Economics 101 Practice Test: Money Growth and Inflation | Practice Test / Quiz / MCQs

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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. The inflation tax refers to the tendency

for people to pay more income tax as prices rise. for the value of dollars people hold to fall as the government prints more money. All of these are correct. of real interest rates to rise when money supply growth rises.

2. There was hyperinflation during

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

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

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

4. Consider the following two assumptions. The velocity of money is stable over time. Factory supplies and production technology primarily determine the economy’s output of goods and services.

Only the second assumption is important to the quantity theory of money. Only the first assumption is important to the quantity theory of money. Neither assumption is important to the quantity theory of money. Both assumptions are important to the quantity theory of money.

5. Data on hyperinflation indicates,

no close relationship between money supply growth and inflation. that money supply growth was much greater than inflation. that money supply growth was much less than inflation. that money supply growth was about the same as inflation.

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

money demand shifts right or money supply shifts left.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.

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

8. If wages and prices both rose by 5%, workers’

real wages would rise so they would be better-off.real wages would be unchanged, so they would be neither better-off nor worse-off.nominal wage would fall, so they would be worse-off.None of the above is correct.

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

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

10. Menu costs refer to the costs of

changing prices.comparing alternative investments.All of these are correct.comparing prices.

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

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

12. When the price level falls, 1/P

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

13. Suppose the economy is initially in monetary equilibrium. The Federal Reserve then increases the money supply. As a result the quantity of money demanded will

be less than the quantity of money supplied, and the price level will increase. exceed the quantity of money supplied, and the price level will increase.exceed the quantity of money supplied, and the price level will fall.be less than the quantity of money supplied, and the price level will fall.

14. The quantity theory of money is helpful for explaining

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

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

16. If a country suddenly and unexpectedly reduces monetary growth inflation will be unexpectedly

low and wealth is redistributed from borrowers to lenders.low and wealth is redistributed from lenders to borrowers.high and wealth is redistributed from lenders to borrowers.None of the above is correct.

17. Menu costs refer to

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

18. When the money market is drawn with the value of money on the vertical axis, the money demand curve slopes

downward, because at higher prices people want to hold more money.downward, because at higher prices people want to hold less money.upward, because open-market purchases make more money available.upward, because at higher prices people want to hold less money.

19. If there is monetary neutrality which of the following change when the money supply changes?

real interest ratesthe price levelemploymentbuilding and modernizing of factories.

20. 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?

2%4%3.2%2.8%

21. Today most economists accept Hume’s conclusion of monetary neutrality as an accurate description of the economy in

the long run only.the short run only.neither the short run nor the long run. both the long run and the short run.

22. Velocity is computed as

(Y  M)/V.(Y  M)/P.(P  M)/Y.(P  Y)/M.

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

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

24. 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

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

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

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

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