Chapter 26 Money and Inflation
5) A one-time increase in the money supply
A) is synonymous with inflation.
B) cannot cause inflation.
C) leads to an increase in the price level.
D) results in both (a) and (c) of the above.
E) results in both (b) and (c) of the above.
Answer: E
10) Which of the following help explain inflationary money growth?
A) The federal government's commitment to high employment since 1946
B) One-shot supply shocks
C) One-shot tax cuts
D) All of the above
Answer: A
15) Theoretically, one can distinguish a demand-pull inflation from a cost-push inflation by comparing
A) how fast prices rise relative to wages.
B) the unemployment rate with its natural rate level.
C) when prices rise relative to wages.
D) none of the above.
Answer: B
20) An examination of the inflationary episode in the United States from 1960 through 1980 reveals that
A) budget deficits constituted the primary source of inflationary monetary policy.
B) budget deficits do not appear to have been the driving force behind inflationary monetary policy.
C) the supply shocks of the 1970s appear to have had no effect on the rate of inflation during this period.
D) none of the above are true.
Answer: B
25) The condition of a continually rising price level is defined as
A) stagflation. B) stagnation. C) disinflation. D) inflation.
Answer: D
30) If inflation is defined as a condition of a continually, rapidly rising price level, then
A) monetarists contend that inflation is a monetary phenomenon.
B) Keynesians are willing to accept that inflation is a monetary phenomenon.
C) Keynesians are unwilling to accept that inflation is a monetary phenomenon.
D) both (a) and (b) of the above.
Answer: D
35) To say that inflation is a monetary phenomenon is somewhat misleading since
A) fiscal expansions that are not accommodated by the Fed can be inflationary.
B) supply shocks that are not accommodated by the Fed can be inflationary.
C) excessive money growth often results from an accommodating monetary policy.
D) both (a) and (b) of the above.
Answer: C
40) Countries with the highest inflation rates are likely to have
A) the highest rates of money growth. B) large budget deficits.
C) the lowest interest rates. D) both (a) and (b) of the above.
Answer: D
45) The monetarists' proposition that inflation is always and everywhere a monetary phenomenon holds only if
A) government budget deficits do not rise continually.
B) the unemployment rate does not rise continually.
C) the price level rises continually.
D) the United States does not experience more than one negative supply shock per decade.
Answer: C
50) According to the Keynesians, inflation is caused by
A) supply shocks. B) expansionary fiscal policies.
C) expansionary monetary policies. D) wage push.
Answer: C
55) According to the monetarist view of inflation, a continually increasing money supply causes
A) the aggregate demand curve to shift right along a stationary aggregate supply curve, leading to continually increasing aggregate output and prices.
B) the aggregate supply curve to shift left along a stationary aggregate demand curve, leading to continually contracting aggregate output and prices.
C) the aggregate demand curve to shift continually to the right as the aggregate supply curve shifts continually inward, leading to higher and higher price levels.
D) the aggregate demand curve to shift continually to the left as the aggregate supply curve shifts continually outward, leading to higher and higher price levels.
Answer: C
60) Keynesian analysis indicates that
A) supply-side phenomena can not be the sole source of high inflation.
B) high inflation cannot be driven by fiscal policy alone.
C) inflation is a monetary phenomenon.
D) all of the above are correct.
Answer: D
65) According to the Keynesian view of inflation, a continually increasing money supply causes
A) the aggregate demand curve to shift right along a stationary aggregate supply curve, leading to continually increasing aggregate output and prices.
B) the aggregate supply curve to shift left along a stationary aggregate demand curve, leading to continually contracting aggregate output and prices.
C) the aggregate demand curve to shift continually to the right as the aggregate supply curve shifts continually inward, leading to higher and higher price levels.
D) the aggregate demand curve to shift continually to the left as the aggregate supply curve shifts continually outward, leading to higher and higher price levels.
Answer: C
70) If by inflation one means a continual increase in the price level at a rapid rate, then Keynesian and monetarist views of the inflation process are
A) quite different as Keynesians emphasize the significance of supply shocks while monetarists stress the significance of money growth.
B) quite different as Keynesians stress the importance of expansionary fiscal actions while monetarists stress the significance of money growth.
C) quite different as Keynesians stress the importance of business confidence while monetarists stress the significance of money growth.
D) not very different.
