Chapter 11 - Inflation, Money Growth and Interest Rates

Name:

True/False
Indicate whether the statement is true or false.

The real rate of interest is the nominal rate of interest less the expected inflation rate.

The real return on money is zero.

An increase in the money growth rate affects household consumption, C.

In the market clearing model, an increase in the money growth rate leads to an increase in the inflation rate.

In the market clearing model an increase in the money growth rate leads to a decrease in the nominal interest rate.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

The actual inflation rate is:

a.	the change in the price level divided by the original price level.
b.	The original price level divided the change in price level.
c.	the original price level divided by the new price level.
d.	the new price level divided by the original price level

If the price level last year was 110 and this year is 118, then the inflation rate between last period and this period was:

a.	7.3%.
b.	7%.
c.	8%.
d.	6.8%.

If the price level last year was 135 and this year is 142, then the inflation rate between last period and this period was:

a.	4.9%.
b.	7%.
c.	5.1%.
d.	5.2%.

If the price level last year was 106 and this year is 102, then the inflation rate between last period and this period was:

a.	-3.8%.
b.	4%.
c.	3.8%.
d.	-3.9%.

10.

The unexpected inflation rate is:

a.	the expected inflation rate less the actual inflation rate.
b.	the expected inflation rate divided by the actual inflation rate.
c.	the actual inflation rate less the expected inflation rate.
d.	the actual inflation rate divided by the expected inflation rate.

11.

If the expected inflation rate is 5% and the actual inflation rate is 4%, then the unexpected inflation rate is:

a.	1%.
b.	9%.
c.	-1%.
d.	1.25%.

12.

If the expected inflation rate is 3% and the actual inflation rate is 5%, then the unexpected inflation rate is:

a.	2%.
b.	8%.
c.	-2%.
d.	1.67%.

13.

If the expected inflation rate is 5% and the unexpected inflation rate is 4%, then the actual inflation rate is:

a.	1%.
b.	9%.
c.	-1%.
d.	1.25%.

14.

If the expected inflation rate is 3% and the unexpected inflation rate is -2%, then the actual inflation rate is:

a.	2%.
b.	1%.
c.	-2%.
d.	1.67%.

15.

The real interest rate is

a.	the nominal interest rate plus the expected inflation rate.
b.	the nominal interest rate divided by the expected inflation rate.
c.	the nominal interest rate less the expected inflation.
d.	the expected inflation rate divided by the nominal rate of interest.

16.

If the nominal interest rate is 5% and the expected inflation rate is 2%, then the expected real rate of interest is:

a.	7%.
b.	3%.
c.	2.5%.
d.	-3%.

17.

If the nominal interest rate is 2% and the actual inflation rate is 5%, then the actual real rate of interest is:

a.	7%.
b.	3%.
c.	2.5%.
d.	-3%.

18.

When the real interest rate, r, can differ from the nominal interest rate, i, then:

a.	money demand depends on the real rate of interest.
b.	consumption depends on the real rate of interest.
c.	consumption depends on the nominal rate of interest.
d.	money demand no longer depends on any interest rate.

19.

An indexed bond is one:

a.	that pays a real rate of interest.
b.	that is indexed to the economic growth rate.
c.	that is indexed to the expected inflation rate.
d.	that pays a nominal rate of interest.

20.

The data on countries around the world show that:

a.	the inflation rate is positively related to the growth of currency.
b.	the inflation rate is unrelated to the growth in currency.
c.	the inflation rate is inversely related to the growth of currency.
d.	countries with high currency growth rates have higher real GDP.

21.

The nominal rate of interest on money is:

a.	zero.
b.	real rate of return on money less the inflation rate.
c.	minus the inflation rate.
d.	all of the above.

22.

The nominal rate of interest on money is:

a.	positive.
b.	real rate of return on money plus the inflation rate.
c.	minus the inflation rate.
d.	all of the above.

23.

The real rate of interest on money is:

a.	zero.
b.	the nominal rate of return on money plus the inflation rate.
c.	minus the inflation rate.
d.	all of the above.

24.

If the interest rate is 5% and the inflation rate is 3%, then the nominal rate of return on money is:

a.	2%.
b.	3%.
c.	5%.
d.	zero.

25.

If the interest rate is 5% and the inflation rate is 3%, then the real rate of return on money is:

a.	2%.
b.	3%.
c.	-3%.
d.	zero.

26.

