## Multiple ChoiceEdit

1. In which of the following cases was the inflation rate 10 percent over the last year?

- a. One year ago, the price index had a value of 110, and now it has a value of 120.
- b. One year ago, the price index had a value of 120, and now it has a value of 132.
- c. One year ago, the price index had a value of 126, and now it has a value of 140.
- d. One year ago, the price index had a value of 145, and now it has a value of 163.
- e. One year ago, the price index had a value of 90, and now it has a value of 100.

2. If M = 10,000, P = 2, and Y = 20,000, then velocity =

- a. 4. Velocity will rise if money changes hands more frequently.
- b. 4. Velocity will rise if money changes hands less frequently.
- c. 8. Velocity will rise if money changes hands more frequently.
- d. 8. Velocity will rise if money changes hands less frequently.
- e. 8. Velocity will fall if money changes hands more frequently.

3. Which of the following combinations of real interest rates and inflation implies a nominal interest rate of 7 percent?

- a. a real interest rate of 2.5 percent and an inflation rate of 2 percent
- b. a real interest rate of 4 percent and an inflation rate of 11 percent
- c. a real interest rate of 6 percent and an inflation rate of 1 percent
- d. a real interest rate of 5.5 percent and an inflation rate of 3 percent
- e. a real interest rate of 7 percent and an inflation rate of 7 percent

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

- a. increases, so the value of money rises.
- b. increases, so the value of money falls.
- c. decreases, so the value of money rises.
- d. decreases, so the value of money falls.
- e. remains constant to offset the fall in the value of money.

5. An associate professor of physics gets a $200 a month raise. With her new monthly salary, she can buy more goods and services than she could buy last year.

- a. Her real and nominal salaries have risen.
- b. Her real and nominal salaries have fallen.
- c. Her real salary has risen and her nominal salary has fallen.
- d. Her real salary has fallen and her nominal salary has risen.
- e. Her real salary has remained constant but her nominal salary has risen.

6. On its website, your bank posts the interest rates it is paying on savings accounts. Those posted rates

- a. are real values.
- b. are nominal values.
- c. are gross values.
- d. are net values.
- e. are adjusted for inflation.

7. In 1898, prospectors on the Klondike River discovered gold. This discovery caused an unexpected price level

- a. decrease that benefited creditors at the expense of debtors.
- b. decrease that benefited debtors at the expense of creditors.
- c. increase that benefited creditors at the expense of debtors.
- d. increase that benefited debtors at the expense of creditors.
- e. increase that benefited debtors and creditors equally.

8. Wealth is redistributed from creditors to debtors when inflation was

- a. expected to be high and it turns out to be high.
- b. expected to be low and it turns out to be low.
- c. expected to be low and it turns out to be high.
- d. expected to be high and it turns out to be low.
- e. unexpected and turns out to be low.

9. In order to maintain stable prices, a central bank must

- a. maintain low interest rates.
- b. keep unemployment low.
- c. tightly control the money supply.
- d. engage in counter-cyclical monetary policy.
- e. back the money supply with gold.

10. When inflation rises, people desire to hold

- a. less money, and firms make less frequent price changes.
- b. less money, and firms make more frequent price changes.
- c. more money, and firms make less frequent price changes.
- d. more money, and firms make more frequent price changes.
- e. more money, and firms do not make price changes.

11. You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the price level. Before taxes, you experienced

- a. both a nominal gain and a real gain, and you paid taxes on the nominal gain.
- b. both a nominal gain and a real gain, and you paid taxes only on the real gain.
- c. a nominal gain, but no real gain, and you paid taxes on the nominal gain.
- d. a nominal gain, but no real gain, and you paid no taxes on the transaction.
- e. a real gain, but no nominal gain, and you paid taxes on the real gain.

12. For a given real interest rate, an increase in inflation makes the after-tax real interest rate

- a. decrease, which encourages savings.
- b. decrease, which discourages savings.
- c. increase, which encourages savings.
- d. increase, which discourages savings.
- e. increase, but has no effect on savings.

## AnswersEdit

- B
- A
- C
- C
- A
- B
- D
- C
- C
- B
- C
- k

## Free ResponseEdit

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

2. Identify each of the following as nominal or real variables.

- a. the physical output of goods and services
- b. the dollar price of apples
- c. the price of apples relative to the price of oranges
- d. the amount that shows up on your paycheck after taxes
- e. the amount of goods you can purchase with the wage you get each hour
- f. the taxes that you pay the government