Deck 34: Inflation, Deflation, and Macro Policy

Question 1

If global prices are lower than domestic prices, the short-run Phillips curve is likely to be horizontal.

Answer 1

True

Question 2

Asset price inflation occurs when the prices of assets rise.

Answer 2

False

Question 3

Asset price inflation can be a problem because it:

A)gives people the illusion that their real wealth has decreased more than it really has.
B)makes people switch their resources from risky investments to conservative investments.
C)gives people the illusion that their real wealth has increased more than it really has.
D)typically increases at the same rate as goods price inflation.

Answer 3

gives people the illusion that their real wealth has increased more than it really has.

Question 4

According to the Phillips curve model, when expectations of inflation increase, the same level of unemployment will be associated with a higher rate of inflation.

Question 5

Expectations of inflation are assumed to be constant at each point on a given short-run Phillips curve.

Question 6

Asset inflation tends to hurt those who save in risky assets.

Question 7

Asset inflation is when:

A)asset prices rise regardless of their real value.
B)the money supply increase leads to inflation.
C)asset prices rise more than their real value.
D)expansionary fiscal policy leads to inflation.

Question 8

If expectations of inflation are greater than actual inflation, the short-run Phillips curve will eventually shift upward.

Question 9

Economists before the 1940s were most likely to call a rise in asset prices inflation, as long as it is accompanied by an increase in:

A)the money supply.
B)GDP.
C)goods inflation.
D)a price index.

Question 10

Asset inflation:

A)is equal to goods inflation.
B)is the rise in the physical increase in assets.
C)is the rise in asset prices that exceed the rise in the real value of assets.
D)does not occur when the economy faces globalization because prices are capped.

Question 11

It's difficult to measure asset inflation because asset prices can increase when assets become more productive.

Question 12

The long-run Phillips curve shifts to the left or the right as expectations of inflation change.

Question 13

The prices of assets are included in standard measures of inflation.

Question 14

The usefulness of standard goods market price indexes for judging policy is limited because:

A)they include the prices of assets.
B)they include only the price of gold and silver.
C)the United States is no longer on the gold standard.
D)they do not include the price of assets.

Question 15

Economists who accept the quantity theory of money favor a monetary rule because they believe the short-run effects of monetary policy are unpredictable and the long-run effects are on the price level, not real output.

Question 16

Inflation redistributes income from people who do not raise their prices to people who do raise their prices.

Question 17

Inflation has both benefits and costs.

Question 18

One way to measure asset inflation is to:

A)multiply the GDP deflator times nominal net worth; if it increases, there is asset inflation.
B)multiply the GDP deflator times real net worth; if it increases, there is asset inflation.
C)divide GDP by nominal net worth; if it increases, there is asset inflation.
D)divide nominal net worth by GDP; if it increases, there is asset inflation.

Question 19

Asset inflation has a danger of:

A)obscuring goods inflation.
B)accommodating contractionary monetary policy.
C)reducing the productive capacity of assets.
D)leading to a misallocation of resources to risky investments.

Question 20

Economists who accept the quantity theory of money believe that inflation is always and everywhere a monetary phenomenon.

Question 21

Suppose you sell surfboards for a living, and you expect the price of surfboards to increase at the same rate as inflation; you adjust your prices accordingly. If this does not occur, then it must be true that:

A)the price of surfboards is changing at a rate that is different from what was expected.
B)the inflation rate is different from what was expected.
C)both the price of surfboards and the inflation rate are different from what was expected.
D)the relative price of surfboards is changing.

Question 22

Inflation frees policy makers from:

A)the 2.5 percent interest rate lower bound.
B)the 2.5 percent growth rate bound.
C)the zero interest rate lower bound.
D)the zero interest rate upper bound.

Question 23

Asset deflation generally:

A)is more harmful than the preceding inflation was helpful.
B)is less harmful than the preceding inflation was helpful.
C)is neither good nor bad, it merely redistributes income.
D)cannot occur because people will know it will follow asset inflation.

Question 24

Before the financial crisis of 2008:

A)the 2.5 percent inflation target was seen as a lower bound.
B)the 2.5 percent inflation target was seen as an upper bound.
C)the 2.5 percent inflation target was seen as a precise target.
D)inflation was not seen as a target.

