A) nominal interest rate

Inflation and its Rate

If the aggregate price level at time t is denoted by P_t, the inflation rate from time t –1 to t, denoted as π _t is defined as

(A) π _t = (P_t – P_t–1)/ P_t

(B) π _t = (P_t– ₁ – P_t)/ P_t

(C) π _t = (P_t – P_t_– ₁)/ P_t_– ₁

(D) π _t = (P_t ₊₁ – P_t– ₁)/ P_t– ₁

(E) π _t = (P_t ₊₁ – P_t)/ P_t

Comment: please note than inflation rates are measured in % points

2. Inflation below 10 percent per year is called

(A) super inflation

(B) hyperinflation

(D) creeping inflation

(E) stealth inflation

3. Inflation in excess of 20 percent per year is called:

(A) super inflation

(B) hyperinflation

(C) galloping inflation

(D) creeping inflation

(E) stealth inflation

When prices rise at an extraordinarily high rate, it is called

(A) inflation

(B) hyperinflation

(D) hypoinflation

(E) disinflation

The decrease in the rate of inflation is called:

(A) hyperinflation

(B) galloping inflation

(C) disinflation

(D) super inflation

(E) deflation

Inflation is a situation in which

(A) there is a decrease in the purchasing power of the monetary unit

(M/P) decreases when price level rises faster

(B) there is a decrease in the price level

It is called deflation, not inflation

It happens in deflation: P decreases => (M/P) rises => more goods are bought

When there is inflation, on the contrary in the given amount of M we can buy fewer goods (M/P decreases)

(D) increases in the price level exceed increases in the nominal wage

It does not necessarily mean that growth rate of P increased

(E) there is an increase in the real variables

Real variables are constant, only nominal change due to inflation

An increase in the price level from 200 in year 5 to 210 in year 6 indicates a

(A) 10% rate of inflation between years 5 and 6

(B) 5% rate of inflation between years 5 and 6

(D) 105% rate of inflation between years 5 and 6

(E) Not enough information to answer

Comment: π = (P_t – P_t_– ₁)/ P_t_– ₁*100% = (210-200)/200*100%=5%

All of the following are true statements except:

(A) An increase in the price level is the same as a decrease in the value of money

P increases, purchasing power of money (M/P) or value of money decreases

(B) If the price level were to double, the quantity of money demanded would double because people would need twice as much money to cover the same transactions

Increase in P gives a proportional increase in M^D (transactional demand for money rises)

(C) Inflation reduces the relative price of goods whose prices have been temporarily held constant to avoid the costs associated with changing prices

Since it is costly to change prices, firms change prices as rarely as possible. During inflation, the relative price of goods whose price is held constant for a period of time is falling with respect to the average price level. This misallocates resources because economic decisions are based on relative prices.

(D) The change in the price level means the change in the rate of inflation

Change in rate of inflation occurs when the growth rate of prices changes (not prices themselves)

(E) All the above statements are true

Which of the following is a true statement?

(A) The average price level of goods and services in an economy is called the inflation rate.

False, inflation is a sustained increase in the overall price level (growth rate of prices).

(B) The aggregate price level is measured as the rate of change in the inflation rate.

False, P is measured as GDP deflator or CPI

It equals 100%. π = (P_t – P_t_– ₁)/ P_t_– ₁*100% = (2* P_t-1 – P_t_– ₁)/ P_t_– ₁*100% = 100%

(D) If nominal income doubles while the rate of inflation is equal to 50%, the real income falls by one third.

ΔY^N = ΔY^R + π => 100% = ΔY^R + 50% => Y^R increases by 50%.

(E) None of the above is true.

Causes of Inflation

Price Level

Real GDP

10. Which of the following is illustrated in the figure above?

I. Stagflation

No, it occurs when there is a decrease in SRAS

II. Cost-push inflation

No, it occurs when there is a decrease in SRAS

III. Supply-side inflation

No, occurs when there is a decrease in SRAS

IV. Demand-pull inflation

Yes, AD increases, P rises

(A) I and II only

(B) II and III

(D) only IV

(E) only I and IV only

11. A successful wage push by workers leads to

(A) demand-pull inflation

(B) supply-side inflation

(D) cost-push inflation

(E) deflation

Comment: in answer sheet it’s D but both B and D are correct (synonyms)

12. A permanent increase in government spending will generate

(A) temporarily increased inflation

(B) permanently increased inflation

(D) temporarily decreased inflation

(E) hyperinflation

Comment: можете не слишком сильно заморачиваться на вопросах по permanent/temporary increase in inflation, потому что мы это не проходили толком, да и в тестах встречается крайне редко. Тем не менее, увеличение G приведет к росту цен, но дальше агенты могут скорректировать свои ожидания. К тому же инфляция – это именно рост темпа роста цен, а не просто изменение самих цен. Так что любые политики имеют временный эффект на темпах роста цен, то есть инфляция вырастет только temporarily.

