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Economics 101 Practice Test: Money Growth and Inflation

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In economics, money growth and inflation are closely related. When the money supply in an economy grows rapidly, it can lead to inflation. This is because more money chases the same amount of goods and services, driving up prices. Central banks often try to manage money growth to maintain stable inflation rates. According to the classical theory of inflation, money growth causes inflation. The quantity theory of money treats money as neutral. This means that changes in the money supply have no impact on real output. In the long run, real output will depend on resources and technology, not... Show more

In economics, money growth and inflation are closely related. When the money supply in an economy grows rapidly, it can lead to inflation. This is because more money chases the same amount of goods and services, driving up prices.

Central banks often try to manage money growth to maintain stable inflation rates. According to the classical theory of inflation, money growth causes inflation. The quantity theory of money treats money as neutral. This means that changes in the money supply have no impact on real output. In the long run, real output will depend on resources and technology, not the money supply.
The main causes of inflation can be grouped into three broad categories: demand-pull, cost-push, and inflation expectations.
If the money supply grows faster than overall economic growth, inflation will occur. If the difference between the money supply growth and the growth of the economy becomes too wide, hyperinflation occurs.

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Economics 101 Practice Test: Money Growth and Inflation

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1. When the money market is drawn with the value of money on the vertical axis, the price level increases if

either money demand or money supply shifts right.money demand shifts right or money supply shifts left.money demand shifts left or money supply shifts right.either money demand or money supply shifts left.

2. The quantity theory of money is helpful for explaining

hyperinflation only. moderate inflation only. Neither moderate inflation nor hyperinflation. Both moderate inflation and hyperinflation.

3. If velocity and output were nearly constant,

the inflation rate would be about the same as the money supply growth rate.the inflation rate would be much lower than the money supply growth rate.Any of the above could be correct, more information is needed.the inflation rate would be much higher than the money supply growth rate.

4. If the nominal interest rate is 10%, the inflation rate is 6%, and the tax rate is 20%, what is the after-tax real rate of interest?

4%3.2%2%2.8%

5. Hubert spends $60 on a portable CD player.

The $60 is a nominal variable and the CD player is a real variable.Both the $60 and the CD player are real variables.Both the $60 and the CD player are nominal variables.The $60 is a real variable and the CD player is a real variable.

6. When the price level rises, the number of dollars needed to buy a representative basket of goods

increases, so the value of money falls.decreases, so the value of money falls.increases, so the value of money rises.decreases, so the value of money rises.

7. A decrease in the equilibrium quality of money and an increase in the equilibrium value of money could be created by

a decrease in money demand.an increase in money demand. an increase in money supply. a decrease in money supply.

8. Shoeleather costs refer to

the cost of more frequent price changes induced by higher inflation.the distortion in incentives, created by inflation, by taxes that do not adjust for inflation.the distortion in resource allocation created by distortions in relative prices due to inflation.resources used to maintain lower money holdings when inflation is high.

9. According to the classical dichotomy, which of the following is influenced by monetary factors?

nominal interest ratesAll of these are correct.real GDPemployment

10. Which of the following is an example of a real variable?

the income of your economics professorthe dollar value of the economy’s outputthe quantity of rice produced by a rice farmerthe profits earned by Ford Motor Company in 2000

11. According to the quantity equation, other things the same, the price level would increase if either the money supply

decreased or the velocity of money increased. or the velocity of money decreased. increased or the velocity of money decreased. or the velocity of money increased.

12. If the money supply growth rate permanently increased from 10 percent to 20 percent we would expect that inflation and nominal interest rates would both increase

None of the above is correct.by more than 10 percentage points.by 10 percentage points.but by less than 10 percentage points.

13. When the money market is drawn with the value of money on the vertical axis, the value of money increases if

either money demand or money supply shifts right.either money demand or money supply shifts left.money demand shifts left or money supply shifts right.money demand shifts right or money supply shifts left.

14. Which of the following concerning U.S. inflation is incorrect?

Inflation was relatively low in the 1990s. Farmers were especially hurt by the high inflation of the late 1800s.Over the last 60 years the average inflation rate was about 5%. In the nineteenth century there were periods of deflation.

15. When the price level falls, 1/P

increases and the value of money decreases. decreases and the value of money increases. decreases and the value of money decreases. increases and the value of money increases.

16. Which of the following concerning U.S. inflation is false?

There were long periods in the nineteenth century during which prices fell.U.S. inflation has varied over time, but international data shows even more variation.The U.S. public has viewed inflation of even 7 percent as a major economic problem.Low inflation was viewed as a triumph of President Carter’s economic policy.

17. The quantity of money supplied is balanced with the quantity of money demanded by adjustments in the

interest rate in the long run and adjustments in the price level in the short run.price level in the long run and adjustments in the interest rate in the long run.interest rate in both the long run and the short run.price level in both the long run and the short run.

18. Shoeleather costs refer to

All of these are correct.the tendency of some costs to rise more than others when inflation rises.resources people use to reduce their money holdings when inflation is high.the costs incurred by people looking for better-paying jobs when inflation rises.

19. A decrease in the money supply creates an excess

supply of money that is eliminated by rising prices.supply of money that is eliminated by falling prices.demand for money that is eliminated by falling prices.demand for money that is eliminated by rising prices.

20. According to the Fisher effect, when the rate of money supply growth increases

both real and nominal interest rates should increase.None of the above is correct. real interest rates should increase and nominal interest rates should be unchanged. both real and nominal interest rates should decrease.

21. Inflation was higher in Argentina in the 1980s than in the 1990s. If the Fisher effect is correct, we would expect to observe that in Argentina

real interest rates were higher in the 1990s than in the 1980s.nominal interest rates were higher in the 1990s than in the 1980s.real interest rates were higher in the 1980s than in the 1990s.nominal interest rates were higher in the 1980s than in the 1990s.

22. The inflation tax

is an alternative to income taxes and government borrowing.is the cost to the government of printing currency.All of these are correct.taxes those who hold the least amount of money most.

23. There was hyperinflation during

post World War I Germany.All of these are correct.the 1970s in the United States.1880 to 1896 in the United States.

24. Which of the following inflation costs matter even when actual and expected inflation are the same?

relative price variabilitymenu costsinflation induced tax distortionsAll of these are correct.

25. The equation of exchange alone implies that an increase in M could result in

an increase in real GDP.an increase in the price level.All of these are correct.an increase in nominal GDP.

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