Chapter 5 Practice Problems PDF

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Chapter 5 Multiple Choice Problems...

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Quiz 8-24-2014 1. One possible benefit of moderate inflation is: A. a reduction in boredom attributable to the changing prices. B. the elimination of menu costs. C. better functioning labor markets. D. increased certainty about the future. 2. A positive relationship between nominal interest rates and inflation in the United States i A. both recent data and nineteenth-century data. B. recent data but not nineteenth-century data. C. nineteenth-century data but not recent data. D. neither nineteenth-century data nor recent data. 3. The major source of government revenue in most countries that are experiencing hyperi A. customs duties. B. income taxes. C. seigniorage. D. borrowing. 4. Devoting resources to avoiding the costs of expected inflation leads to: A. eliminating the costs of expected inflation. B. fewer relative price changes. C. economic inefficiency. D. a decrease in the transaction velocity of money. 5. Using average rates of money growth and inflation in the United States over many decad and Schwartz found that decades of high money growth tended to have ______ rates of decades of low money growth tended to have ______ rates of inflation. A. high; high B. high; low C. low; low D. low; high 6. Most hyperinflations end with _____ reforms that eliminate the need for _____. A. monetary; taxes

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8. If velocity is constant and, in addition, the factors of production and the production funct real GDP, then: A. the price level is proportional to the money supply. B. real GDP is proportional to the money supply. C. the price level is fixed. D. nominal GDP is fixed. 9. The quantity equation for money, by itself: A. may be thought of as a definition for velocity. B. implies that the velocity of money is constant. C. implies that the price level is proportional to the money supply. D. implies that real gross domestic product (GDP) is proportional to the money supply 10. Inflation ______ the variability of relative prices and ______ allocative efficiency. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; increases 11. The theoretical separation of real and monetary variables is called: A. the classical dichotomy. B. monetary neutrality. C. the Fisher effect. D. the quantity theory of money. 12. The ex ante real interest rate is equal to the nominal interest rate: A. minus the inflation rate. B. plus the inflation rate. C. minus the expected inflation rate. D. plus the expected inflation rate.

14. The income velocity of money: A. is defined in the identity MV = PY. B. is defined in the identity MV = PT. C. is the same thing as the transactions velocity of money. D. is the same as the number of times a dollar bill changes hands. 15. If there are 100 transactions in a year and the average value of each transaction is $10 $200 of money in the economy, transactions velocity is ______ times per year. A. 0.2 B. 2 C. 5 D. 10 16. The one-to-one relation between the inflation rate and the nominal interest rate, the Fis assumes that the: A. money supply is constant. B. velocity is constant. C. inflation rate is constant. D. real interest rate is constant. 17. One effect of an unexpected rise in inflation is that wealth is redistributed from: A. borrowers to lenders. B. lenders to borrowers. C. young people to old people. D. government to firms. 18. The ex ante real interest rate is based on _____ inflation, while the ex post real interes on _____ inflation. A. expected; actual B. core; actual C. actual; expected D. expected; core 19. Which of the following is NOT a social cost of inflation? A. The money that people hold loses value due to the inflation tax. B People hold smaller real balances and so have to make more frequent trips to the

C. draft citizens into the armed forces. D. print money. 21. The quantity theory of money states that if the money supply doubles and output is con will: A. fall by half. B. remain the same. C. double. D. fall only if velocity rises. 22. According to the quantity equation, if M increases by 3 percent and V increases by 2 pe A. real income increases by approximately 5 percent. B. the price level increases by approximately 5 percent. C. the nominal interest rate increases by approximately 5 percent. D. nominal income increases by approximately 5 percent. 23. To end a hyperinflation, a government trying to reduce its reliance on seigniorage would A. print more money. B. raise taxes and cut spending. C. lower taxes and increase spending. D. lower interest rates. 24. An example of a real variable is the: A. dollar wage a person earns. B. quantity of goods produced in a year. C. price level. D. nominal interest rate. 25. In practice, in order to stop a hyperinflation, in addition to stopping monetary growth, t must: A. lower taxes and raise government spending. B. raise taxes and reduce government spending. C. change from one kind of currency to another. D. call for a new election. 26. All of the following are costs of fully expected inflation except that expected inflation: l