13. A permanent increase in the level of the money stock, with no change in the rate of growth, will generate

(A) temporarily increased inflation

(B) permanently increased inflation

(D) temporarily decreased inflation

(E) permanent increase in real output

Comment: то же самое, что и выше. Само по себе увеличение денежной массы – явление временное, но если помимо увеличения Ms увеличивать и growth rate, тогда не только цены будут расти, но и темпы роста цен (то есть инфляция постоянно увеличится). Если же no change in the rate of growth of the money stock – only temporary increase in inflation.

14. Demand-pull inflation can result when

(A) policymakers set an unemployment target that is too high

Unemployment target is connected to i. For example: interest rates won't rise from 0.5% until unemployment falls below at least 7%. So firstly AD increases but then when i rises there could be a decrease in AD, so we don’t know for sure which effect is greater.

(B) a persistent budget deficit is financed by money creation

BD increases, AD increases + it is paid by printing money => P increases and M increases => demand-pull inflation

If BD is financed by selling bonds, AD rises first and them falls due to Ms decrease => P can be unchanged.

(D) only (A) and (B) of the above occur

(E) only (A) and (C) of the above occur

15. Cost-push inflation exists when

(A) consumers use their market power to push up prices

Nothing like this exists and consumers have no incentive to increase P

(B) resource owners use their market power to push up prices

True, resource owners want to earn more => they argue for increase in the P of raw materials => costs of firms increase => SRAS decreases => P rises => cost-push inflation can occur

It’s demand-pull inflation (Ms increases => AD increases)

(D) potential output is growing faster than real GDP

Recessionary gap

(E) real GDP is increasing faster than potential GDP

Inflationary gap but we don’t know the reason. More often it occurs due to the excess demand for goods, so it’s likely a demand-pull inflation

16. In a full-employment economy, all of the following would contribute to inflation except:

(A) a rapid expansion of the money supply

In full-employment Y=Y* and V = const => M*V = P*Y => m = π

Increase in Ms causes increase in inflation

(B) an increase in productivity in the farm sector

If productivity increases, than Y* increases (g ≠0) => m = π + g => real variables rises, not nominal. We can produce more at lower prices (LRAS increases)

Wages rise more than g => costs increase => inflation occurs (SRAS falls)

(D) an increase in deficit spending financed by the central bank

BD => AD + CB prints more money => m increases more than g => π increases

(E) floods, droughts, and other natural disasters

SRAS decreases => costs increase => inflation occurs

17. In the case of demand-pull inflation, other things equal

(A) both the inflation rate and the unemployment rate rise at the same time

(B) the unemployment rate rises, but the inflation rate falls

(C) the inflation rate rises, but the unemployment rate falls

(D) both the inflation rate and the unemployment rate fall

(E) the inflation rate rises, but real output falls

Demand-pull: AD increases => Y and P increases => inflation rises, employment rises, unemployment falls

18. Stagflation consists of

(A) high inflation & high unemployment

(B) high inflation & low unemployment

(D) low inflation & low unemployment

(E) zero inflation & natural rate of unemployment

Stagflation occurs due to the adverse supply shock => SRAS decreases => P increases (inflation) + Y decreases (stagnation)

19. When stagflation occurs

(A) expected inflation exceeds actual inflation

(B) expected inflation is equal to actual inflation

(C) actual inflation exceeds expected inflation

(D) inflation is very high

(E) inflation is very low

P increases due to SRAS decrease. P^e was at full-employment output, now P increases => Pact is more than P^e

20. In the long run, inflation is caused by

(A) banks that have market power and refuse to lend money

Ms decreases, P decreases

(B) governments that raise taxes so high that it increases the cost of doing business and, hence, raises prices

Tx increases => there is a negative effect on h/h => AD decreases, P falls. But costs doing business increases => Sras decreases, P rises. We don’t know which effect is stronger, so overall change in prices in unknown.

(C) governments that print too much money

Correct => more money supply, monetary base grows at accelerating rate => inflation occurs

(D) increases in the price of inputs, such as labor and oil

It is a temporary effect on inflation. P rises but the growth rate of P in the LR is unaffected

(E) none of the above

Quantity Theory of Money. Equation of Exchange.

21. The average number of times that a dollar is spent in buying the total amount of final goods and services produced during a given time period is known as

(A) gross domestic product

(B) the spending multiplier

(D) velocity

(E) money demand

22. The quantity equation for money, by itself:

(A) may be thought of as a definition for velocity

From the equation it is seen that V = P*Y/M => what speed of money is needed if we want to buy Y goods and prices P given than we have money (M). Definition of velocity!

