Question 1

In which case below does a person's purchasing power from saving increase the most?
A)the nominal interest rate = 10% and inflation = 8%
B)the nominal interest rate = 9% and inflation = 6%
C)the nominal interest rate = 8% and inflation = 4%
D)the nominal interest rate = 7% and inflation = 2%

Accepted Answer

The real interest rate is the nominal interest rate minus the inflation rate. In option D, the real interest rate is 5% (7% - 2%), which is the highest among the options, indicating the greatest increase in purchasing power.

Question 2

If a country experienced deflation,then
A)the nominal interest rate would be greater than the real interest rate.
B)the real interest rate would be greater than the nominal interest rate.
C)the real interest rate would equal the nominal interest rate.
D)nominal GDP would be smaller than the money supply.

Accepted Answer

Deflation is a period of falling prices, which means that the value of money increases over time. In such a scenario, the real interest rate would be higher than the nominal interest rate. This is because the nominal interest rate reflects the inflation rate and if there is deflation, the inflation rate is negative. Therefore, the real interest rate (nominal interest rate minus inflation rate) would be higher than the nominal interest rate.  Option A is incorrect because in deflation, the nominal interest rate would be lower due to the negative inflation rate. Option C is incorrect because in deflation, the real interest rate is higher than the nominal interest rate. Option D is incorrect because nominal GDP is based on the prices of goods and services and in deflation, prices are falling, which would result in a lower nominal GDP.

Question 3

In the U.S. ,from the early 1980s through the early 1990s,
A)both inflation and nominal interest rates rose.
B)both inflation and nominal interest rates fell.
C)the inflation rate fell and the nominal interest rate rose.
D)the inflation rate rose and the nominal interest rate fell.

Accepted Answer

During the early 1980s through the early 1990s, both inflation and nominal interest rates in the U.S. generally fell, particularly after the high inflation and interest rates of the late 1970s and early 1980s. This was due to monetary policies aimed at controlling inflation.

Question 4

Shawn puts money into an account.One year later he sees that he has 6 percent more dollars and that his money will buy 5 percent more goods.
A)The nominal interest rate was 11 percent and the inflation rate was 5 percent.
B)The nominal interest rate was 6 percent and the inflation rate was 5 percent.
C)The nominal interest rate was 5 percent and the inflation rate was -1 percent.
D)The nominal interest rate was 6 percent and the inflation rate was 1 percent.

Accepted Answer

The nominal interest rate is the rate of interest before adjusting for inflation. The inflation rate is the rate at which prices for goods and services increase over time. In this case, the nominal interest rate is 6 percent and the inflation rate is 1 percent. This means that the real interest rate, which is the nominal interest rate minus the inflation rate, is 5 percent. This is the same as the increase in the purchasing power of the money, which is 5 percent.

Question 5

From the early 1980's through the 1990's,the nominal interest rate
A)fell because the Fed got inflation under control.
B)fell because the Fed let inflation get out of control.
C)rose because the Fed got inflation under control.
D)rose because the Fed let inflation get out of control.

Accepted Answer

During the 1980s and 1990s, the nominal interest rate fell because the Fed successfully controlled inflation through policies aimed at reducing inflationary pressures in the economy. Lower inflation led to lower nominal interest rates as expectations for future price increases decreased. So, choice A is the correct answer.

Question 6

Suppose that monetary neutrality and the Fisher effect both hold.An increase in the money supply growth rate increases
A)the inflation rate and nominal interest rates.
B)the inflation rate,but not nominal interest rates.
C)nominal interest rates,but not the inflation rate.
D)neither the inflation rate nor nominal interest rates.

Accepted Answer

If monetary neutrality and the Fisher effect both hold, an increase in the money supply growth rate will only affect nominal variables, such as the inflation rate and nominal interest rates. Real variables, such as real GDP or real interest rates, will remain unchanged. This is consistent with choice A, which states that an increase in the money supply growth rate will increase both the inflation rate and nominal interest rates.

Question 7

Banks advertise
A)the real interest rate,which is how fast the dollar value of savings grows.
B)the real interest rate,which is how fast the purchasing power of savings grows.
C)the nominal interest rate,which is how fast the dollar value of savings grows.
D)the nominal interest rate,which is how fast the purchasing power of savings grows.

Accepted Answer

Banks typically advertise the nominal interest rate, which indicates how fast the dollar value of savings grows, without adjusting for inflation.

Question 8

Suppose that monetary neutrality and the Fisher effect both hold and the money supply growth rate has been the same for a long time.Other things the same a higher money supply growth would be associated with
A)both higher inflation and higher nominal interest rates.
B)a higher inflation rate,but not higher nominal interest rates.
C)a higher nominal interest rate,but not higher inflation.
D)neither a higher inflation rate nor a higher nominal interest rate.

