Question 1

Why is deflation such a problem for consumption and investment?

Accepted Answer

A)   It increases the rate of both.
B)   It slows both.
C)   It slows investment while simultaneously increases consumption.
D)   It causes firms and households to spend more.E) B) and D)
F) B) and C)

Question 2

Tax distortions refer to the cost of inflation that comes from:

Accepted Answer

A)   the money, time, and opportunity used to change prices to keep pace with inflation.
B)   the time, money, and effort one has to spend managing cash in the face of inflation.
C)   being penalized via taxes for making more money in dollars, even though real purchasing power hasn't changed at all.
D)   labor costs associated with inflation.E) B) and C)
F) C) and D)

Question 3

The severe oil shortages of the 1970s in the US created:

Accepted Answer

A)   cost push inflation.
B)   demand pull inflation.
C)   a recession.
D)   an increase in the velocity of money.E) B) and C)
F) A) and C)

Question 4

Nominal output is the _________ of goods and services, and real output is the _______ of goods and services .

Accepted Answer

A)   dollar value; actual amount
B)   actual amount; dollar value
C)   actual amount; dollar value with inflation
D)   dollar value with inflation; dollar valueE) A) and B)
F) B) and D)

Question 5

Inflation is an overall:

Accepted Answer

A)   rise in prices in the economy.
B)   decline in prices in the economy.
C)   rise in prices in the economy, excluding those with historically volatile price changes.
D)   decline in prices in the economy, excluding those with historically volatile price changes.E) B) and D)
F) A) and B)

Question 6

Arguably the most damaging economic consequence of inflation is:

Accepted Answer

A)   high prices.
B)   the uncertainty it can create.
C)   the adjustment of sticky wages.
D)   the erosion of value of real assets.E) B) and C)
F) All of the above

Question 7

Central banks, as they conduct monetary policy, inevitably affect only ___________, with no lasting impact on ___________ in the long run.

Accepted Answer

A)   prices; employment
B)   employment; prices
C)   output; prices
D)   demand; employmentE) A) and D)
F) B) and D)

Question 8

If inflation was zero percent, nominal interest rates would be:

Accepted Answer

A)   equal to real interest rate.
B)   larger than real interest.
C)   smaller than real interest.
D)   at the optimal rate.E) All of the above
F) B) and C)

Question 9

According to the graph shown, what does P on the y-axis stand for?

Accepted Answer

A)   Average price level
B)   Inflation rate
C)   Price of GDP
D)   Price of YE) B) and C)
F) A) and B)

Question 10

If an economy produces 4,000 units of output with a price level of $2 and with a velocity of money of 8, we know that the money supply must be:

Accepted Answer

A)   $1,000.
B)   $8,000.
C)   $2,000.
D)   $4,000.E) C) and D)
F) None of the above

Question 11

When real rates of interest are positive, it is better to be a:

Accepted Answer

A)   saver than a borrower, because the value of savings and debts are increasing.
B)   borrower than a saver, because the value of savings and debts are increasing.
C)   saver than a borrower, because the value of savings and debts are decreasing.
D)   borrower than a saver, because the value of savings and debts are decreasing.E) B) and C)
F) A) and D)

Question 12

If the economy is represented in the graph shown and is currently at point E1, what could be said about the state of the economy?

Accepted Answer

A)   There is higher unemployment than the natural rate.
B)   There is lower unemployment than the natural rate.
C)   The unemployment rate is just about the natural rate.
D)   The unemployment rate is zero.E) A) and C)
F) A) and B)

Question 13

The relationship between money supply, output, and the overall level of prices is illustrated by the:

Accepted Answer

A)   classical theory of inflation.
B)   neutrality of money.
C)   aggregate price level.
D)   measure of real output.E) B) and C)
F) A) and D)

Question 14

Kim is paid $50,000 per year, and pays an annual income tax of 10 percent. Due to an inflation rate of 10 percent, her pay increases to $55,000, which puts her in a higher tax bracket where she must pay 20 percent. Which of the following can be said of Kim?

