Question 1

According to the classical theory of inflation, what is the primary determinant of the long-run inflation rate in an economy?

Accepted Answer

Growth in the money supply

Question 2

If the price level in an economy is $$P$$, what is the value of money according to the classical theory?

Accepted Answer

$$\frac{1}{P}$$

Question 3

Suppose the central bank doubles the money supply in the long run. According to monetary neutrality, what happens to real GDP?

Accepted Answer

It is unaffected

Question 4

Which equation represents the quantity theory of money?

Accepted Answer

$$M 	imes V = P 	imes Y$$

Question 5

In the quantity equation $$M 	imes V = P 	imes Y$$, if $$V$$ and $$Y$$ are constant, what is the effect of increasing $$M$$?

Accepted Answer

It increases $$P$$

Question 6

Which of the following best describes monetary neutrality?

Accepted Answer

Changes in the money supply affect only nominal variables, not real variables

Question 7

If the nominal interest rate is 6% and the inflation rate is 2%, what is the real interest rate according to the Fisher effect?

Accepted Answer

4%

Question 8

Which of the following is NOT considered a cost of inflation?

Accepted Answer

Increase in real GDP

Question 9

Unexpected inflation can redistribute wealth in an economy. Which group is most likely to benefit from unexpected inflation?

Accepted Answer

Borrowers with fixed-rate loans

Question 10

If the velocity of money ($$V) is $$stable and real output ($$Y) is $$determined by productivity, what does the quantity theory of money predict about the relationship between money supply ($$M) $$and the price level ($$P$$)?

Accepted Answer

An increase in $$M$$ will increase $$P$$

Question 11

Which of the following scenarios best illustrates the concept of 'menu costs'?

Accepted Answer

A restaurant spends money to reprint its menus after a price increase due to inflation

Question 12

During a period of high inflation, which of the following is a direct consequence for people who hold cash?

Accepted Answer

Their purchasing power decreases

Question 13

Suppose the government finances a budget deficit by having the central bank print more money. What is the likely macroeconomic consequence according to the classical theory?

Accepted Answer

Higher inflation and an inflation tax on money holders

Question 14

Which of the following best describes the Fisher effect?

Accepted Answer

The nominal interest rate adjusts one-for-one with changes in the inflation rate

Question 15

If the price of apples is $10 per pound, what is the value of money in terms of pounds of apples per dollar?

Accepted Answer

0.1 pounds per dollar

Question 16

Which of the following statements is TRUE regarding inflation and the standard of living in the long run?

Accepted Answer

Inflation does not affect the standard of living because nominal wages adjust proportionally

Question 17

Which of the following is an example of 'shoeleather costs'?

Accepted Answer

People making more frequent trips to the bank to avoid holding cash during inflation

Question 18

If the central bank increases the money supply and the velocity of money and real output remain unchanged, what happens to the nominal GDP?

Accepted Answer

Nominal GDP increases

Question 19

Which of the following is a direct result of 'tax bracket creep' caused by inflation?

Accepted Answer

Individuals pay higher taxes even if their real income does not increase

Question 20

In the long run, which of the following variables is LEAST likely to be affected by an increase in the money supply?

Accepted Answer

Real GDP

Money Growth and Inflation: Classical Theory and Costs

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