Accepted Answer

Monetary neutrality implies that changes in the money supply only affect nominal variables, not real ones. The Fisher effect states that the nominal interest rate adjusts one-for-one with changes in the inflation rate. Therefore, a higher money supply growth rate would lead to higher inflation and, consequently, higher nominal interest rates.

Question 9

When deflation exists,
A)the real interest rate is less than the nominal interest rate.
B)the real interest rate is greater than the nominal interest rate.
C)the real interest rate and inflation are less than the nominal interest rate.
D)prices rise.

Accepted Answer

When deflation exists, the general price level is decreasing, resulting in a greater purchasing power of money. Therefore, the real interest rate, which takes into account inflation or deflation, is higher than the nominal interest rate, which only considers the stated interest rate.

Question 10

Darla puts her money into a bank account that earns interest.One year later she sees that the account has 6 percent more dollars and that her money will buy 7.5 percent more goods.
A)The nominal interest rate was 13.5 percent and the inflation rate was 7.5 percent.
B)The nominal interest rate was 13.5 percent and the inflation rate was 1.5 percent.
C)The nominal interest rate was 6 percent and the inflation rate was -1.5 percent.
D)The nominal interest rate was 6 percent and the inflation rate was 7.5 percent.

Accepted Answer

The nominal interest rate is the percentage increase in the amount of money, which is 6 percent. The real interest rate is the percentage increase in the purchasing power of the money, which is 7.5 percent. The real interest rate is calculated as the nominal interest rate minus the inflation rate. Therefore, the inflation rate must be negative, specifically -1.5 percent, to result in a real interest rate of 7.5 percent.

Question 11

Under the assumptions of the Fisher effect and monetary neutrality,if the money supply growth rate rises,then
A)both the nominal and the real interest rate rise.
B)neither the nominal nor the real interest rate rise.
C)the nominal interest rate rises,but the real interest rate does not.
D)the real interest rate rises,but the nominal interest rate does not.

Accepted Answer

Under the Fisher effect, an increase in the growth rate of the money supply leads to an increase in the nominal interest rate. However, under monetary neutrality, changes in the money supply growth rate have no effect on the real interest rate. Therefore, the nominal interest rate increases but the real interest rate remains the same, resulting in a decrease in the purchasing power of money.

Question 12

Suppose that monetary neutrality and the Fisher effect both hold.An increase in the money supply growth rate increases
A)the inflation rate and growth of real GDP.
B)the inflation rate but not the growth rate of real GDP.
C)the growth rate of real GDP,but not the inflation rate.
D)neither the inflation rate nor the growth rate of real GDP.

Accepted Answer

According to monetary neutrality, changes in the money supply growth rate only affect nominal variables, not real variables. The Fisher effect states that an increase in the money supply growth rate leads to an increase in the inflation rate. Therefore, an increase in the money supply growth rate will increase the inflation rate but will not affect the growth rate of real GDP.

Question 13

Suppose that monetary neutrality and the Fisher effect both hold.An increase in the money supply growth rate increases
A)the inflation rate and real interest rates.
B)the inflation rate,but not real interest rates.
C)real interest rates,but not the inflation rate.
D)neither the inflation rate nor real interest rates.

Accepted Answer

If monetary neutrality and the Fisher effect both hold, then an increase in the money supply growth rate would increase the nominal interest rate by the same amount as the increase in the money supply growth rate. However, the real interest rate (which is the nominal interest rate minus the inflation rate) would remain unchanged by the increase in the money supply growth rate. Therefore, the inflation rate would increase, but real interest rates would not be affected.

Question 14

Under the assumptions of the Fisher effect and monetary neutrality,if the money supply growth rate falls,then
A)both the nominal and the real interest rate fall.
B)neither the nominal nor the real interest rate fall.
C)the nominal interest rate falls,but the real interest rate does not.
D)the real interest rate falls,but the nominal interest rate does not.

Accepted Answer

According to the Fisher effect, a decrease in the money supply growth rate leads to a decrease in the nominal interest rate, while the real interest rate remains unchanged due to monetary neutrality.

Question 15

The Fisher effect says that
A)the nominal interest rate adjusts one for one with the inflation rate.
B)the growth rate of the money supply is negatively related to the velocity of money.
C)real variables are heavily influenced by the monetary system.
D)All of the above are correct.

Accepted Answer

The Fisher effect states that the nominal interest rate adjusts one for one with the inflation rate. This means that if inflation increases by 2%, then nominal interest rates will also increase by approximately 2%. Option B refers to the quantity theory of money, where the growth rate of the money supply is related to the velocity of money. Option C is a general statement about the influence of monetary policy on real economic variables, but it is not specifically related to the Fisher effect.

Question 16

Which of the following can a country increase in the long run by increasing its money growth rate?
A)the nominal wage.
B)real output.
C)real interest rates.
D)the real wage.