(B) implies that the velocity of money is constant

No, it’s constant only in the LR, in the SR it may change

No, it’s true only in the LR when Y=Y* and V-const, in the SR this proportional change may not hold

(D) implies that real gross domestic product (GDP) is proportional to money supply

No, it implies that nominal GDP is proportional to M*V (or to Ms if V is const in the LR)

(E) may be thought as a definition of inflation

23. According to the classical quantity theory of money, velocity:

(A) Increases with nominal income

(B) Is positively related to the interest rate

(C) Is a constant number

(D) Is proportional to the price level

(E) Is unstable

24. If the money supply increases by 6%, velocity decreases by 2%, and the price level increases by 1%, then the change in real GDP must be approximately:

(A) 3%

(B) 4%

(D) 7%

(E) 8%

MV=PY => m+ΔV = π+g => g = 6%-2%-1% = 3%

25. If the quantity of real money balances is kY, where k is a constant, then velocity is:

(A) k

(B) 1 /k

(D) P/k

(E) k/P

MV=PY – Fisher equation

M = k*PY – Cambridge equation

Thus, V = 1/k

26. According to the quantity theory of money, when the money supply doubles

(A) velocity falls by 50 percent

(B) velocity doubles

(D) nominal income doubles

(E) none of the above

MV=PY, PY – nominal income, if M doubles, other things being equal (V – const), PY doubles as well.

27. Velocity is

(A) the annual rate of turnover of the money supply

(B) the annual rate of turnover of output

Скорость обращения денег (money supply), а не выпуска

(D) highly unstable

(E) impossible to measure

28. The definition of the transactions velocity of money is:

(A) money multiplied by prices divided by transactions

(B) transactions divided by prices multiplied by money

(D) prices multiplied by transactions divided by money

(E) none of the above.

MV = PY => V = P*Y/ M

Prices multiplied by output (or transactions) divided by money

29. Given the definition of income velocity of money, if velocity is constant:

(A) the price level is proportional to money supply

(B) real GDP is proportional to money supply

(C) nominal GDP is proportional to money supply

(D) nominal GDP is constant

(E) the price level is constant

MV = PY, if V is const => M is proportional to PY (nominal GDP, since Y is real GDP, P – price level)

30. If an increase in the nominal money supply results in no change in the level of money income, then which of the following is true?

(A) The price level must have risen.

(B) Real income must have declined.

(D) Government expenditure must have risen.

(E) The velocity of money must have fallen.

MV=PY

PY – money income – const when P rises, then V should fall proportional to the rise in M

31. The classical economists believed that if the quantity of money doubled,

(A) output would double

(B) prices would fall

(D) prices would remain constant

(E) output would remain constant

According to classical economists V and P were constant so increase in M will lead to the equal increase in P

	Year 1	Year 2
Money
Real GDP
Prices		?

32. According to the quantity theory of money, the data above suggest which of the following prices for year 2?

(A) 7.5

(B) 8.0

(D) 12.0

(E) 12.5

Year 1: MV = PY => V = PY/M = 100*10/250 = 4

Year 2: MV = PY => P = MV/Y = 300*4/120 = 10

33. An increase of 1 percent per year in the rate of growth of the money supply will increase inflation in the long run by

(A) 0

(B) 0.5%

(D) 2.5%

(E) more than 1%

In LR Y=Y* and V – const => Δm = Δπ = 1%

34. A permanent increase in the rate of growth of money of 1 percent will permanently increase GDP by

(A) 0

(B) 0.5%

(D) 2.5%

(E) more than 1%

Ms increases => leads only to temporary increase in GDP, there is not permanent changes due to monetary policy (money is neutral in the LR, Y = Y*)

35. When the rate of inflation is greater than the rate of money growth, the real money supply

(A) rises

(B) falls

(D) may rise or remain constant

(E) may fall or remain constant

P rises more that Ms => real money supply = (Ms/P) falls

36. The classical dichotomy:

(A) cannot hold if money is “neutral”

(B) is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money

(D) arises because money depends on the nominal interest rate

(E) is said to hold when money is not neutral in the short run

According to classical dichotomy changes in the money supply affect only nominal variables, but not real variables

37. If the price level doubles,

(A) the quantity demanded of money falls by half

(B) the money supply has been cut by half

(D) the value of money has been cut by half

(E) none of the above

Value of all money = purchasing power = M/P => if P multiplied by 2, then M/P new = M/(P old*2) => value of money is cut by half

38. In the long run, the demand for money is most dependent upon

(A) the level of prices

(B) the availability of credit cards

(D) the interest rate

(E) the level of real output

In LR all real variable are constant (r, Y*, u*, etc), so the main determinant of Md is P

39. The quantity theory of money concludes that an increase in the money supply causes

(A) a proportional increase in velocity

(B) a proportional increase in prices

(D) a proportional decrease in velocity

(E) a proportional decrease in prices

Classical approach: V – const, Y = Y*, so from MV = PY we get that P is changed proportionally to M