If the interest rate is 6% and the inflation rate is 2%, then the nominal rate of return on money is:

a.	2%.
b.	4%.
c.	8%.
d.	zero.

27.

If the interest rate is 6% and the inflation rate is 2%, then the real rate of return on money is:

a.	2%.
b.	4%.
c.	-2%.
d.	zero.

28.

In the market clearing model money growth is modeled as:

a.	random.
b.	lump-sum transfers.
c.	via the purchase of bonds.
d.	all of the above.

29.

Lump sum transfers for money growth implies:

a.	we need to analyze how transfer affects GDP.
b.	we do not have to analyze how households adjust their behavior to attract transfers.
c.	we need to analyze how transfers affect capital.
d.	we need to model how households adjust their behavior to attract transfers.

30.

The expected rate of inflation is:

a.	the real rate of interest less the nominal rate of interest.
b.	the nominal interest rate on nominal bonds less the interest rate on indexed bonds.
c.	the nominal rate of interest plus the real rate of interest.
d.	the interest rate on indexed bonds less the nominal interest rate on nominal bonds.

31.

An increase in the money growth rate in the market clearing model causes:

a.	an increase in the nominal interest rate.
b.	a decrease in money demand.
c.	an increase in the price level.
d.	all of the above.

32.

An increase in the money growth rate in the market clearing model causes:

a.	an increase in the nominal interest rate.
b.	an increase in money demand.
c.	a decrease in the price level.
d.	all of the above.

33.

An increase in the money growth rate in the market clearing model causes:

a.	a decrease in the nominal interest rate.
b.	a decrease in money demand.
c.	an increase in consumption.
d.	all of the above.

34.

An increase in the money growth rate in the market clearing model causes:

a.	a decrease in the nominal interest rate.
b.	an increase in consumption.
c.	an increase in the price level.
d.	all of the above.

35.

An increase in the money growth rate in the market clearing model causes:

a.	an increase in the nominal interest rate.
b.	a decrease in money demand.
c.	an increase in the inflation rate.
d.	all of the above.

36.

An increase in the money growth rate in the market clearing model causes:

a.	a decrease in the nominal interest rate.
b.	an increase in money demand.
c.	an increase in the inflation rate.
d.	all of the above.

37.

The growth rate of real money balances is:

a.	the growth rate of nominal money less the inflation rate.
b.	the growth rate of nominal money divided by the inflation rate.
c.	the growth rate of nominal money plus the inflation rate.
d.	the inflation rate divided by the growth rate of nominal money.

38.

When the rate of growth rate of money is constant:

a.	the inflation rate equals the growth rate of money.
b.	the nominal interest rate is the real rate of interest plus the growth rate of money.
c.	real money balance are fixed over time.
d.	all of the above.

39.

When the rate of growth rate of money is constant:

a.	the inflation rate equals the growth rate of money.
b.	the nominal interest rate rises.
c.	real money balance are declining.
d.	all of the above.

40.

When the rate of growth rate of money is constant:

a.	the inflation rate is growing.
b.	the nominal interest rate is the real rate of interest plus the growth rate of money.
c.	real money balance are declining.
d.	all of the above.

41.

When the rate of growth rate of money is constant:

a.	the inflation rate is growing.
b.	the nominal interest rate is declining.
c.	real money balance are constant over time.
d.	all of the above.

42.

Real revenue from printing money is approximately:

a.	the nominal interest rate times real money balances.
b.	the money growth rate times real money balances.
c.	the real interest rate times nominal money balances.
d.	the money growth rate times nominal money balances.

43.

If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to 5%, then we would expect the nominal interest rate to be:

a.	10%.
b.	7%.
c.	zero.
d.	2%.

44.

If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to 5%, then we would expect the inflation rate to be:

a.	10%.
b.	7%.
c.	5%.
d.	2%.

45.

If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to 5%, then we would expect real money balances to:

a.	fall.
b.	increase.
c.	remain unchanged.
d.	to fluctuate.

46.

If the inflation rate is 2% and the nominal interest rate is 4% and the money growth rate increases to 3%, then we would expect the nominal interest rate to be:

a.	6%.
b.	zero.
c.	5%.
d.	2%.

47.

If the inflation rate is 2% and the nominal interest rate is 4% and the money growth rate increases to 5%, then we would expect the inflation rate to be:

a.	6%.
b.	7%.
c.	5%.
d.	2%.

48.