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STUDY QUESTIONS FOR CHAPTER 9
1.
When Okun’s “misery index” is used to judge macroeconomic conditions, inflation is being
considered
(a) not to be a macroeconomic problem at all.
(b) a less serious macroeconomic problem than unemployment.
(c) just as serious a macroeconomic problem as unemployment.
(d) a more serious macroeconomic problem than unemployment.
2.
When the misery index is used to judge macroeconomic conditions, reducing inflation by one
percentage point
(a) has no effect at all on how we judge the economy’s performance.
(b) is of less benefit to the economy than reducing the unemployment rate by one percentage point.
(c) gives the same benefit to the economy as reducing the unemployment rate by one percentage
point.
(d) is of greater benefit to the economy than reducing the unemployment rate by one percentage
point.
3.
The “quantity equation” states that nominal GDP is equal by the definition of velocity to the money
supply _________ velocity.
(a) plus
(b) minus
(c) multiplied by
(d) divided by
4.
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.
(a) plus, plus
(b) plus, minus
(c) minus, plus
(d) minus, minus
5.
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.
(a) minus
(b) plus
(c) multiplied by
(d) divided by
6.
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.
(a) 9
(b) 7
(c) 5
(d) 3
7.
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.
(a) 7
(b) 9
(c) 13
(d) 3
8.
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.
(a) more, strengthens
(b) more, weakens
(c) less, strengthens
(d) less, weakens
9.
In the quantity equation framework for understanding the determinants of long-run inflation, a rise
in government spending ___________ velocity, putting __________ pressure on inflation.
(a) raises, upward
(b) raises, downward
(c) lowers, upward
(d) lowers, downward
10.
In the quantity equation framework for understanding the determinants of long-run inflation, a drop
in consumer confidence _______ velocity, putting ________ pressure on inflation.
(a) raises, upward
(b) raises, downward
(c) lowers, upward
(d) lowers, downward
11.
In the quantity equation framework for understanding the determinants of long-run inflation,
a depreciation of the exchange rate _______ velocity, putting ________ pressure on inflation.
(a) raises, upward
(b) raises, downward
(c) lowers, upward
(d) lowers, downward
12.
Supply shocks are a potential source of higher inflation, unless the government counters with
_________ policy that ________ the money growth rate.
(a) extinguishing, reduces
(b) extinguishing, increases
(c) neutral, leaves unchanged
(d) accommodative, reduces
(e) accommodative, increases
13.
Higher inflation is particularly damaging to the real value of
(a) wages.
(b) financial assets.
(c) physical assets.
(d) government tax revenues.
14.
The “expected real” interest rate is the
(a) rate actually quoted in financial markets.
(b) rate actually quoted in financial markets minus the expected inflation rate.
(c) rate actually quoted in financial markets plus the expected inflation rate.
(d) rate actually quoted in financial markets divided by the expected inflation rate.
15.
Investment and saving decisions are assumed by economists to depend on the ___________ interest
rate.
(a) expected nominal
(b) nominal
(c) expected real
(d) real
16.
If an increase in expected inflation equally raises the nominal interest rate, the expected real interest
rate __________ and thus investment demand _____________.
(a) rises, increases
(b) rises, decreases
(c) is unchanged, is unchanged
(d) falls, increases
(e) falls, decreases
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.
17.
18.
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.
19.
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.
20.
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.