40. An example of a real variable is

(A) the nominal interest rate

(B) the ratio of wages to the price of soda

(D) the dollar wage

(E) all of the above are real variables

All other variants are in monetary terms => nominal. In B we divide one monetary term to another monetary term and get a real term

41. The quantity equation states that

(A) money × price level = velocity × real output

(B) money × real output = velocity × price level

(D) money × velocity = price level × real output

(E) none of the above

42. If money is neutral,

(A) an increase in the money supply does nothing

No, it does change nominal variables in the LR (P, i, etc)

(B) the money supply cannot be changed because it is tied to a commodity such as gold

Totally incorrect, Ms can be changed by the CB + there is no direct connection to gold these days

Only affects nominal variables

(D) a change in the money supply only affects nominal variables such as prices and dollar wages

(E) a change in the money supply reduces velocity proportionately; therefore there is no effect on either prices or real output

In the LR V is const so there is an effect on P only when M changes

43. Increase in the rate of money growth will eventually cause the real money supply to

(A) be higher

(B) be lower

(D) do any of (A), (B), or (C), depending on the country

Rate of money grows => P increases => (Ms/P) falls

44. If the money supply grows 5%, and real output grows 2%, prices should rise by

(A) 5%

(B) less than 5%

(D) not enough information to answer

(E) none of the above

MV = PY or m = π+g => π = m-g = 5%-2% = 3%

So less than 5%

Fischer Effect. Inflation and Interest Rates.

45. An increase in the rate of growth of the money supply:

(A) raises interest rates

(B) lowers interest rates

(C) first lowers, then raises interest rates

(D) first raises, then lowers interest rates

(E) does not influence interest rates

Ms increases => i falls => I, C rise => AD rises => Y rises => M^D rises => i rises

It’s like first and second-round effect

46. The real interest rate is the rate of interest:

(A) that is actually paid by consumers

(B) that is actually paid by banks

(D) that determines investment decisions

(E) all of the above

47. The real interest rate is:

(A) amount of interest that a lender really receives when making a loan

(B) what one sees when looking at bank literature

(D) amount of interest that a lender appoints when giving a loan

(E) none of the above

Real interest никто никогда реально не получает на руки, получают деньги по номинальной ставке, а потом уже можно посчитать, какова покупательная стоимость полученных денег с учетом инфляции.

48. The real interest rate is equal to:

(A) the nominal interest rate minus the inflation rate

(B) the nominal interest rate divided by the inflation rate

(D) the nominal interest rate multiplied by the inflation rate

(E) the nominal interest rate minus anticipated inflation

Fisher effect: r = i – π^e

(for low inflation rate, for high rates the formula is different r = (i – π^e)/(i + π^e) but there is no such option here)

49. The nominalinterest rate is the:

(A) rate of interest that investors pay to borrow money

(B) same thing as the real interest rate

(D) real rate of interest minus the rate of inflation

(E) none of the above

50. Large changes in nominal interest rates most likely occur because of large swings in the

(A) real interest rate

(B) rate of inflation

(D) investment rate

(E) real wage rate

51. If the real interest remains constant, an increase in expected inflation from 4% to 8% will cause the nominal interest rate to:

(A) Remain constant

(B) Rise to 8%

(D) Rise by 4 percentage points

(E) Fall by 4 percentage points

i = r + π^e => π^e increases by 4%, i increases by 4% when r is const

52. If the real interest rate declines by 1% and the inflation rate increases by 2%, the nominal interest rate must:

(A) increase by 2 %

(B) increase by 1%

(D) decrease by 1%

(E) increase by 3%

Δi = Δr + Δπ^e = -1%+2% = 1%

53. The ex ante real interest rate is equal to the nominal interest rate:

(A) minus the inflation rate

(B) plus the inflation rate

(C) minus the expected inflation rate

(D) plus the expected inflation rate

(E) plus the natural rate of unemployment

Ex ante – same as expected

54. The ex post real interest rate will be greater than the ex ante real interest rate when the:

(A) rate of inflation is increasing

(B) rate of inflation is decreasing

(D) actual rate of inflation is less than the expected rate of inflation

(E) rate of inflation is zero

Ex ante – expected = i - π^e

Ex post – actual = i – π^act

If r ex post > r ex ante => π^act < π^e

55. Which of the following is most likely to cause an immediate rise in domestic nominal interest rates?

(A) Announcement of a favorable trade balance

(B) News that creates anticipation of increased inflation

(D) A decrease in bank-reserve requirements

(E) A decrease in demand for new housing

Since i = r + π^e increase in π^e will give an immediate push of i

56. Which of the following statements is correct?

(A) The real interest rate is the sum of the nominal interest rate and the inflation rate