Answer: D
75) If policymakers set a target for unemployment that is too low because it is less than the natural rate of unemployment, this can set the stage for a higher rate of money growth and
A) cost-push inflation. B) demand-pull inflation.
C) cost-pull inflation. D) demand-push inflation.
Answer: B
80) In those countries that do not have well-developed capital markets
A) inflation is uncommon because they cannot finance budget deficits by issuing bonds.
B) inflation is uncommon because government expenditures must be financed with taxes and/or user fees.
C) budget deficits will tend to be inflationary.
D) both (a) and (b) of the above.
Answer: C
85) An examination of the inflationary episode in the United States from 1960 through 1980 indicates that
A) there is a close correlation between movements in the inflation rate and the money growth rate from two years earlier.
B) federal government budget deficits were sufficiently small so that the ratio of debt to aggregate output declined.
C) policymakers tried to achieve an output target that was too high.
D) all of the above.
E) only (a) and (b) of the above.
Answer: D
90) Which of the following statements describe activists' policy views?
A) Wage and price adjustment and, therefore, the economy's self-correcting mechanism brings the economy back to the natural rate level of output quickly.
B) Discretionary economic policies speed the return of the economy back to the natural rate level of output.
C) Discretionary economic policies, because of long and variable time lags, are likely to be destabilizing.
D) Only (a) and (b) of the above.
Answer: B
95) Economists from which of the following schools of thought are least likely to favor activist government policies?
A) Keynesian B) Nonclassical Rational Expectations
C) New Classical Rational Expectations D) Only (a) and (b) of the above
Answer: C
100) If aggregate output is below the natural rate level, advocates of nonactivist policy would recommend that the government
A) do nothing.
B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right.
C) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right.
D) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left.
Answer: A
105) Evidence indicating that an increase in money growth causes aggregate output to increase with long and variable lags would strengthen the case for
A) nonactivist policy. B) a constant-money-growth-rate rule.
C) discretionary policy. D) only (a) and (b) of the above.
Answer: D
110) Of the five time lags that prevent an activist policy from returning aggregate output to full employment instantaneously, two do not slow the effectiveness of monetary policy--the
A) implementation and effectiveness lags.
B) legislative and effectiveness lags.
C) legislative and implementation lags.
D) recognition and effectiveness lags.
Answer: C
115) The time it takes for a policy to have an impact on the economy, once it has been implemented, is called the
A) implementation lag.
B) effectiveness lag.
C) legislative lag.
D) distributed lag.
E) inside lag.
Answer: B
120) If expectations matter to the wage-setting process, then
A) an accommodating, activist policy will likely be inflationary.
B) a nonaccommodating, nonactivist policy will have the advantage of keeping inflation low.
C) the case for a constant-money-growth-rate rule is strengthened.
D) all of the above.
Answer: D
125) The economist who proposed that, "Inflation is always and everywhere a monetary phenomenon." was
A) John Maynard Keynes. B) John R. Hicks.
C) Milton Friedman. D) Franco Modigliani.
Answer: C
130) According to monetarist analysis, in order for inflation to occur,
A) the money supply must continually increase, causing the aggregate demand curve to continually shift right.
B) the aggregate supply curve must continually shift left, as wages rise in response to higher prices.
C) the price level must continually rise.
D) all of the above must occur.
E) only (a) and (c) of the above.
Answer: D
135) According to Keynesian analysis, an increase in government spending will shift the aggregate demand curve to the _____, causing output to _____ above the natural rate level.
A) right; fall B) right; rise C) left; fall D) left; rise
Answer: B
140) According to Keynesian analysis,
A) the net result of the negative supply shock is that we return to full employment at the initial price level and an inflation does not result.
B) negative supply shocks cannot drive a continually rising price level.
C) high inflation can be driven by fiscal policy alone.
D) only (a) and (b) of the above.
Answer: D
145) Cost-push inflation can result when
A) workers decide to accept lower wages because they want to remain employed.
B) government fiscal policies become more expansionary.
C) the government gives in to the demands of workers for higher wages by implementing policies to raise aggregate demand.
D) only (a) and (b) of the above occur.
Answer: C
150) Demand-pull inflation can result when
A) policymakers set an unemployment target that is too high.
B) a persistent budget deficit is financed by money creation.
C) the deficit is financed by selling bonds to the public.
