The classical theory of inflation

is also known as the quantity theory of money.

was developed by some of the earliest economic thinkers.

is used by most modern economists to explain the long-run determinants of the inflation rate.

The value of money rises as the price level

falls, because the number of dollars needed to buy a representative basket of goods falls.

rises, because the number of dollars needed to buy a representative basket of goods rises.

rises, because the number of dollars needed to buy a representative basket of goods falls.

falls, because the number of dollars needed to buy a representative basket of goods rises.

If P denotes the price of goods and services measured in terms of money, then

1/P represents the value of money measured in terms of goods and services.

P can be interpreted as the inflation rate.

the supply of money influences the value of P, but the demand for money does not.

With the value of money on the vertical axis, the money supply curve is

vertical because we assume the central bank controls the money supply.

upward sloping because people supply a larger quantity of money when the value of money increases.

downward sloping because people supply a larger quantity of money when the value of money decreases.

horizontal because we assume the central bank controls the money supply

When the money market is drawn with the value of money on the vertical axis, as the price level increases which of the following increases?

the quantity of money demanded but not the quantity of money supplied

the quantity of money demanded and the quantity of money supplied

the quantity of money supplied but not the quantity of money demanded

neither the quantity of money supplied nor the quantity of money demanded

When the money market is drawn with the value of money on the vertical axis, as the price level decreases, the value of money

increases, so the quantity of money demanded decreases.

increases, so the quantity of money demanded increases.

decreases, so the quantity of money demanded decreases.

decreases, so the quantity of money demanded increases.

When the money market is drawn with the value of money on the vertical axis, an increase in the price level causes a

movement to the right along the money demand curve.

shift to the right of the money demand curve.

shift to the left of the money demand curve.

movement to the left along the money demand curve.

When the money market is drawn with the value of money on the vertical axis, if the money supply rises

the price level rises and the value of money falls.

the price level and the value of money rise.

the price level falls and the value of money rises.

the price level and the value of money fall.

In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold, which was in use as a medium of exchange. We would predict that this increase in gold

raised the price level, but decreased the value of gold in Cairo.

raised both the price level and the value of gold in Cairo.

lowered the price level, but increased the value of gold in Cairo.

lowered both the price level and the value of gold in Cairo.

When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve sells bonds, then the money supply curve

shifts left, causing the price level to fall.

shifts right, causing the price level to rise.

shifts right, causing the price level to fall.

shifts left, causing the price level to rise.

Consider the money market drawn with the value of money on the vertical axis. If money demand is unchanged and the price level rises, then

the money supply must have increased, perhaps because the Fed bought bonds.

the money supply must have increased, perhaps because the Fed sold bonds.

the money supply must have decreased, perhaps because the Fed bought bonds.

the money supply must have decreased, perhaps because the Fed sold bonds.

The price level rises if either

money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a fall in the value of money.

money demand shifts rightward or money supply shifts leftward; this rise in the price level is associated with a rise in the value of money.

money demand shifts rightward or money supply shifts leftward; this rise in the price level is associated with a fall in the value of money.

money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a rise in the value of money.

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

If the money supply is MS2 and the value of money is 2, then

the quantity of money supplied is greater than the quantity demanded; the price level will rise.

the quantity of money demanded is greater than the quantity supplied; the price level will rise.

the quantity of money demanded is greater than the quantity supplied; the price level will fall.

the quantity of money supplied is greater than the quantity demanded; the price level will fall.

If the current money supply is MS1, then

equilibrium exists when the value of money is 2.

equilibrium exists when the equilibrium is at point D.

equilibrium exists when the value of money is 1.

there is excess demand if the value of money is 2.

If the relevant money-supply curve is the one labeled MS2, then

when the money market is in equilibrium, one dollar purchases about one-third of a basket of goods and services.

when the money market is in equilibrium, one unit of goods and services sells for 33 cents.

there is an excess demand for money if the value of money in terms of goods and services is 0.5.

the dollar value of the economy's output of final goods and services.

the total quantity of final goods and services produced.

the total income received from producing final goods and services measured in constant dollars.

The payments you make on your automobile loan are given in terms of dollars. As prices rise you notice you give up fewer goods to make your payments.

The dollar amount you pay is a nominal value. The number of goods you give up is a real value.

The dollar amount you pay is a real value. The number of goods you give up is a nominal value.

Both the dollar amount you pay and the goods you give up are nominal values.

Both the dollar amount you pay and the goods you give up are real values.

You find that to attract a sufficient number of workers you have to pay them more dollars. Given the price of your output you determine you are paying your workers more in goods than before. Which of the following has risen?