Accepted Answer

A)   Inflation caused her to be taxed more heavily and decreased her purchasing power.
B)   Inflation caused her to be taxed more heavily and increased her purchasing power.
C)   Her raise reflects the inflation rate, and therefore her purchasing power is unchanged.
D)   Inflation caused her to be taxed more but didn't change her purchasing power.E) A) and B)
F) A) and C)

Question 15

If an economy produces 2,000 units of output with a price level of $2 and the money supply (M)  is $1,000, velocity is:

Accepted Answer

A)   4.
B)   500.
C)   1.
D)   2.E) C) and D)
F) B) and C)

Question 16

Deflation is a:

Accepted Answer

A)   sustained fall in the aggregate price level.
B)   sustained increase in the aggregate price level.
C)   steady, unchanging aggregate price level.
D)   steady fall in the exchange rate.E) A) and B)
F) All of the above

Question 17

Tax distortions happen because tax laws take into consideration only:

Accepted Answer

A)   nominal income.
B)   real income.
C)   nominal output.
D)   real output.E) B) and D)
F) A) and D)

Question 18

The lowest possible unemployment rate that will not cause the inflation rate to increase is called:

Accepted Answer

A)   the nonaccelerating inflation rate of unemployment (NAIRU) .
B)   the natural rate of unemployment.
C)   "full employment."
D)   All of these statements are true.E) B) and C)
F) A) and D)

Question 19

When an economy is producing at its potential level of output:

Accepted Answer

A)   cyclical unemployment is not occurring.
B)   structural unemployment is not occurring.
C)   frictional unemployment is not occurring.
D)   there is no unemployment.E) A) and D)
F) B) and C)

Question 20

The time, money, and effort one has to spend managing cash in the face of inflation is referred to as:

Accepted Answer

A)   shoe-leather costs.
B)   menu costs.
C)   tax distortions.
D)   the velocity of inflation.E) None of the above
F) B) and C)

Exam 16: Inflation

Nominal output is the _________ of goods and services, and real output is the _______ of goods and services .

Correct AnswerverifiedShow Answer

If inflation was zero percent, nominal interest rates would be:

Correct AnswerverifiedShow Answer

Tax distortions happen because tax laws take into consideration only:

Correct AnswerverifiedShow Answer

The relationship between money supply, output, and the overall level of prices is illustrated by the:

Correct AnswerverifiedShow Answer

Deflation is a:

Correct AnswerverifiedShow Answer

The lowest possible unemployment rate that will not cause the inflation rate to increase is called:

Correct AnswerverifiedShow Answer

Tax distortions refer to the cost of inflation that comes from:

Correct AnswerverifiedShow Answer

Arguably the most damaging economic consequence of inflation is:

Correct AnswerverifiedShow Answer

When real rates of interest are positive, it is better to be a:

Correct AnswerverifiedShow Answer

The time, money, and effort one has to spend managing cash in the face of inflation is referred to as:

Correct AnswerverifiedShow Answer

According to the graph shown, what does P on the y-axis stand for?

Correct AnswerverifiedShow Answer

Why is deflation such a problem for consumption and investment?

Correct AnswerverifiedShow Answer

The severe oil shortages of the 1970s in the US created:

Correct AnswerverifiedShow Answer

When an economy is producing at its potential level of output:

Correct AnswerverifiedShow Answer

If an economy produces 4,000 units of output with a price level of $2 and with a velocity of money of 8, we know that the money supply must be:

Correct AnswerverifiedShow Answer

Inflation is an overall:

Correct AnswerverifiedShow Answer

Central banks, as they conduct monetary policy, inevitably affect only ___________, with no lasting impact on ___________ in the long run.

Correct AnswerverifiedShow Answer

If the economy is represented in the graph shown and is currently at point E1, what could be said about the state of the economy?

Correct AnswerverifiedShow Answer

Kim is paid $50,000 per year, and pays an annual income tax of 10 percent. Due to an inflation rate of 10 percent, her pay increases to $55,000, which puts her in a higher tax bracket where she must pay 20 percent. Which of the following can be said of Kim?

Correct AnswerverifiedShow Answer

If an economy produces 2,000 units of output with a price level of $2 and the money supply (M) is $1,000, velocity is:

Correct AnswerverifiedShow Answer

Nominal output is the ___ of goods and services, and real output is the _ of goods and services .

Correct Answer
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Central banks, as they conduct monetary policy, inevitably affect only _, with no lasting impact on _ in the long run.

Correct Answer
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If the economy is represented in the graph shown and is currently at point E₁, what could be said about the state of the economy?

Correct Answer
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