(B) The real interest rate is the nominal interest rate minus the inflation rate

(D) The nominal interest rate is the real interest rate minus the inflation rate

(E) None of the above

57. If inflation is 8% and the real interest rate is 3%, then the nominal interest rate should be

(A) 3/8%

(B) 5%

(D) 24%

(E) -5%

i = r + π^e=3%+8%=11%

58. Under which of the following conditions would you prefer to be the lender?

(A) the nominal rate of interest is 20% and the inflation rate is 25%

r = 20-25% = -5%

(B) the nominal rate of interest is 15% and the inflation rate is 14%

r = 15-14% = 1%

r = 12%-9%=3%

(D) the nominal rate of interest is 5% and the inflation rate is 1%

r = 5%-1%=4%

(E) in all the above cases

The biggest gain for the lender (what he receives) is 4%

59. Under which of the following conditions would you prefer to be the borrower?

(A) the nominal rate of interest is 20% and the inflation rate is 25%

(B) the nominal rate of interest is 15% and the inflation rate is 14%

(D) the nominal rate of interest is 5% and the inflation rate is 1%

(E) in all the above cases

Numbers are as in 58 => in A the purchasing power of money which are given back is fallen, so in real terms borrowers gained.

60. Suppose the nominal interest rate is 7% while the money supply is growing at a rate of 5% per year. If the central bank increases the growth rate of the money supply from 5% to 9%, the Fisher effect suggests that, in the long run. the nominal interest rate should become

(A) 4%

(B) 9%

(D) 12%

(E) 16%

If m increases by 4% than i will increase proportionally, so i new = 7+4=11%

61. If the nominal interest rate is 7% and the inflation rate is 3%, then the real interest rate is

(A) -4%

(B) 3%

(D) 10%

(E) 21%

r = 7-3=4%

62. Suppose that the investment function is given by I = 1,000 – 30 r, where r is the real rate of interest. Suppose that the nominal rate of interest is 10% and the inflation rate is 2%. According to the investment function, investment will be:

(A) 240

(B) 700

(D) 970

(E) 1060

r = 10-2=8%

I = 1000-30*8 = 760

63. If expected inflation rises by one percentage point, in the short run the nominal interest rate will

(A) remain constant

(B) rise by one point

(C) rise by less than one point

(D) rise by more than one point

(E) rise by 2.5 points

Comment: максимально не обращаем внимания на это задание. В упрощенном виде мы пишем, что i = r + π^e. Но по сути ставка в SR меняется немного медленнее, чем инфляционные ожидания, ей нужно время дл адаптации. А в LR все приходит в соответствии с эффектом Фишера. Но плиз не заморачивайтесь и пользуйтесь спокойно формулой i = r + π^e.

64. If expected inflation rises by one percentage point, in the long run the nominal interest rate will

(A) remain constant

(B) rise by one point

(D) rise by more than one point

(E) rise by 2 points

См. 63

65. If expected inflation rises by one percentage point, in the short run the expected real interest rate will

(A) remain constant

(B) fall by one point

(C) fall by less than one point

(D) fall by more than one point

(E) not enough information to answer

Снова ставка медленнее реагирует на изменение ожиданий в SR. В LR реальная ставка вернется к первоначальному значению.

66. If expected inflation rises by one percentage point, in the long run the expected real interest rate will

(A) remain constant

(B) fall by one point

(D) fall by more than one point

(E) not enough information to answer

В LR изменение номинальных величин (инфляции) не оказывает никакого влияния на реальные величины, поэтому r – const

67. The opportunity cost of holding money is the:

A) nominal interest rate

B) real interest rate

C) rate of inflation

D) prevailing Treasury bill rate

E) discount rate

Это видно из функции спроса Md = k*Y – h*i

Мы можем держать деньги в кармане из-за ликвидности денег, а может положить в банк на депозит или купить какой-нибудь финансовый актив (облигацию), тогда у нас проценты будут капать. Но любые такие операции совершаются по номинальной ставке (та, которую банк объявит)

68. The real return on holding money is:

(A) the real interest rate

(B) minus the real interest rate

(D) minus the inflation rate

(E) the nominal interest rate

Inflation rate – это потеря покупательной способности, а return от того, что деньги под подушкой или в кармане держатся, будет в том случае, если инфляция отрицательная, то есть темп рост цен наоборот падает, покупательная способность денег M/P растет. Это deflation или minus inflation.