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A. faster than the overall price level. B. more slowly than the overall price level. C. in proportion to the increase in the overall price level. D. in real terms during periods of inflation. 28. “Inflation tax” means that: A. as the price level rises, taxpayers are pushed into higher tax brackets. B. as the price level rises, the real value of money held by the public decreases. C. as taxes increase, the rate of inflation also increases. D. in a hyperinflation, the chief source of tax revenue is often the printing of money 29. A rate of inflation that exceeds 50 percent per month is typically referred to as a(n): A. conflagration. B. hyperinflation. C. deflation. D. disinflation. 30. The ex ante real interest rate differs from the ex post real interest rate only when: A. the money supply grows at a constant rate. B. the money supply remains the same. C. the money supply falls at a constant rate. D. actual inflation differs from expected inflation. 31. The income velocity of money increases and the money demand parameter k ______ w to hold ______ money. A. increases; more B. increases; less C. decreases; more D. decreases; less 32. Mary Tsai is paid $3,000 every 30 days. Her salary is deposited directly in her bank. Sh money at a constant rate over the 30 days and must pay cash. She can (1) withdraw a at once; (2) withdraw half at once and the rest after 15 days; (3) withdraw one-third a after 10 days, and one-third at 20 days; or (4) make any number of evenly spaced with withdrawal costs her $2 in terms of time and inconvenience. For each day that Mary ha bank, she gets .03 cents (.0003 per dollar) in interest. Thus, if she withdraws half of he immediately and half in 15 days, she has $1,500 in the bank for 15 days and earns $6. a Create a table showing transaction costs interest earned and total net earnings (+

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33. According to the Fisher Effect, the expected rate of inflation does not influence the: A. demand for real money balances. B. ex post real interest rate. C. nominal interest rate. D. current price level. 34. The opportunity cost of holding money is the: A. nominal interest rate. B. real interest rate. C. federal funds rate. D. prevailing Treasury bill rate. 35. The cost of holding money is determined by the: A. inflation rate. B. real interest rate. C. growth rate of the money supply. D. nominal interest rate. 36. Although “inflation is always and everywhere a monetary phenomenon,” explain why: a. the start of a hyperinflation is typically related to the fiscal policy situation, and b.

the end of a hyperinflation is usually related to changes in fiscal policy.

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37. Survey evidence indicates that economists worry ______ the general public does about increasing more rapidly than their incomes. A. more than

B. the money supply decreases. C. the demand for money increases. D. the demand for money decreases. 39. In recent U.S. experience, inflation has: A. been persistent from year to year, whereas in the nineteenth century inflation ha persistence. B. been persistent from year to year, and this was also true in the nineteenth centu C. not been persistent from year to year, although it was persistent in the nineteent D. not been persistent from year to year, and the same was true in the nineteenth c 40. The definition of the transactions velocity of money is: A. money multiplied by prices divided by transactions. B. transactions divided by prices multiplied by money. C. money divided by prices multiplied by transactions. D. prices multiplied by transactions divided by money. 41. If the money supply is held constant, then an increase in the nominal interest rate will _ demand for money and ______ the price level. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease 42. The transactions velocity of money indicates the _____ in a given period, while the inco money indicates the _____ in a given period. A. number of transactions; amount of income earned B. quantity of money used for transactions; quantity of money paid as income C. number of times a dollar bill changes hands; number of times a dollar bill enters income D. volume of transactions; flow of income 43. If the real interest rate declines by 1 percent and the inflation rate increases by 2 perce interest rate must: A. increase by 2 percent. B. increase by 1 percent. C. remain constant.

D. 11 45. The percentage of government revenue raised by printing money has usually accounted A. more than 10 percent of government revenue in the United States. B. less than 3 percent of government revenue in the United States. C. less than 3 percent of government revenue in Italy. D. less than 3 percent of government revenue in Greece. 46. Consider the following table:

By how much has the real interest rate changed between year 1 and year 2? A. It has increased by 5 percentage points. B. It has decreased by 5 percentage points. C. It has increased by 10 percentage points. D. It has decreased by 10 percentage points. 47. A variable rate of inflation is undesirable because: A. debtors and creditors cannot protect themselves by indexing contracts. B. shoeleather costs are greater under variable inflation than under constant inflatio C. menu costs are greater under variable inflation than under constant inflation. D. variable inflation leads to greater uncertainty and risk than under constant inflati 48. When the government raises revenue by printing money, it imposes an "inflation tax" b A. real value of money holdings falls. B. interest rate falls. C. difference between nominal and real interest rates becomes smaller. D. nominal value of money holdings falls.

49. In the quantity equation, the total output of the economy Y is used instead of transactio A. income is harder to measure than transactions. B. transactions are harder to measure than income. C. transactions grow at a faster rate than income....