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Study Questions
1). For inflation to have no real effect on the economy, leaving all decisions and their real outcomes
unchanged, five conditions must be met. Which of the following incorrectly states one of those
conditions?
(a) Inflation is universally and accurately anticipated.
(b) All savings and money earn the nominal interest rate.
(c) Inflation of p0 percent lowers the nominal interest rate by p0 below the no-inflation nominal
rate.
(d) Only real interest income is taxable and only the real cost of borrowing is tax-deductible.
(e) Inflation raises the prices of all goods by the same percentage.
2. For inflation to have no real effect on the economy, leaving all decisions and their real outcomes
unchanged, five conditions must be met. Which of the following incorrectly states one of those
conditions?
(a) Inflation is universally and accurately anticipated.
(b) All savings and money earn the nominal interest rate.
(c) Inflation of p0 percent raises the nominal interest rate by p0 above the no-inflation nominal rate.
(d) Only nominal interest income is taxable and only the nominal cost of borrowing is taxdeductible.
(e) Inflation raises the prices of all goods by the same percentage.
3. For inflation to have no real effect on the economy, leaving all decisions and their real outcomes
unchanged, five conditions must be met. Which of the following incorrectly states one of those
conditions?
(a) Inflation is universally and accurately anticipated.
(b) All savings earn the nominal interest rate, while money earns zero interest.
(c) Inflation of p0 percent raises the nominal interest rate by p0 above the no-inflation nominal rate.
(d) Only real interest income is taxable and only the real cost of borrowing is tax-deductible.
(e) Inflation raises the prices of all goods by the same percentage.
4. The classic loser from an unanticipated inflation is
(a) the borrower who pays less nominal interest than expected.
(b) the borrower who pays more nominal interest than expected.
(c) the saver who earns less real interest than expected.
(d) the saver who earns more real interest than expected, and so should have saved more.
5) Real income is redistributed from _____________ in the case of ____________ inflation.
(a) creditors to debtors, anticipated
(b) creditors to debtors, unanticipated
(c) debtors to creditors, anticipated
(d) debtors to creditors, unanticipated
6. The “Fisher effect” occurs when a one-percentage-point rise in expected inflation _______________
interest rate by one percentage point
(a) raises the expected real
(b) lowers the expected real
(c) raises the nominal
(d) lowers the nominal
7. When the Fisher effect holds, a one-percentage-point increase in the long-run money growth rate,
because it _________ expected inflation, causes ___________ in the nominal interest rate in the
long run.
(a) equally lowers, a one-percentage-point decrease
(b) does not change, a one-percentage point decrease
(c) does not change, no change
(d) equally raises, no change
(e) equally raises, a one-percentage-point increase
8. The government budget constraint tells us that to the extent that government expenditures are not
financed by tax collection, the public ends up holding ______ government bonds and _______
money.
(a) more, more
(b) more, less
(c) fewer, more
(d) fewer, less
9. The three sources of government revenue are taxes, the _______ of government bonds, and the
________ of high-powered money.
(a) issuance, collection
(b) issuance, issuance
(c) buying back, collection
(d) buying back, issuance
10. Governments promote long-run inflation when they depend on ___________ to finance their
expenditures.
(a) issuing bonds
(b) taxation
(c) raising the national debt
(d) money creation
(e) selling off assets
11. The short-run simulative effect of a government budget deficit on real GDP is stronger with
__________ financing, since this __________ the crowding out effect of the deficit.
(a) bond, enhances
(b) bond, eliminates
(c) money, enhances
(d) money, eliminates
12. Government deficit financing is made easier by a p-percentage-point rise in inflation if it raises the
nominal interest rate by _______ than p percentage points, and the private sector wishes to hold
_________ quantity of real government bonds.
(a) less, a lower
(b) less, the same
(c) more, a lower
(d) more, the same
13. Government deficit financing is made easier by a rise in inflation when inflation ______ the private
sector’s demand for high-powered money, which the government can ______________.
(a) lowers, create and spend
(b) lowers, obtain through taxation
(c) raises, create and spend
(d) raises, obtain through taxation
14. In nations where conventional taxes are difficult to collect, the inflation tax is __________, which
tends to ________ the inflation rates of those nations.
(a) also difficult to collect, aggravate
(b) also difficult to collect, hold down
(c) a realistic alternative, aggravate
(d) a realistic alternative, hold down