69. The general demand function for real balances depends on income and the:

(A) real interest rate

(B) nominal interest rate

(D) price level

(E) rate of unemployment

Это видно из функции спроса Md = k*Y – h*i

Costs of Inflation

70. If the price level doubles, the value of money

(A) doubles

(B) more than doubles, due to scale economies

(D) falls by 50 percent

(E) does not change

(M/P) decreases by 50% if P increases by 2: M/Pnew = M/(2Pold)=1/2*(M/P old)

71. If the money-wage index were to rise by 50% between1999 and 2003 and the price index were to rise by 20% over the same period, then the real wage index would rise by

(A) 35%

(B) 30%

(D) 20%

(E) 10%

(W/P)new = (W+0.5W)/(P+0.2P)=1.5W/1.2P = 1.25*(W/P) => W/P rises by 25%

72. If other factors remain constant, an increase in the level of prices will do which of the following?

(A) Reduce the nominal wage rate.

No change in nominal variables

(B) Reduce the real money supply.

(Ms/P) falls when P rises

When P rises, lenders (or creditors) are worse off since the money that they receive back from borrowers has less purchasing power

(D) Generate a positive real-balance effect.

Real balance effect = Pigou effect. When P rises, M/P falls => C falls, so effect is negative

(E) Exert a downward pressure on interest rates.

P rises => upward pressure on nominal i

73. Which of the following is a true statement?

(A) The quantity theory of money suggests that an increase in the money supply increases real output proportionately.

No, it increases nominal output and has no effect on real output

(B) In the long run, an increase in the money supply tends to have an effect on real variables but no effect on nominal variables.

On the contrary, affects nominal, not effect on real

anything at all.

Incorrect, it changes nominal variables (P, Y nominal, i, etc)

(D) Inflation erodes the value of people's wages and reduces the standard of living of all the groups of people.

Not all the groups of people, there is an artitrary redistribution of wealth. Borrowers are better off, young people are better off, firms are better off due to decrease in W/P (costs)

(E) Inflation reduces the relative price of goods whose prices have been temporarily held constant to avoid the costs associated with changing prices.

Correct. One of the consequences of inflation. Relative-price variability and the misallocation of resources

74. The right of seignorage is the right to:

(A) levy taxes on the public

(B) borrow from the public

(D) print money

(E) lend money

In general. seignorage is the difference between the value of money and the cost to produce and distribute it. It is the revenue, received by the government by printing money.

75. If workers and firms agree on an increase in wages based on their expectations of inflation and inflation turns out to be more than they expected

(A) firms will gain at the expense of workers

(B) workers will gain at the expense of firms

(D) neither workers nor firms will gain because the increase in wages is fixed in the labor agreement

(E) who gains depends on the rate of inflation

If inflation is more than expected than the increase in P is higher than expected, (W/P) lower than expected, workers are worse off, firms gain => arbitrary redistribution of wealth

76. If borrowers and lenders agree on a nominal interest rate and inflation turns out to be less than they had expected

(A) Borrowers will gain at the expense of lenders

(B) Lenders will gain at the expense of borrowers

(D) Neither borrowers nor lenders will gain because the nominal interest rate has been fixed by contract

(E) Who gains depends on the rate of inflation

If inflation less than expected that the purchasing power of money that lenders get back from borrows greater than expected => lenders are better off.

77. Which of the following groups of people would benefit from unanticipated inflation?

I. Savers

Unexpected inflation => real interest rate is lower than expected, real capital gain on saving is lower, savers are worse off

II. Borrowers

Unexpected inflation => the money that they pay back to lenders has less purchasing power. So when they got a loan that bought more goods than lenders can do it now for money they receive back. Borrowers are better off. Lenders are worse off.

III. Lenders

(A) I only

(B) II only

(D) I and II only

(E) I and III only

78. Among those hurt by inflation are

I. Borrowers at fixed interest rates

They are better off

II. Individuals on fixed incomes

Worse off since real income is falling when nominal is fixed and prices are rising

III. Those with savings earning fixed interest rates

Worse off, real capital gain decreases when nominal interest is fixed and prices are rising

IV. Restaurant owners

Worse off, they have menu costs and have to print new menus

(A) I and II only

(B) II and III only

(D) II only

(E) II, III, and IV only

79. Anticipated inflation largely transfers wealth from

(A) debtors to creditors

(B) creditors to debtors

(D) rich to poor

(E) none of the above

If inflation is anticipated (expected) there is no redistribution of wealth since all contracts are made taking into account increase in π.