D) only (a) and (b) of the above occur.
Answer: B
155) The German hyperinflation of 1921-1923 provides important support for the view that high money growth results when
A) the government sets an employment target that is too high.
B) the government expands the money supply to finance its expenditures.
C) the government raises taxes to finance its expenditures.
D) the government sells bonds to the public.
Answer: B
160) Evidence from the time period 1960-1980 indicates that inflation in the United States resulted from
A) an employment target that was set too high.
B) the government's inability to sell bonds to the Fed.
C) an expansion in the money supply to finance federal government expenditures.
D) the excessive sale of government bonds to the public.
Answer: A
165) Evidence from the United States for the time period 1960-1980 indicates that
A) budget deficits can be ruled out as the initiating source of rapid money growth, as the ratio of government debt to GDP declined from 1960 through 1980.
B) inflation temporarily surged in 1974-1975 and 1979-1980 as a result of negative supply shocks.
C) increases in inflation led increases in money growth with an approximate two-year lag.
D) all of the above are true.
E) only (a) and (b) of the above are true.
Answer: E
170) If aggregate output is below the natural rate level, policymakers have two choices:
A) if they do nothing, the aggregate supply curve will shift out bringing the economy back to full employment.
B) the accommodating, activist alternative is to try to eliminate the high unemployment by attempting to shift the aggregate demand curve out by pursuing expansionary policy.
C) the accommodating, activist alternative is to try to keep the price level constant by attempting to shift the aggregate demand curve in by pursuing contractionary policy.
D) both (a) and (b) of the above.
E) both (a) and (c) of the above.
175) The _____ lag is the time it takes for policymakers to obtain the data that tell them what is happening to the economy, while the _____ lag is the time it takes for policymakers to be sure of what the data are signaling about the future course of the economy.
A) data; recognition B) recognition; data
C) data; implementation D) implementation; recognition
Answer: A
Answer: A
180) The _____ lag is the time it takes for policymakers to be sure of what the information is signaling about the future course of the economy, while the _____ lag is the time it takes for policymakers to change policy instruments once they have decided on the new policy.
A) recognition; implementation B) recognition; legislative
C) data; legislative D) data; implementation
Answer: A
185) The view that the wage and price adjustment process is extremely slow and that failing to implement an expansionary monetary policy to move the economy to full employment results in a significant loss of output is most likely to be held by
A) activists. B) Keynesians
C) monetarists. D) only (a) and (b) of the above.
Answer: D
190) Which of the following views are consistent with the case for nonactivist macroeconomic policy?
A) An activist, accommodating policy of shifting the aggregate demand curve will be costly because it produces more volatility in both the price level and output due to the substantial time it takes to shift aggregate demand.
B) The wage and price adjustment process being quite rapid, a nonactivist policy results in a small loss of output.
C) Workers will come to expect expansionary policies whenever the economy moves below full employment.
D) All of the above.
Answer: D
195) If workers' opinions about whether policy is accommodating or nonaccommodating matter to the wage-setting process, then
A) the case for a nonactivist policy is much stronger and the case for an activist policy is much weaker.
B) the case for an activist policy is much stronger and the case for a nonactivist policy is much weaker.
C) the case for a policy rule to keep the aggregate demand curve from fluctuating away from the trend rate of growth of the natural rate level of output is much stronger.
D) only (a) and (c) of the above.
Answer: D
200) Methods of financing government spending are described by an expression called the government budget constraint, which states the following:
A) the government budget deficit must equal the sum of the change in the monetary base and the change in government bonds held by the public.
B) the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the public.
C) the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the Fed.
D) the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the Treasury.
Answer: A
205) The financing of government spending by issuing debt
A) causes both reserves and the monetary base to rise.
B) causes both reserves and the monetary base to decline.
C) causes reserves to rise, but the monetary base to decline.
D) has no net effect on the monetary base.
Answer: D
210) If the Fed pursues a policy goal of
A) preventing high interest rates, and deficits cause interest rates to rise, then deficits will lead to money creation.
B) preventing high inflation, and deficits cause inflation to rise, then deficits will lead to money creation.
C) preventing high bond prices, and deficits cause bond prices to rise, then deficits will lead to money creation.
D) preventing high stock prices, and deficits cause stock prices to rise, then deficits will lead to money creation.
Answer: A