Question 25

Policy makers:

A)like inflation because it allows individuals to maintain illusions.
B)dislike inflation because it allows individuals to maintain illusions.
C)like inflation because it makes society richer.
D)dislike inflation because it redistributes income.

Question 26

Inflation:

A)has only costs.
B)has both benefits and costs.
C)just exists; it does not have benefits or costs.
D)has costs and benefits that generally offset each other.

Question 27

Over the last 20 years, the United States experienced periods of considerable:

A)asset price inflation, followed by sudden spurts of asset price deflation.
B)goods price inflation, followed by sudden spurts of goods price deflation.
C)asset price deflation, followed by sudden spurts of goods price inflation.
D)asset price deflation, followed by sudden spurts of asset price inflation.

Question 28

With 6 percent inflation and a 1 percent nominal interest rate, the real interest rate is:

A)7 percent.
B)1 percent.
C)−5 percent.
D)5 percent.

Question 29

If inflation is highly volatile:

A)mortgage contracts will likely be more complicated.
B)mortgage contracts will likely be less complicated.
C)there will be no mortgage contracts.
D)there will be no effect on mortgage contracts.

Question 30

Inflation:

A)can obscure relative price changes.
B)redistributes income from those who can raise prices to those who cannot.
C)can undermine faith in the monetary system, the economy, and the government if it is high enough.
D)makes society poorer on average.

Question 31

If monetary policy makers want to target a negative interest rate, they:

A)cannot do so since negative interest rates are impossible.
B)need to stop inflation before they do it.
C)need to encourage inflation before they do it.
D)need to stop asset inflation before they do it.

Question 32

If inflation is highly volatile, money is:

A)more valuable because you need more of it.
B)less valuable because there is less of it.
C)more valuable because its unit of account function is reduced.
D)less valuable because its unit of account function is reduced.

Question 33

The effects of asset price inflation and asset price deflation generally:

A)even out.
B)have unequal effects on the economy.
C)are unrelated.
D)are addressed by policymakers.

Question 34

If there is inflation the:

A)unit of account function of money is improved.
B)unit of account function of money is undermined.
C)distributional function of money is improved.
D)distributional function of money is undermined.

Question 35

If asset prices rise:

A)real wealth increases.
B)productive capacity increases.
C)inflation increases.
D)it is unclear whether wealth increases or inflation has occurred.

Question 36

Generally, in the United States today, goods inflation:

A)under 5 percent is considered acceptable.
B)under 2.5 percent is considered acceptable.
C)at zero is considered acceptable.
D)that is negative is preferable.

Question 37

Inflation is undesirable because it:

A)always makes the nation poorer.
B)redistributes income from those who can raise prices to those who cannot.
C)distorts the information value of prices.
D)makes everyone worse off.

Question 38

Currently, if inflation is 2 percent and the goods inflation target is 2.5 percent, policymakers:

A)congratulate themselves for coming in under their target.
B)are unhappy because they have come in under their target.
C)are indifferent because they don't have an inflation target.
D)are indifferent because they are more interested in asset inflation.

Question 39

A cost of inflation is that it:

A)makes everyone poorer.
B)makes the poor poorer and the rich richer.
C)reduces the informational content of prices.
D)it raises real interest rates.

Question 40

Because inflation undermines money's unit of account function, government policy will try to keep it:

A)at zero.
B)at a low rate.
C)negative.
D)at either a low or a negative rate.

Question 41

The higher the rate of inflation, the lower the:

A)real interest rate can fall, as long as it is positive.
B)nominal interest rate can fall, as long as it is positive.
C)nominal interest rate can fall.
D)real interest rate can fall.

Question 42

Given the basic rule of thumb for the relationship among inflation, productivity and nominal wage increases, if wages rise by 1 percent and productivity increases 2 percent, one would predict inflation to be:

A)−1 percent.
B)0 percent.
C)1.5 percent.
D)3 percent.

Question 43

The last time the United States experienced hyperinflation was during:

A)the oil crisis of the 1970s.
B)World War II.
C)the Civil War.
D)the Great Depression.