Accepted Answer

Increasing money growth rate may lead to an increase in the nominal wages in the long run due to the effect of inflation. Real output, real interest rates, and real wages may not necessarily increase as they depend on factors such as productivity growth, investment rates, and labor market conditions.

Question 17

When money is neutral,which of the following increases when the money supply growth rate increases?
A)real output growth
B)real interest rates
C)nominal interest rates
D)the money supply divided by the price level

Accepted Answer

When money is neutral, changes in the money supply only affect nominal variables, such as nominal interest rates, not real variables like real output or real interest rates.

Question 18

In which case below is the real interest rate the highest?
A)the nominal interest rate = 1% and inflation = 3%
B)the nominal interest rate = 6% and inflation = 4%
C)the nominal interest rate = 2% and inflation = -1%
D)the nominal interest rate = 2% and inflation = 1%

Accepted Answer

In option C, the nominal interest rate is 2% and inflation is negative, which means the real interest rate is the nominal interest rate plus inflation, i.e., 2% + (-1%) = 1%. This is the highest among all the options presented. In options A and D, inflation is higher than the nominal interest rate, resulting in negative real interest rates. In option B, though the nominal interest rate is higher, inflation is also higher, resulting in a lower real interest rate than option C.

Question 19

Katarina puts money into an account.One year later she sees that she has 6 percent more dollars and that her money will buy 4 percent more goods.
A)The nominal interest rate was 10 percent and the inflation rate was 6 percent.
B)The nominal interest rate was 6 percent and the inflation rate was 2 percent.
C)The nominal interest rate was 4 percent and the inflation rate was 2 percent.
D)The nominal interest rate was 10 percent and the inflation rate was 4 percent.

Accepted Answer

If Katarina's money earns a nominal interest rate of 6%, and the goods she wants to buy are 4% more expensive, then her real interest rate is 2%. This is the difference between the nominal interest rate and the inflation rate (real interest rate = nominal interest rate - inflation rate). Therefore, of the options given, only (B) satisfies this condition. The other options either have a higher nominal interest rate or a higher inflation rate, which would result in a higher real interest rate.

Question 20

Walter puts money in a savings account at his bank earning 3.5 percent.One year later he takes his money out and notes that while his money was earning interest,prices rose 1.5 percent.Walter earned a nominal interest rate of
A)3.5 percent and a real interest rate of 5 percent.
B)3.5 percent and a real interest rate of 2 percent.
C)5 percent and a real interest rate of 3.5 percent
D)5 percent and a real interest rate of 2 percent

Accepted Answer

The nominal interest rate is the rate at which Walter's savings account earned interest, which is 3.5 percent.

The real interest rate takes inflation into account and measures the purchasing power of Walter's earnings. To calculate the real interest rate, we subtract the inflation rate from the nominal interest rate:

Real interest rate = Nominal interest rate - Inflation rate

Real interest rate = 3.5% - 1.5%

Real interest rate = 2%

Therefore, Walter earned a nominal interest rate of 3.5 percent and a real interest rate of 2 percent. The correct answer is B.

Quiz 17: Money Growth and Inflation: The Classical Theory of Inflation

In which case below does a person's purchasing power from saving increase the most?

If a country experienced deflation,then

In the U.S. ,from the early 1980s through the early 1990s,

Shawn puts money into an account.One year later he sees that he has 6 percent more dollars and that his money will buy 5 percent more goods.

From the early 1980's through the 1990's,the nominal interest rate

Suppose that monetary neutrality and the Fisher effect both hold.An increase in the money supply growth rate increases

Banks advertise

Suppose that monetary neutrality and the Fisher effect both hold and the money supply growth rate has been the same for a long time.Other things the same a higher money supply growth would be associated with

When deflation exists,

Darla puts her money into a bank account that earns interest.One year later she sees that the account has 6 percent more dollars and that her money will buy 7.5 percent more goods.

Under the assumptions of the Fisher effect and monetary neutrality,if the money supply growth rate rises,then

Suppose that monetary neutrality and the Fisher effect both hold.An increase in the money supply growth rate increases

Suppose that monetary neutrality and the Fisher effect both hold.An increase in the money supply growth rate increases

Under the assumptions of the Fisher effect and monetary neutrality,if the money supply growth rate falls,then

The Fisher effect says that

Which of the following can a country increase in the long run by increasing its money growth rate?

When money is neutral,which of the following increases when the money supply growth rate increases?

In which case below is the real interest rate the highest?

Katarina puts money into an account.One year later she sees that she has 6 percent more dollars and that her money will buy 4 percent more goods.

Walter puts money in a savings account at his bank earning 3.5 percent.One year later he takes his money out and notes that while his money was earning interest,prices rose 1.5 percent.Walter earned a nominal interest rate of