80. Unanticipated inflation transfers wealth from

(A) creditors to debtors

If inflation is more than expected that the purchasing power of money that lenders get back from borrows is lower than expected => lenders are worse off. Lenders = creditors, debtors = borrowers

(B) debtors to creditors

From old (have fixed income) to young

(D) rich to poor

(E) none of the above

81. Unanticipated inflation is harmful to

(A) retirees whose retirement income is indexed

If income is indexed to inflation there is no loss in the purchasing power of money

(B) Debtors

= borrowers are better off

(C) Creditors

Worse off, look 80

(D) economic growth but has no effect upon individual members of the economy

Just nonsense

(E) all the answers are true

82. During inflation

(A) lender loose, borrowers gain

(B) borrowers loose, lenders gain

(D) the real interest rate rise

(E) the real money supply grows

Look 80

83. All of the following are costs of fully expected inflation except:

(A) expected inflation causes lower real wages

(B) expected inflation leads to loss of time because people are trying to minimize losses that inflation inflicts

(D) expected inflation increases menu costs

(E) expected inflation leads to taxing of nominal capital gains that are not real

If inflation is fully expected, workers demand for higher nominal wages (proportionally in the increase in P) and there is no loss in real wages. The costs of anticipated inflation are described in the Lecture notes, slides 18-22

84. In the case of an unanticipated inflation:

(A) creditors with an unindexed contract are hurt because they get less than they expected in real terms

(B) creditors with an indexed contract gain because they get more than they contracted for in nominal terms

No change in real terms since indexation means the proportional change in nominal variables

They gain since in real terms they pay less

(D) the sum of losses of debtors and creditors equals zero

Only creditors lose, debtors gain

(E) debtors with an indexed contract are hurt because they pay more than they contracted for in nominal terms

No change since indexation presents

85. The inflation tax is primarily a tax on:

(A) Government bonds

(B) Social Security recipients

(C) Money

(D) Real income

(E) Foreigners

It is not a real tax, it is the loss in the purchasing power of money. An inflation tax is a tax on people who hold money. The tax rate is equal to the rate of inflation.

86. If the nominal money supply is growing at 6% a year, output is growing at 2% a year, and the money base is fixed at $100 billion, how large will inflation tax revenues be?

(A) $400 billion.

(B) $100 billion.

(C) $60 billion.

(D) $4 billion.

(E) $6 billion.

Tx_π = B*π and m = g + π => π = 6% - 2% = 4% => Tx_π = 100*4% = 4 mln

Again nobody really pays this money, it is just the loss in the purchasing power of all printed money in the economy = monetary base.

87. If the general price level increases, the real income of workers will increase only if the following condition holds:

(A) employers have a monopsonistic hiring market

(B) tile increase in wages is equal to labor's increase in productivity

(D) increases in wages are greater than the increase in the price level

(E) price increases are greater than wage increases

If P increases, W/P falls if W nominal is constant. So if we want to increase W/P, W should increase more than P has increased

88. An inflation tax

(A) is an explicit tax paid quarterly by businesses based on the amount of increase in the prices of their products

(B) is a tax on people who hold money

(D) is usually employed by governments with balanced budgets

(E) none of the above

Look 85

89. The term “inflation tax” means that:

(A) as the price level rises, taxpayers are pushed into higher tax brackets

(B) as the price level rises, the real value of money held by the public decreases

(D) in a hyperinflation, the duet source of tax revenue is often the printing of money

(E) All of the above

Look 85 and 86

90. As the inflation rate rises, the revenue from the "inflation tax"

(A) rises

(B) falls

(C) rises, but eventually starts to fall

(D) falls, but eventually starts to rise

(E) remains constant

Firstly it is rises since B* π rises due to increase in π, But at some point CB will intervene and lower Ms (firstly by lowering B) which will lower P

91. Countries that employ an inflation tax do so because

(A) the government doesn't understand the causes and consequences of inflation

(B) the government has a balanced budget

(C) government expenditures are high and the government has inadequate tax collections and difficulty borrowing

(D) an inflation tax is the most equitable of all taxes

(E) an inflation tax is the most progressive (paid by the rich) of all taxes

Employ an inflation tax = have to print money. It happens when government cannot pay for its expenditures by taxes or by loans from public or from abroad. The only option to pay for its expenditures is to print money

92. Under a non-indexed income tax with a progressive rate structure, inflation will

(A) increase the real value of existing exemptions

(B) increase tax receipts as a fraction of national income

(D) reduce, at the margin, the nominal tax savings from deductible items, such as charitable contributions

(E) reduce the number of persons who pay a positive tax

National income is in nominal terms (PY). When P increases => t*(PY) increases

93. If actual inflation turns out to be greater than people had expected, then

(A) wealth was redistributed to lenders from borrowers

(B) wealth was redistributed to borrowers from lenders

(D) may be (A) and (C)

(E) may be (B) and (C)

Look 80

94. Which of the following costs of inflation does not occur when inflation is constant and predictable?

(A) Shoeleather costs

(B) Menu costs

(D) Arbitrary redistributions of wealth

(E) Costs due to confusion and inconvenience

If inflation is predictable, those who have fixed income (lenders, workers, old people) correct their behavior bearing in mind inflationary expectations: they argue for the increase in nominal interest rates/nominal wages/pensions proportional to the expected increase in inflation. Arbitrary redistributions of wealth occur only when inflation is unexpected and agents cannot adjust quickly nominal variables.

