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When do most economists believe the principle of monetary neutrality is relevant?


A) relevant to both the short and long run
B) irrelevant to both the short and long run
C) mostly relevant to the short run
D) mostly relevant to the long run

E) A) and B)
F) A) and C)

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Define each of the symbols and explain the meaning of M * V = P * Y.

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M is the quantity of money, V is the vel...

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Suppose that monetary neutrality holds. Of the following variables, which ones do not change when the money supply increases? a.real interest rates b.inflation c.the price level d.real output e.real wages f. nominal wages

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a.real int...

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Which of the following would be the effect of indexing the tax system to take into account the effects of inflation on taxing capital gains?


A) Only real interest earnings would be taxed.
B) Taxing capital gains would become irrelevant.
C) Average tax rates would increase.
D) Investors would be worse off.

E) C) and D)
F) A) and B)

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Which of the following terms refers to the cost of changing price tags and price listings?


A) inflation-induced tax distortions
B) relative-price variability costs
C) shoeleather costs
D) menu costs

E) B) and C)
F) A) and B)

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In the 14th century, the Western African Emperor Kankan Musa travelled to Cairo where he gave away much gold, which was in use as a medium of exchange. Which of the following would we predict this increase in gold would do to the price level and value of gold in Cairo?


A) raise both the price level and the value of gold in Cairo
B) raise the price level, but decrease the value of gold in Cairo
C) lower the price level, but increase the value of gold in Cairo
D) lower both the price level and the value of gold in Cairo

E) A) and B)
F) None of the above

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Which of the following best defines the velocity of money?


A) It is the rate at which the central bank puts money into the economy.
B) It is the same thing as the long-term growth rate of the money supply.
C) It is the money supply divided by nominal GDP.
D) It is the average number of times per year a dollar is spent.

E) None of the above
F) A) and B)

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You put money in an account and earn a real interest rate of 10 percent, inflation is 3 percent, and your marginal tax rate is 40 percent. Which of the following is your after-tax real rate of interest?


A) 4.8 percent
B) 3.2 percent
C) 2.8 percent
D) 1.8 percent

E) A) and D)
F) None of the above

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If the nominal interest rate is 5 percent and the inflation rate is 2 percent, what is the real interest rate?


A) 7 percent
B) 6 percent
C) 5 percent
D) 3 percent

E) A) and B)
F) B) and C)

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Which of the following best explains why governments may prefer an inflation tax to some other kind of tax?


A) The inflation tax is easier to impose.
B) The inflation tax reduces inflation.
C) The inflation tax falls mainly on high-income individuals.
D) The inflation tax reduces the real cost of government expenditure.

E) C) and D)
F) A) and D)

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Which of the following best describes the evolution of inflation in Canada?


A) Prices rose at an average annual rate of about 2 percent over the last 60 years.
B) There was about a 12-fold increase in the price level over the last 60 years.
C) Inflation in the 1970s was above the average over the last 60 years.
D) Canada has never experienced periods of deflation.

E) A) and B)
F) A) and C)

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The money supply in Freedonia is $100 billion. Nominal GDP is $800 billion, and real GDP is $200 billion. What is the price level in Freedonia?


A) 1
B) 2
C) 4
D) 8

E) A) and D)
F) A) and B)

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According to the quantity equation, if Y and V are constant, and M doubles, which of the following will happen to the price level?


A) It will more than double.
B) It will less than double.
C) It will double.
D) It might double, less than double, or more than double; more information is needed.

E) B) and D)
F) B) and C)

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When the number of dollars needed to buy a representative basket of goods falls, what happens to the value of money?


A) It rises, and so the price level rises.
B) It rises, and so the price level falls.
C) It falls, and so the price level rises.
D) It falls, and so the price level falls.

E) None of the above
F) A) and D)

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The source of all four classic hyperinflations was high rates of money growth.

A) True
B) False

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The country of Aquilonia has a tax system identical to that of Canada. Suppose someone in Aquilonia bought a parcel of land for $20 000 in 1960 when the price index equalled 100. In 2002, the person sold the land for $100 000, and the price index equalled 600. If the person must pay 20 percent of any capital gain in taxes, which of the following is the after-tax real capital gain (in 2002 dollars) on the land?


A) $64 000
B) -$36 000
C) -$16 667
D) -$3333

E) A) and B)
F) A) and C)

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Which of the following does the quantity theory of money try to explain?


A) how inflation determines economic growth
B) the relationship between the quantity of money and the price level
C) the determinants of relative prices in the economy
D) the relationship between inflation and unemployment

E) All of the above
F) A) and B)

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When a graph of the money market is drawn with the value of money on the vertical axis, which of the following will happen if the value of money is below the equilibrium level?


A) The price level will rise.
B) The value of money will rise.
C) Money demand will shift left.
D) Money demand will shift right.

E) A) and B)
F) A) and C)

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The irrelevance of monetary changes for real variables is called monetary neutrality. Most economists accept monetary neutrality as a good description of the economy in the long run, but not the short run.

A) True
B) False

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Under which of the following conditions is wealth distributed from creditors to debtors?


A) When inflation is high, whether it is expected or not.
B) When inflation is low, whether it is expected or not.
C) When inflation is unexpectedly high.
D) When inflation is unexpectedly low.

E) C) and D)
F) All of the above

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