True/False Indicate whether the
sentence or statement is true or false.
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1.
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An increase in the price level is the same as a
decrease in the value of money.
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2.
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The quantity theory of money suggests that an
increase in the money supply increases real output proportionately.
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3.
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If the price level were to double, the quantity of
money demanded would double because people would need twice as much money to cover the same
transactions.
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4.
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In the long run, an increase in the money supply
tends to have an effect on real variables but no effect on nominal variables.
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5.
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If the money supply is €500, real output is
2,500 units, and the average price of a unit of real output is €2, the velocity of money is
10.
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6.
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The Fisher effect suggests that, in the long run,
if the rate of inflation rises from 3 per cent to 7 per cent, the nominal interest rate should
increase by 4 percentage points and the real interest rate should remain unchanged.
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7.
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An inflation tax is paid by those that hold money
because inflation reduces the value of their money holdings.
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8.
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Monetary neutrality means that a change in the
money supply doesn't cause a change in anything at all.
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9.
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Inflation erodes the value of people's wages
and reduces their standard of living.
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10.
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Inflation reduces the relative price of goods whose
prices have been temporarily held constant to avoid the costs associated with changing
prices.
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11.
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The shoeleather costs of inflation should be
approximately the same for a medical doctor and for an unemployed worker.
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12.
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Inflation tends to stimulate saving because it
raises the after tax real return to saving.
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13.
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Governments that spend more money than they can
raise from taxing or borrowing tend to print too much money which causes inflation.
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14.
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If inflation turns out to be higher than people
expected, wealth is redistributed to lenders from borrowers.
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15.
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If the nominal interest rate is 7 per cent and the
inflation rate is 5 per cent, the real interest rate is 12 per cent.
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Multiple Choice Identify the
letter of the choice that best completes the statement or answers the question.
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16.
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In the long run, inflation is caused
by
a. | governments that raise taxes so high that it increases
the cost of doing business and, hence, raises prices. | b. | banks that have market power and refuse to lend
money. | c. | none of these answers. | d. | governments that print too much money. | e. | increases in the price of inputs, such as labour and
oil. |
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17.
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When prices rise at an extraordinarily fast rate,
it is called
a. | disinflation. | b. | deflation. | c. | hyperinflation. | d. | inflation. | e. | hypoinflation. |
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18.
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If the price level doubles,
a. | the quantity demanded of money falls by
half. | b. | the value of money has been cut by
half. | c. | nominal income is unaffected. | d. | none of these answers. | e. | the money supply
has been cut by half. |
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19.
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In the long run, the demand for money is most
dependent upon
a. | the level of prices. | b. | the interest rate. | c. | the availability
of banking outlets. | d. | the availability
of credit cards. |
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20.
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The quantity theory of money concludes that an
increase in the money supply causes
a. | a proportional increase in
prices. | b. | a proportional increase in real
output. | c. | a proportional decrease in
velocity. | d. | a proportional increase in
velocity. | e. | a proportional decrease in
prices. |
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21.
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An example of a real variable is
a. | the wage rate in euros. | b. | None of these answers are real variables. | c. | the price of corn. | d. | the nominal
interest rate. | e. | the ratio of the
value of wages to the price of soda. |
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22.
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The quantity equation states that
a. | money 3 real output = velocity 3 price
level. | b. | money 3 velocity = price level 3 real
output. | c. | none of these answers. | d. | money 3 price level = velocity 3 real
output. |
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23.
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If money is neutral,
a. | an increase in the money supply does
nothing. | b. | a change in the money supply only affects real variables
such as real output. | c. | a change in the
money supply reduces velocity proportionately; therefore there is no effect on either prices or real
output. | d. | a change in the money supply only affects nominal
variables such as prices and wages. | e. | the money supply
cannot be changed because it is tied to a commodity such as
gold. |
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24.
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If the money supply grows 5 per cent, and real
output grows 2 per cent, prices should rise by
a. | 5 per cent. | b. | more than 5 per cent. | c. | less than 5 per
cent. | d. | none of these
answers. |
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25.
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The velocity of money is
a. | highly unstable. | b. | impossible to measure. | c. | the rate at which
money loses its value. | d. | the rate at which
inflation rises. | e. | the rate at which
money changes hands. |
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26.
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Countries that employ an inflation tax do so
because
a. | the government doesn't understand the causes and
consequences of inflation. | b. | government
expenditures are high and the government has inadequate tax collections and difficulty
borrowing. | c. | an inflation tax
is the most progressive (paid by the rich) of all taxes. | d. | an inflation tax is the most equitable of all
taxes. | e. | the government has a balanced
budget. |
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27.
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An inflation tax
a. | is usually employed by governments with balanced
budgets. | b. | none of these answers. | c. | is an explicit tax paid quarterly by businesses based on the amount of
increase in the prices of their products. | d. | is a tax borne
only by people who hold interest bearing savings accounts. | e. | is a tax on people who hold money. |
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28.
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Suppose the nominal interest rate is 7 per cent
while the money supply is growing at a rate of 5 per cent per year. If the government increases the
growth rate of the money supply from 5 per cent to 9 per cent, the Fisher effect suggests that, in
the long run, the nominal interest rate should become
a. | 9 per cent. | b. | 11 per cent. | c. | 4 per
cent. | d. | 16 per cent. | e. | 12 per cent. |
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29.
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If the nominal interest rate is 6 per cent and the
inflation rate is 3 per cent, the real interest rate is
a. | none of these answers.
| b. | 3 per cent. | c. | 6 per
cent. | d. | 18 per cent. | e. | 9 per cent. |
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30.
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If actual inflation turns out to be greater than
people had expected, then
a. | no redistribution occurred. | b. | wealth was redistributed to lenders from borrowers. | c. | the real interest rate is unaffected. | d. | wealth was redistributed to borrowers from
lenders. |
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31.
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Which of the following costs of inflation does not
occur when inflation is constant and predictable?
a. | Costs due to inflation induced tax
distortions. | b. | Arbitrary
redistributions of wealth. | c. | Shoeleather
costs. | d. | Menu costs. | e. | Costs due to confusion and
inconvenience. |
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32.
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Suppose that, because of inflation, a business in
Russia must calculate, print, and mail a new price list to its customers each month. This is an
example of
a. | shoeleather costs. | b. | costs due to confusion and inconvenience. | c. | arbitrary redistributions of wealth. | d. | costs due to inflation induced tax distortions. | e. | menu costs. |
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33.
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Suppose that, because of inflation, people in
Brazil economize on currency and go to the bank each day to withdraw their daily currency needs. This
is an example of
a. | costs due to inflation induced relative price
variability which misallocates resources. | b. | menu
costs. | c. | shoeleather costs. | d. | costs due to inflation induced tax distortions. | e. | costs due to confusion and
inconvenience. |
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34.
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If the real interest rate is 4 per cent, the
inflation rate is 6 per cent, and the tax rate is 20 per cent, what is the after tax real interest
rate?
a. | 5 per cent | b. | 2 per cent | c. | 1 per
cent | d. | 3 per cent | e. | 4 per cent |
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35.
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Which of the following statements is true about a
situation where real incomes are rising at 3 per cent per year.
a. | None of these answers is
true. | b. | If money is neutral, an increase in the money supply
will not alter the rate of growth of real income. | c. | All of these answers are true. | d. | If inflation were 0 per cent, people should receive raises of about 3 per
cent. | e. | If inflation were 5 per cent, people should receive
raises of about 8 per cent per year. |
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