The real and nominal value of the wages you pay.

The real but not the nominal value of wages you pay.

The nominal but not the real value of the wages you pay.

Neither the real nor the nominal value of the wages you pay.

You put money in the bank. The increase in the dollar value of your savings

is a nominal variable, but the change in the number of goods you can buy with your savings is a real variable.

and the change in the number of goods you can buy with your savings are both nominal variables.

and the change in the number of goods you can buy with your savings are both real variables.

is a real variable, but the change in the number of goods you buy with your savings is a nominal variable.

Over time both real GDP and the price level have trended upward. Which of these trends would the classical dichotomy say could be explained by an upward trend in the money supply?

the upward trend in the price level but not the upward trend in real GDP

both the upward trend in real GDP and the upward trend in the price level

the upward trend in real GDP but not the upward trend in the price level

neither the upward trend in the price level nor the upward trend in real GDP

According to the classical dichotomy, when the money supply doubles which of the following doubles?

the price level and nominal GDP

Monetary neutrality means that a change in the money supply

does not change real GDP. Most economists think this is a good description of the economy in the long run but not the short run.

does not change real GDP. Most economists think this is a good description of the economy in the short run and in the long run.

does change real GDP. Most economists think this is a good description of the economy in the short-run and the long run.

does change real GDP. Most economists think this is a good description of the economy in the long run but not the short run.

Velocity is computed as the

price level times real GDP divided by the money supply.

price level times the money supply divided by real GDP.

real GDP times the money supply divided by the price level.

real GDP times the money supply divided by the rate at which money changes hands.

According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then

the price level would rise by 5 percent and real GDP would be unchanged.

both the price level and real GDP would rise by 5 percent.

the price level would be unchanged and real GDP would rise by 5 percent.

both the price level and real GDP would be unchanged.

(P x Y)/M and increases if dollars are exchanged more frequently.

Y/(M x P) and increases if dollars are exchanged less frequently.

Y/(M x P) and increases if dollars are exchanged more frequently.

(P x Y)/M and increases if dollars are exchanged less frequently.

The money supply is 4,000, nominal GDP is 8,000, and real GDP is 2,000. Which of the following is 2?

velocity but not the price level.

the price level but not velocity.

neither the price level nor velocity.

PE Chapter30

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Over the past 80 years, prices in the U.S. have risen on average aboutA. 2 percent per year.B. 4 percent per year.C. 3.6 percent per year.D. 6 percent per year.

Inflation can be measured by theA. change in the consumer price index.B. percentage change in the consumer price index.C. percentage change in the price of a specific commodity.D. change in the price of a specific commodity.

In which of the following cases was the inflation rate 12 percent over the last year?

If the price level increased from 200 to 250, then what was the inflation rate?A. 50 percentB. 25 percentC. 20 percentD. None of the above is correct.

Deflation

The term hyperinflation refers toA. the spread of inflation from one country to others.B. a decrease in the inflation rate.C. a period of very high inflation.D. inflation accompanied by a recession.

There was hyperinflation during theA. period 1880-1896 in the United States.B. 1970s in the United States.C. early part of the current century in Zimbabwe.D. All of the above are correct.

The classical theory of inflation

When the price level rises, the number of dollars needed to buy a representative basket of goodsA. increases, and so the value of money rises.B. increases, and so the value of money falls.C. decreases, and so the value of money rises.D. decreases, and so the value of money falls

The value of money rises as the price level

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Over the past 80 years, prices in the U.S. have risen on average about
A. 2 percent per year.
B. 4 percent per year.
C. 3.6 percent per year.
D. 6 percent per year.

Inflation can be measured by the
A. change in the consumer price index.
B. percentage change in the consumer price index.
C. percentage change in the price of a specific commodity.
D. change in the price of a specific commodity.

If the price level increased from 200 to 250, then what was the inflation rate?
A. 50 percent
B. 25 percent
C. 20 percent
D. None of the above is correct.

The term hyperinflation refers to
A. the spread of inflation from one country to others.
B. a decrease in the inflation rate.
C. a period of very high inflation.
D. inflation accompanied by a recession.

There was hyperinflation during the
A. period 1880-1896 in the United States.
B. 1970s in the United States.
C. early part of the current century in Zimbabwe.
D. All of the above are correct.

When the price level rises, the number of dollars needed to buy a representative basket of goods
A. increases, and so the value of money rises.
B. increases, and so the value of money falls.
C. decreases, and so the value of money rises.
D. decreases, and so the value of money falls