Question 1

The "excess" growth rate of the money supply is the growth rate of money

Accepted Answer

The "excess" growth rate of the money supply is defined as the growth rate of money minus the long-run growth rate of real GDP. This concept is used to analyze the relationship between money supply growth and economic growth, suggesting that if the money supply grows faster than real GDP, it could lead to inflation.

Question 2

The "quantity equation" states that nominal GDP is equal by the definition of velocity to the money supply ________ velocity.

Accepted Answer

The quantity equation of money is MV = PY, where M is the money supply, V is the velocity of circulation, P is the price level, and Y is real output. Solving for nominal GDP, we get PY = MV, which means nominal GDP is equal to the money supply multiplied by the velocity of money. Therefore, the answer is C, multiplied by.

Question 3

If the nominal interest rate is 10% and expected inflation is 5%,the real expected interest rate is

Accepted Answer

Real expected interest rate = Nominal interest rate - inflation rate 
= 10% - 5% 
= 5%

Question 4

In the quantity equation framework for understanding the determinants of long-run inflation,a rise in government spending ________ velocity,putting ________ pressure on inflation.

Accepted Answer

In the quantity equation framework (MV = PY), where M is the money supply, V is the velocity of money, P is the price level, and Y is the real output, a rise in government spending typically increases the velocity of money as it stimulates economic activity, leading to more transactions. This increased velocity, without a corresponding increase in the money supply or output, puts upward pressure on the price level, hence inflation.

Question 5

Over a year,the money supply in a nation grew by 6 percent,while velocity fell by 1 percent and real GDP rose by 2 percent.This results in an inflation over the year of ________ percent.

Accepted Answer

The answer of Over a year,the money supply in a...

Question 6

Rising velocity means that people want to hold ________ nominal money per dollar of nominal GDP,which ________ the inflationary tendency of an increase in the money supply as one way of re-equating the demand and supply of money.

Accepted Answer

Rising velocity means that people are holding less nominal money per dollar of nominal GDP, which weakens the inflationary tendency of an increase in the money supply. This is because people are spending the money faster, increasing demand and helping to re-equating the demand and supply of money.

Question 7

In the quantity equation framework for understanding the determinants of long-run inflation,a drop in consumer confidence ________ velocity,putting ________ pressure on inflation.

Accepted Answer

According to the quantity equation (MV=PY), a drop in consumer confidence will lead to a decrease in velocity (V), assuming the money supply (M) and output (Y) remain constant. This is because people will spend less and hold onto their money, slowing down the velocity of money in the economy. A decrease in velocity puts downward pressure on inflation, as there is less money circulating to bid up prices. Therefore, the correct answer is D, which states that a drop in consumer confidence lowers velocity and puts downward pressure on inflation.

Question 8

In the quantity equation framework for understanding the determinants of long-run inflation,a depreciation of the exchange rate ________ velocity,putting ________ pressure on inflation.

Accepted Answer

In the quantity equation framework (MV = PY), a depreciation of the exchange rate typically leads to an increase in the price level (P), as imported goods become more expensive. This does not directly affect the velocity of money (V), which is more about how often money circulates in the economy. However, the increase in the price level puts upward pressure on inflation, as goods and services in the economy become more expensive.

Question 9

From the quantity equation we find that the rate of inflation is equal by definition to the growth rate of nominal GDP ________ the growth rate of real GDP.

Accepted Answer

The rate of inflation is calculated by subtracting the growth rate of real GDP from the growth rate of nominal GDP. This is because inflation represents the portion of nominal GDP growth that is not accounted for by real GDP growth, indicating an increase in prices rather than in the quantity of goods and services produced.

Question 10

Over a year,the money supply in a nation grew by 8 percent,while velocity rose by 2 percent and real GDP rose by 3 percent.This results in an inflation over the year of ________ percent.

Accepted Answer

The equation of exchange is MV = PQ, where M is the money supply, V is velocity, P is the price level, and Q is real GDP. If M grows by 8%, V grows by 2%, and Q grows by 3%, then P must grow by 7% to keep the equation in balance.