Question 44

In Zimbabwe, inflation rose from an annual rate of 32 percent in 1998 to 100,000 percent in early 2009. Considering only the effects of this unexpected inflation, which of the following groups are helped by the inflation:

A)Debtors
B)People living on fixed pensions
C)Unemployed people
D)No one; inflation hurts everyone

Question 45

A basic rule of thumb to predict inflation is that it equals:

A)real wage increases minus productivity growth.
B)productivity growth plus nominal wage increases.
C)productivity growth minus nominal wage increases.
D)nominal wage increases minus productivity growth.

Question 46

In a hyperinflation, the economy:

A)always collapses.
B)can continue to function but people are unwilling to hold any money.
C)can continue to function because people build expected inflation into wages and prices.
D)will slow on its own to lower inflation.

Question 47

In which case will adaptive, extrapolative and rational expectations predict the same inflation rate in the coming year?

A)Inflation is 4 percent last year, 2 percent this year, and the economist's model predicts 3 percent.
B)Inflation is 4 percent last year, 2 percent this year, and the economist's model predicts 0 percent.
C)Inflation is 3 percent last year, 2 percent this year, and the economist's model predicts 4.5 percent.
D)In none of the options would the predictions be the same.

Question 48

A situation in which the price level increases at an extremely high rate is called:

A)hyperinflation.
B)disinflation.
C)inflation.
D)stagflation.

Question 49

Inflationary expectations are important, because widespread changes in inflationary expectations affect:

A)the distribution of income.
B)relative prices.
C)actual inflation.
D)Okun's rule of thumb.

Question 50

In an unexpected inflation, lenders will generally:

A)gain relative to borrowers.
B)lose relative to borrowers.
C)neither gain nor lose relative to borrowers.
D)The effect will be totally random.

Question 51

Governments usually accept goods inflation as long as it stays low, which for the United States currently means around:

A)1 to 2.5 percent.
B)3.5 to 4 percent.
C)5.5 to 6 percent.
D)7.5 to 8 percent.

Question 52

Given the basic rule of thumb for the relationship among inflation, productivity and nominal wage increases, if wages rise by 2 percent and productivity increases 1 percent, one would predict inflation to be:

A)0 percent.
B)1 percent.
C)1.5 percent.
D)3 percent.

Question 53

One reason goods inflation is preferred by policymakers is that it:

A)keeps the economy away from asset inflation.
B)keeps the economy away from asset deflation.
C)makes people richer.
D)makes people see the importance of monetary policy.

Question 54

A central policy concern about inflation is to see that it:

A)does not become built into expectations.
B)does not redistribute income.
C)does redistribute income.
D)does become built into expectations.

Question 55

If inflation increases unexpectedly, then:

A)borrowers tend to lose.
B)lenders tend to lose.
C)lenders and borrowers tend to gain.
D)neither borrowers nor lenders tend to lose.

Question 56

In Zimbabwe, inflation rose from an annual rate of 32 percent in 1998 to 100,000 percent in early 2009. Considering only the effects of this unexpected inflation, which of the following is most harmed by the inflation?

A)Businesses with large inventories
B)Businesses with large debts
C)Businesses with wages determined by long-term contracts
D)Businesses who had contracted to sell their services to others at fixed prices

Question 57

When inflation is unexpected, it tends to hurt:

A)people who save money in financial institutions.
B)people who borrow money from financial institutions.
C)businesses who borrow money from financial institutions.
D)people with flexible income.

Question 58

According to the text, if individuals base their expectations on the past, we could say that their expectations are:

A)rational.
B)historical.
C)adaptive.
D)regressive.

Question 59

According to the text, if individuals base their expectations on economic models, we say that their expectations are:

A)rational.
B)historical.
C)adaptive.
D)extrapolative.

Question 60

Given the basic rule of thumb for the relationship among inflation, productivity and nominal wage increases, if wages rise by 5 percent and productivity increases 3 percent, one would predict inflation to be:

A)−1 percent.
B)0 percent.
C)1 percent.
D)2 percent.

Question 61

If the velocity of money is increasing, but the money supply is not, it is likely the economy is experiencing:

A)a trade deficit.
B)deflation.
C)growth.
D)inflation.

Question 62

Suppose a country has a velocity of money equal to 12 and a nominal GDP of $30 billion. This means that each dollar in this economy is supporting approximately:

A)$10 in total income.
B)$30 in total income.
C)$1.5 in total income.
D)$12 in total income.

