Macroeconomics [ch. 17]

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Macroeconomics [ch. 17] - Quiz


Questions and Answers
  • 1. 

    In the long run, inflation is caused by

    • A.

      Bands that have market power and refuse to lend money.

    • B.

      Governments that raise taxes so high that it increases the cost of doing business and, hence, raises prices.

    • C.

      Governments that print too much money

    • D.

      Increases in the price of inputs, such as labor and oil

    • E.

      None of the above

    Correct Answer
    C. Governments that print too much money
    Explanation
    Inflation refers to the general increase in prices of goods and services over time. When governments print too much money, it leads to an increase in the money supply in the economy. As a result, there is more money chasing the same amount of goods and services, leading to an increase in prices. This excessive money creation by governments is one of the main causes of inflation in the long run.

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  • 2. 

    When prices rise at an extraordinarily high rate, it is called

    • A.

      Inflation

    • B.

      Hyperinflation

    • C.

      Deflation

    • D.

      Hypoinflation

    • E.

      Disinflation

    Correct Answer
    B. Hyperinflation
    Explanation
    Hyperinflation refers to a situation where prices rise at an extremely high rate, typically exceeding 50% per month. It is characterized by a rapid devaluation of the currency, leading to a loss of confidence in the economy. Hyperinflation is often caused by excessive money supply, government deficits, or political instability. This phenomenon can have severe economic and social consequences, such as a sharp decline in purchasing power, hoarding of goods, and economic instability.

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  • 3. 

    If the price level doubles,

    • A.

      The quantity demanded of money falls by half

    • B.

      The money supply has been cut by half

    • C.

      Nominal income is unaffected

    • D.

      The value of money has been cut by half

    • E.

      None of the above

    Correct Answer
    D. The value of money has been cut by half
    Explanation
    If the price level doubles, it means that the general level of prices for goods and services has increased. In this scenario, the value of money has been cut by half because it now has less purchasing power. With higher prices, the same amount of money can buy fewer goods and services, thus reducing the value of money. The other options, such as the quantity demanded of money falling by half or the money supply being cut by half, do not directly address the impact of the price level doubling on the value of money.

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  • 4. 

    In the long run, the demand for money is most dependent upon

    • A.

      The level of prices

    • B.

      The availability of credit cards

    • C.

      The availability of banking outlets

    • D.

      The interest rate

    Correct Answer
    A. The level of prices
    Explanation
    The demand for money is most dependent upon the level of prices because as prices increase, individuals and businesses require more money to make purchases and conduct transactions. When prices are higher, more money is needed to buy the same goods and services, leading to an increased demand for money. Conversely, when prices are lower, less money is needed for transactions, resulting in a lower demand for money. Therefore, the level of prices directly affects the demand for money in the long run.

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  • 5. 

    The quantity theory of money concludes that an increase in the money supply causes

    • A.

      A proportional increase in velocity

    • B.

      A proportional increase in prices

    • C.

      A proportional increase in real output

    • D.

      A proportional decrease in velocity

    • E.

      A proportional decrease in prices

    Correct Answer
    B. A proportional increase in prices
    Explanation
    The quantity theory of money states that an increase in the money supply leads to a proportional increase in prices. This theory is based on the equation of exchange, which states that the total amount of money in an economy multiplied by the velocity of money (the rate at which money is exchanged) is equal to the total value of goods and services produced (real output) multiplied by the average price level. Therefore, when the money supply increases, and assuming velocity remains constant, the equation can only be balanced by an increase in prices. This is because there is more money available to purchase the same amount of goods and services, leading to inflationary pressure.

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  • 6. 

    An example of a real variable is

    • A.

      The nominal interest rate

    • B.

      The ratio of the value of wages to the price of sode

    • C.

      The price of corn

    • D.

      The dollar wage

    • E.

      None of the above

    Correct Answer
    B. The ratio of the value of wages to the price of sode
    Explanation
    The ratio of the value of wages to the price of soda is an example of a real variable because it represents a measure of purchasing power. Real variables are those that are adjusted for changes in prices, allowing for a more accurate comparison of economic variables over time. In this case, the ratio of wages to the price of soda provides insight into the affordability of goods and the standard of living.

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  • 7. 

    The quantity equation states that

    • A.

      Money x price level = velocity x real output

    • B.

      Money x real output = velocity x price level

    • C.

      Money x velocity = price level x real output

    • D.

      None of the above

    Correct Answer
    C. Money x velocity = price level x real output
    Explanation
    The correct answer is "money x velocity = price level x real output". This equation is known as the quantity equation and it states that the total amount of money in an economy multiplied by the velocity of money (the rate at which money is exchanged) is equal to the price level multiplied by the real output (the total quantity of goods and services produced). This equation highlights the relationship between money supply, inflation (represented by the price level), and economic output.

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  • 8. 

    If money is neutral,

    • A.

      An increase in the money supply does nothing

    • B.

      The money supply cannot be changed because it is tied to a commodity such as gold

    • C.