Question 11

According to Gordon,the main losers due to the redistributive effect of the postwar inflation in the United States were

Accepted Answer

Gordon states in the passage that the redistributive effect of the postwar inflation in the United States was mainly at the expense of households as their purchasing power decreased due to rising inflation, while corporations were able to pass on the costs to consumers through price increases and government was able to benefit from increased tax revenue. Foreigners are not mentioned in relation to the redistributive effect.

Question 12

If the market rate of interest is 13%,the growth of nominal GDP 9%,and the growth of real GDP 2%,then

Accepted Answer

The answer of If the market rate of interest is...

Question 13

The costs imposed by inflation should be lessened in the future because of the following reform that took place during the early 1980s

Accepted Answer

The answer of The costs imposed by inflation should be...

Question 14

In the United States,the long-run inflation rate can be expressed simply as the growth rate of money

Accepted Answer

The long-run inflation rate in the United States can be expressed as the growth rate of money minus the long-run growth rate of real GDP, according to the quantity theory of money. This theory suggests that if the money supply grows at a faster rate than real GDP, inflation will occur.

Question 15

From the quantity equation we find that the rate of inflation is equal by definition to the growth rate of the money supply ________ the growth rate of velocity ________ the growth rate of real GDP.

Accepted Answer

The quantity equation is MV = PY, where M is money supply, V is velocity of money, P is price level, and Y is real GDP. Taking the percentage change of both sides, we get:

%Δ M + %Δ V = %Δ P + %Δ Y

Rearranging the equation, we get:

%Δ P = %Δ M - %Δ V - %Δ Y

This shows that the rate of inflation (%Δ P) is equal to the growth rate of money supply (%Δ M) minus the growth rate of velocity of money (%Δ V) minus the growth rate of real GDP (%Δ Y). As velocity of money may decrease in response to an increase in money supply or due to other factors, we can have a situation where %Δ M is greater than %Δ V + %Δ Y, leading to inflation. Therefore, the correct answer is B) plus, minus.

Question 16

Inflation has no effect on an economy's well-being if

Accepted Answer

If inflation is universally and accurately anticipated, prices and wages adjust accordingly, and relative prices are unaffected. If the nominal rate of interest for both savers and borrowers rises by an amount just equal to the rate of inflation, then the real interest rate remains stable, allowing savers to maintain the purchasing power of their savings and borrowers to repay their debts with money that has reduced purchasing power. Therefore, all of these conditions must be met for inflation to have no effect on an economy's well-being.

Question 17

The costs of inflation depend upon

Accepted Answer

The answer of The costs of inflation depend upon
...

Question 18

In the United States,the long-run average growth rate of velocity in recent decades has been

Accepted Answer

In recent decades, the long-run average growth rate of velocity in the United States has been virtually zero. This means that the demand for money has been relatively stable and not increasing at a significant rate.

Question 19

The real rate of interest

Accepted Answer

The real rate of interest is the nominal rate minus the rate of inflation. This is because inflation decreases the purchasing power of money, so the actual increase in wealth from receiving interest payments is reduced. Subtracting the inflation rate from the nominal rate gives the real rate, which is the actual increase in purchasing power. A is incorrect because the real rate and the nominal rate are only equal when Y equals YN in the classical model, but this is not the case in reality with sticky prices and imperfect information. C is incorrect because adding inflation to the nominal rate gives a higher rate than the actual increase in purchasing power. D is incorrect because the real rate can be negative if inflation is higher than the nominal rate.

Question 20

The actual real interest rate and the expected real interest rate will be identical if

Accepted Answer

The expected real interest rate is calculated by subtracting the expected inflation rate (pe) from the nominal interest rate. If pe = p, then the actual real interest rate (which is the nominal interest rate minus the actual inflation rate) will also be equal to the expected real interest rate. Therefore, option A is the correct answer.

Quiz 10: The Goals of Stabilization Policy: Low Inflation and Low Unemployment