Question 63

One assumption that changes the equation of exchange into the quantity theory of money is:

A)velocity remains constant.
B)real output varies with the money supply.
C)expectations change with inflation.
D)price times quantity equals nominal output.

Question 64

According to the quantity theory of money, inflation is attributable to increases in:

A)velocity.
B)real GDP.
C)velocity in excess of increases in real GDP.
D)the money supply in excess of increases in real GDP.

Question 65

Suppose that real output is fixed and equal to 400, while velocity is fixed and equal to 5. Then, if the money supply is equal to 200, the price level will be:

A)2.5.
B)5.
C)7.5.
D)10.

Question 66

According to the quantity theory of money, velocity:

A)varies substantially with changes in the rate of interest and the expected rate of inflation.
B)varies with changes in the growth rate of the money supply.
C)is fairly constant, responding only to changes in the expected rate of inflation.
D)is virtually constant, responding only to changes in the underlying institutional structure.

Question 67

According to the quantity theory of money, persistent inflation can only be caused by:

A)a low rate of unemployment.
B)money supply growth that exceeds real GDP growth.
C)a high rate of unemployment.
D)a continually-growing government deficit.

Question 68

If the velocity of money is about 1.8 and the money stock is about $8 trillion, what is the real GDP?

A)$0.8 trillion
B)$4.4 trillion
C)$14.2 trillion
D)We cannot compute real GDP from the data; we can only compute nominal GDP.

Question 69

If inflation was 3 percent last year and 2 percent this year, an individual who follows extrapolative expectations would predict that the inflation rate for the coming year would be:

A)0 percent.
B)1 percent.
C)3 percent.
D)5 percent.

Question 70

Velocity can be calculated as the ratio of:

A)nominal GDP to real GNP.
B)nominal GDP to the money supply.
C)real GDP to the price level.
D)the money supply to the price level.

Question 71

If the velocity of money falls from 1.95 to 1.85, the decline in velocity implies that:

A)inflation increases.
B)inflation decreases.
C)the money stock grows faster than nominal GDP.
D)the money stock grows more slowly than nominal GDP.

Question 72

If productivity growth is 2 percent and inflation is 5 percent, on average, nominal wage increases will be:

A)2 percent.
B)3 percent.
C)5 percent.
D)7 percent.

Question 73

Suppose the U.S. money supply increases from $7.6 trillion to $8.3 trillion. If there is zero real economic growth, and velocity stays constant, then according to the quantity theory of money, the U.S. inflation rate during this period would be:

A)3 percent.
B)6 percent.
C)9 percent.
D)12 percent.

Question 74

According to the quantity theory:

A)unemployment is everywhere and always a monetary phenomenon.
B)inflation is everywhere and always a monetary phenomenon.
C)the equation of exchange does not hold true.
D)real output is everywhere and always a monetary phenomenon.

Question 75

The quantity theory of money implies that an increase in the money supply will ultimately:

A)increase the price level and leave real GDP unchanged.
B)affect only the level of real GDP; the price level will remain unchanged.
C)increase the price level and the level of real GDP.
D)decrease the price level and the level of real GDP.

Question 76

If the money supply is 500 and velocity is 6, then nominal GDP:

A)is 83.33.
B)is 500.
C)is 3,000.
D)cannot be determined.

Question 77

Suppose the money supply is $8 trillion and nominal GDP is $14.2 trillion. What is the velocity of money?

A)1.8
B)8.0
C)112
D)We cannot compute it without knowing real GDP.

Question 78

The quantity theory of money concludes that if real output is constant:

A)changes in the price level are caused by changes in the money supply.
B)real GDP and the money supply are related in the long run.
C)changes in velocity are proportional to changes in nominal income.
D)changes in velocity are proportional to changes in the money supply.

Question 79

The equation of exchange is expressed as:

A)MR = PQ.
B)MV = PQ.
C)MPP = P.
D)MR = MC.

Question 80

If the velocity of money is about 1.8 and nominal GDP is $14.4 trillion, what is the money supply?

A)$1.8 trillion
B)$8.0 trillion
C)$14.4 trillion
D)We cannot compute the money supply from the data given.