      A change in the money supply only affects real variables such as real output

    • D.

      A change in the money supply only affects nominal variables such as prices and dollar wages

    • E.

      A change in the money supply reduces velocity proportionately; therefore, there is no effect on either prices or real output

    Correct Answer
    D. A change in the money supply only affects nominal variables such as prices and dollar wages
    Explanation
    An increase in the money supply only affects nominal variables such as prices and dollar wages because if money is neutral, it means that changes in the money supply do not have any real effects on the economy. Instead, they only impact the nominal values of goods and services, such as prices and wages. This is because the increase in the money supply leads to an increase in the amount of money available in the economy, which can result in inflationary pressures and higher prices. However, it does not directly impact real variables like real output or productivity.

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  • 9. 

    If the money supply grows 5 percent, the real output grows 2 percent, prices should rise by

    • A.

      5 percent

    • B.

      Less than 5 percent

    • C.

      More than 5 percent

    • D.

      None of the above

    Correct Answer
    B. Less than 5 percent
    Explanation
    If the money supply grows by 5 percent and the real output grows by only 2 percent, it suggests that there is not enough demand to match the increase in supply. This means that prices should rise by less than 5 percent. The increase in money supply will lead to more money chasing the same amount of goods and services, causing inflation. However, since the increase in real output is lower than the increase in money supply, the overall increase in prices will be less than 5 percent.

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  • 10. 

    Velocity is

    • A.

      The annual rate of turnover of the money supply

    • B.

      The annual rate of turnover by output

    • C.

      The annual rate of turnover of business inventories

    • D.

      Highly unstable

    • E.

      Impossible to measure

    Correct Answer
    A. The annual rate of turnover of the money supply
    Explanation
    Velocity is a measure of how quickly money circulates in the economy. It represents the annual rate of turnover of the money supply, indicating how many times a unit of currency is used to purchase goods and services in a given period. A higher velocity suggests that money is being spent more frequently, indicating a faster pace of economic activity. Therefore, the given answer accurately describes velocity as the annual rate of turnover of the money supply.

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  • 11. 

    Countries that employ an inflation tax do so because

    • A.

      The government doesn't understand the causes and consequences of inflation

    • B.

      The government has a balanced budget

    • C.

      Government expenditures are high and the government has inadequate tax collections and difficulty borrowing

    • D.

      An inflation tax is the most equitable of all taxes

    • E.

      An inflation tax is the most progressive (paid by the rich) of all taxes

    Correct Answer
    C. Government expenditures are high and the government has inadequate tax collections and difficulty borrowing
    Explanation
    The correct answer is that countries employ an inflation tax because government expenditures are high and the government has inadequate tax collections and difficulty borrowing. This means that the government needs to find alternative ways to generate revenue, and one of the methods they use is by implementing an inflation tax. By increasing the money supply and causing inflation, the government effectively reduces the value of money, allowing them to generate additional revenue. This is seen as a solution when the government is facing financial constraints and is unable to meet its expenditure needs through traditional means such as taxation or borrowing.

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  • 12. 

    An inflation tax is

    • A.

      An explicit tax paid quarterly by businesses baed on the amount of increase in the prices of their products

    • B.

      A tax on people who hold money

    • C.

      A tax on people who hold interest-bearing savings accounts

    • D.

      Usually employed by governments with balanced budgets

    • E.

      None of the above

    Correct Answer
    B. A tax on people who hold money
    Explanation
    An inflation tax refers to a situation where the value of money decreases over time due to inflation, resulting in a hidden tax on individuals who hold money. As the value of money decreases, individuals are effectively taxed as they can purchase fewer goods and services with the same amount of money. This can be seen as a way for governments to indirectly tax individuals without explicitly imposing a tax. Therefore, the correct answer is "a tax on people who hold money."

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  • 13. 

    Suppose the nominal interest rate is 7 percent while the money supply is growing at a rate of 5 percent per year.  Assuming real output remains fixed, if the government increases the growth rate of the money supply from 5 percent to 9 percent, the Fisher effect suggets that, in the long run, the nominal interest rate should become

    • A.

      4 percent

    • B.

      9 percent

    • C.

      11 percent

    • D.

      12 percent

    • E.

      16 percent

    Correct Answer
    C. 11 percent
    Explanation
    The Fisher effect states that an increase in the growth rate of the money supply will lead to an increase in the nominal interest rate in the long run. In this case, if the money supply growth rate increases from 5 percent to 9 percent, it suggests that the nominal interest rate should also increase. Among the given options, the only rate that is higher than the initial 7 percent and consistent with the Fisher effect is 11 percent. Therefore, the correct answer is 11 percent.

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  • 14. 

    If the nominal interest rate is 6 percent and the inflation rate is 3 percent, the real interest rate is

    • A.

      3 percent

    • B.

      6 percent

    • C.

      9 percent

    • D.

      18 percent

    • E.