95. Suppose that, because of inflation, a business in Russia must calculate, print, and mail a new price list to its customers each month. This is an example of

(A) shoeleather costs

(B) menu costs

(D) arbitrary redistributions of wealth

(E) costs due to confusion and inconvenience

The costs of anticipated inflation are described in the Lecture notes, slides 18-22

96. Suppose that, because of inflation, people in Brazil economize on currency and go to the bank each day to withdraw their daily currency needs. This is an example of

(A) shoeleather costs

(B) menu costs

(D) arbitrary redistributions of wealth

(E) costs due to confusion and inconvenience

The costs of anticipated inflation are described in the Lecture notes, slides 18-22

97. If the real interest rate is 4%, the inflation rate is 6%, and the tax rate is 20%, what is the after tax real interest rate?

(A) 1%

(B) 2%

(D) 4%

(E) 5%

Tax is put on nominal interest, so i (before tax) = r + π = 4+6 = 10%

Tax on i = 0.2*10% = 2% => i (after tax) = 10-2 = 8%

r (after tax) = I (after tax) – π = 8-6=2%

98. Which of the following statements is true about a situation where real incomes are rising at 3% per year?

(A) If inflation were 5%, people should receive raises of about 8% per year.

3+5 = 8% - correct

(B) If inflation were 0%, people should receive raises of about 3% per year.

3+0 = 3% - correct

Correct, only P increases, but Y = Y* - const

(D) All of the above are true.

(E) None of the above are true.

99. A variable rate of inflation is undesirable because:

(A) debtors and creditors cannot protect themselves by indexing contracts

Indexation is always an available tool if inflation is expected (even if it varies often)

(B) shoeleather costs are greater under variable inflation than under constant inflation

Same costs, since purchasing power of money in both cases is lower, so people prefer to have little amount of cash

Same, in both cases prices should be recalculated, re-announced and reprinted

(D) variable inflation leads to greater uncertainty and risk than under constant inflation

Variable inflation indeed lower the predictive power of the economy behavior =>greater uncertainty

(E) all of the above

100. The higher the average rate of inflation, the more frequently firms must adjust their prices, which implies that a high rate of inflation:

(A) has no effect on the slope of the short-run aggregate supply curve

(B) should make the short-run aggregate supply curve flatter

(C) makes the short-run aggregate supply curve steeper

(D) causes prices to be stick

(E) makes the long-run aggregate supply curve steeper

When inflation is high, firms are used to the fluctuation of prices, so there is only small response of output to the price shocks => α is small => 1/α is high => SRAS curve is steeper

101. Wages and prices should most clearly be indexed in countries with

(A) high inflation

(B) low inflation

(D) neither

(E) high unemployment

Low inflation is a normal state of economy, so wages and prices are not necessarily indexed under low π. But if π is high indexation is necessary.

102. Which of the statements is true?

(A) The shoe leather costs of inflation should be approximately the same for an employed person and for an unemployed worker.

It’s different since income of employed and unemployed is different = false

(B) Inflation tends to stimulate saving because it raises the after tax real return to saving.

False, it lowers after tax real return

To borrowers from lenders => false

(D) If the nominal interest rate is 7% and the inflation rate is 5%, the real interest rate is 12%.

r = 7-5 = 2% => false

(E) None of the above is a true statement.

Hyperinflation

103. Which of the following annual rates of inflation could be called a hyperinflation?

(A) 10%	(B) 100%	(C) 1000%	(D) 1%	(E) 0%

104. During hyperinflations

(A) the value of money rises rapidly

(B) money no longer functions as a good store of value and people may resort to barter transactions on a much larger scale

(D) creditors benefit

(E) all of the above occur

Prices rises so fast, so the purchasing power of money is almost 0 => people prefer barter economy (change one good for another) which store their value

105. The United States came close to suffering a hyperinflation

(A) in 1929

(B) in 1933

(D) in 1979

(E) never

106. Most economists would agree that the best way to reduce hyperinflation is to:

(A) wipe out labor unions

(B) increase transfer payments

(D) reduce taxes

(E) reduce the nominal money supply growth rate

The first actions is just simple reduction of money in the circulation (Ms reduction)

107. In practice, to stop a hyperinflation, in addition to stopping monetary growth, the government must:

(A) lower taxes and raise government spending

(B) raise taxes and reduce government spending

The most contractionary action: Tx increases => C falls + G falls => AD falls => P falls + gov does not need to print more for covering BD

(D) call for a new election

(E) reduce medical insurance programs

108. Hyperinflations are usually ended through

(A) a currency reform

May lead to decrease in Ms, true

(B) a reduced budget deficits

BD decreases => no need to print money to finance the deficit + AD decreases => P falls, true

Ms decreases => P falls, true

(D) a reduction in the growth of the money supply

m decreases => P falls, true

(E) all of the above

A) nominal interest rate

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