation-adjusted total output in the economy.
d. the number of times each unit of money is spent on goods and services.

4. If real output in an economy is 1000 goods per year, the money supply is $300, and
each dollar is spent 3 times per year, then the average price of goods is
a. $0.90.
b. $1.11.
c. $1.50.
d. $1.33.

5. Within the context of the equation of exchange, the higher the equilibrium price
level is
a. the higher is the nominal money supply.
b. the lower is the nominal interest rate.
c. the higher is real GDP.
d. the lower is velocity.

6. If real GDP falls and the nominal interest rate rises, then the equilibrium price level
a. must fall.
b. must rise.
c. will fall if the effect of the decline in real GDP dominates.
d. will fall if the effect of the increase in the nominal interest rate dominates.

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7. If the supply of money is greater than the amount of money people want to hold,
then
a. spending will increase and the price level will fall.
b. spending will increase and the price level will rise.
c. spending will increase and the rate of interest will rise.
d. None of the above are correct. The amount of money supplied is never greater
than the amount people want to hold.

8. According to classical economists

a. prices are rigid.
b. both velocity and real output are variable.
c. changes in the money supply cause changes in velocity.
d. the velocity of money is constant.

9. Since classical economists believe that both velocity and real output are constants,
the equation of exchange becomes a theory in which
a. the quantity of money explains prices.
b. the quantity of money explains real GDP.
c. changes in the money supply cause changes in velocity.
d. prices are fixed.

10. According to the classical view, to prevent price level changes when real output is
growing by 3 percent per year, the money supply must
a. decrease by 3 percent per year.
b. increase by 3 percent per year.
c. increase by more than 3 percent per year.
d. remain constant.

11. The irrelevance of monetary changes for real variables is called

a. the classical dichotomy.
b. the equation of exchange.
c. monetary neutrality.
d. hyperinflation.

12. Which of the following is a major source of inflation in the United States?
a. faster growth of the money supply than growth in GDP
b. monopoly power
c. low productivity
d. government regulation

13. If a government supplies more money than the quantity people want to hold
a. spending will decrease and the price level will fall.
b. spending will increase and the price level will rise.
c. spending will remain constant but the price level will rise.
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d. there will be no change in the level of economic activity or prices; money is

neutral.

14. Hyperinflation occurs because governments want to __________ spending but they
ignore the fact that increasing the money supply will __________ .
a. decrease, require greater government spending
b. increase, also increase the price level
c. increase, put upward pressure on interest rates
d. decrease, put downward pressure on interest rates

15. The inflation tax is

a. a tax on windfall profits.
b. a special tax imposed on owners of shares of stock.
c. a special tax imposed on profits when inflation is over 10% per year.
d. the loss incurred when inflation reduces the purchasing power of assets.

16. The beneficiaries of the inflation tax are

a. those who borrow money.
b. all corporations.
c. all multinational corporations that can shift assets into alternative currencies.
d. exporters of goods and services.

17. If the nominal interest rate is 10%, the expected rate of inflation is 7%, and the
growth rate of the money supply is 6%, then the real interest rate is
a. –4%.
b. –3%.
c. 3%.
d. 4%.

18. Studies of money demand indicate that the nominal demand for money
a. does not depend on interest rates.
b. does not depend on the price level.
c. is proportional to the price level.
d. is proportional to the nominal interest rate.

19. In 1985, the U.S. government indexed the federal personal income tax system. With
indexing, households are pushed into a higher tax bracket only if their nominal
income
a. rises as fast as the rate of inflation.
b. rises slower than the rate of inflation.
c. rises faster than the rate of inflation.
d. decreases by the amount of inflation.

20. Investors criticize the federal income tax system because they must pay taxes
180  Chapter Money Growth and Inflation

a. on gains that merely reflect the effects of inflation.

b. only on gains that exceed the effects of inflation.
c. on losses as well as gains.
d. on losses but not on gains.

21. Unanticipated inflation helps

a. investors at the expense of savers.
b. proprietorships at the expense of partnerships.
c. borrowers at the expense of lenders.
d. taxpayers at the expense of government.

22. Some economists feel inflation is bad

a. because it reduces real GDP so much.
b. only if it is steady.
c. because it redistributes income arbitrarily.
d. only if it is anticipated.

23. Betty spends the entire week before Christmas shopping. However, inflation is so
high in her community that she must make three trips to the bank each day so as
not to lose too much purchasing power. These costs of inflation are called
a. menu costs.
b. shoeleather costs.
c. the inflation fallacy.
d. redistribution costs.

24. When news reporters blame inflation on monopoly sellers, or on greed, they
a. are correctly distinguishing between relative prices and the level of prices.
b. are confusing the level of prices with the rate of change of prices.
c. are identifying the major cause of inflation in the United States.
d. None of the above are correct.

25. Monopoly sellers

a. charge higher prices than more competitive firms and therefore cause inflation.
b. can achieve economies of scale not available to competitive firms and therefore
charge lower prices, which causes deflation.
c. charge higher prices than more competitive firms, but do not cause inflation.
d. are much greedier than sellers in more competitive markets.