      None of the above

    Correct Answer
    A. 3 percent
    Explanation
    The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. In this case, the nominal interest rate is 6 percent and the inflation rate is 3 percent. Therefore, the real interest rate would be 6 percent minus 3 percent, which equals 3 percent.

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  • 15. 

    If actual inflation turns out to be greater than people had expected, then

    • A.

      Wealth was redistributed to lenders from borrowers

    • B.

      Wealth was redistributed to borrowers from lenders

    • C.

      No redistribution occurred

    • D.

      The real interest rate is unaffected

    Correct Answer
    B. Wealth was redistributed to borrowers from lenders
    Explanation
    When actual inflation turns out to be greater than people had expected, it means that the purchasing power of money decreases. This leads to a situation where borrowers benefit, as they are able to repay their loans with money that is worth less than when they borrowed it. On the other hand, lenders suffer a loss, as they receive back money that has less purchasing power. Therefore, wealth is redistributed from lenders to borrowers in this scenario.

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  • 16. 

    Which of the following costs of inflation does not occur when inflation is constant and predictable?

    • A.

      Shoeleather costs

    • B.

      Menu costs

    • C.

      Costs due to inflation-induced tax distortions

    • D.

      Arbitrary redistributions of wealth

    • E.

      Costs due to confusion and inconvenience

    Correct Answer
    D. Arbitrary redistributions of wealth
    Explanation
    Arbitrary redistributions of wealth do not occur when inflation is constant and predictable. Inflation typically leads to a redistribution of wealth as the value of money decreases. However, when inflation is constant and predictable, individuals and businesses can adjust their behavior and make informed decisions to mitigate the impact of inflation on their wealth. This reduces the occurrence of arbitrary redistributions of wealth, as individuals can plan and adapt accordingly.

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  • 17. 

    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.

      Menu costs

    • C.

      Costs due to inflation-induced tax distortions

    • D.

      Arbitrary redistributions of wealth

    • E.

      Costs due to confusion and inconvenience

    Correct Answer
    B. Menu costs
    Explanation
    Menu costs refer to the costs incurred by a business in changing and updating its prices. In this scenario, the business in Russia has to calculate, print, and mail a new price list to its customers every month due to inflation. This process of constantly updating prices and distributing new price lists incurs additional costs for the business, which are known as menu costs. These costs are a direct result of inflation and the need to adjust prices frequently to keep up with the changing economic conditions.

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  • 18. 

    Suppose that, because of inflation, people in Brazil economize on currency to go to the bank each day to withdraw their daily currency needs.  This is an example of

    • A.

      Shoeleather costs

    • B.

      Menu costs

    • C.

      Costs due to infaltion-induced tax distortions

    • D.

      Costs due to inflation-induced relative price variability, which misallocates resources

    • E.

      Costs due to confusion and inconvenience

    Correct Answer
    A. Shoeleather costs
    Explanation
    The given scenario describes the concept of shoeleather costs. Shoeleather costs refer to the costs incurred by individuals in response to inflation, such as the time, effort, and inconvenience of making frequent trips to the bank to withdraw currency. In this case, people in Brazil are economizing on currency by withdrawing their daily currency needs due to inflation, which leads to increased shoeleather costs.

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  • 19. 

    If the real interest rate is 4 percent, the inflation rate is 6 percent, and the tax rate is 20 percent, what is the after-tax real interest rate?

    • A.

      1 percent

    • B.

      2 percent

    • C.

      3 percent

    • D.

      4 percent

    • E.

      5 percent

    Correct Answer
    B. 2 percent
    Explanation
    The after-tax real interest rate can be calculated by subtracting the tax rate from the nominal interest rate, and then subtracting the inflation rate. In this case, the nominal interest rate is 4 percent, the tax rate is 20 percent, and the inflation rate is 6 percent. Subtracting the tax rate from the nominal interest rate gives us 4 percent - 20 percent = -16 percent. Then, subtracting the inflation rate from this value gives us -16 percent - 6 percent = -22 percent. However, since the after-tax real interest rate cannot be negative, we take the absolute value of -22 percent, which is 22 percent. Therefore, the after-tax real interest rate is 22 percent, which is equivalent to 2 percent.

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  • 20. 

    Which of the following statements about inflation is not true?

    • A.

      Unanticipated inflation redistributes wealth

    • B.

      An increase in inflation increases nominal interest rates

    • C.

      If there is inflation, taxing nominal interest income reducees the return to saving and reduces the rate of economic growth

    • D.

      Inflation reduces people's real purchasing power because it raises the cost of the things people buy

    Correct Answer
    D. Inflation reduces people's real purchasing power because it raises the cost of the things people buy
    Explanation
    Inflation reduces people's real purchasing power because it raises the cost of the things people buy. This statement is true because when there is inflation, the prices of goods and services increase over time. This means that the same amount of money can buy fewer goods and services, resulting in a decrease in purchasing power. Therefore, inflation reduces the real value of money and makes it more expensive for people to buy the same amount of goods and services.

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  • Current Version
  • Aug 31, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Nov 01, 2010
    Quiz Created by
    Emy_2
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