Chapter 5 Mishkin (5)

8/10/2019 Chapter 5 Mishkin (5)

1/21

Macreconomics: Policy and Practice(Mishkin)

Chapter 5 Money and Inflation

5.1 What is Money?

1) Money is not ________.A) income because the former is a stock measure and the latter a flowB) wealth because the latter is generally used to rocure the former!) as desirable as barter because the latter is more efficient than the former") all of the abo#e$) none of the abo#eAnswer% A&oic% 5.1 What is Money?AA!'B% (eflecti#e &hinking

) Money is not ________.

A) income because the former is a stock measure and the latter a flowB) wealth because the former is generally used to rocure the latter!) as inefficient as barter because the latter re*uires a double coincidence of wants") all of the abo#e$) none of the abo#eAnswer% "&oic% 5.1 What is Money?AA!'B% (eflecti#e &hinking

+) Money is another measure of ________.A) income because they both are flow measures

B) wealth because they both measure the total collection of roerty that ser#es as store of #alue!) the flow of earnings one draws e#ery two weeks") all of the abo#e$) none of the abo#eAnswer% $&oic% 5.1 What is Money?AA!'B% (eflecti#e &hinking

,) Money ser#es as ________.A) a unit of account-B) a store of #alue!) a medium of echange") all of the abo#e$) none of the abo#eAnswer% "&oic% 5.1 What is Money?

1

!oyright / 01 earson $ducation- 2nc.


2/21


3/21

10) 'ub4ect to a few legal and ractical restrictions- anythingmay be echanged for anythingelse. &he distincti#e ad#antage of money is that ________.A) it is likely to retain its #alue- whether it is ket or echangedB) it has little- if any- use other than echange!) it can generate income while it is ket

") it is likely to be acceted by e#eryone in echange for anything$) none of the abo#eAnswer% "&oic% 5.1 What is Money?AA!'B% (eflecti#e &hinking

11) Which of the following is most like money?A) game arcade tokensB) board game money!) credit cards") baseball trading cards

$) fre*uent flyer milesAnswer% A&oic% 5.1 What is Money?AA!'B% (eflecti#e &hinking

1) A risoner of war cam seems a likely lace for cigarette money- because ________.A) nearly all risoners smoke cigarettesB) of the absence of better alternati#es!) cigarettes are abundant and easy to count") the guards can enforce the ractice of acceting cigarettes as a medium of echange$) cigarettes retain their #alue o#er timeAnswer% B&oic% 5.1 What is Money?AA!'B% (eflecti#e &hinking

1+) !haracteristics that enable an item to ser#e well as money include each of the following-except________.A) durableB) abundant!) di#isible") ortable$) #erifiableAnswer% B&oic% 5.1 What is Money?AA!'B% (eflecti#e &hinking

+



4/21

1,) 'uose you ha#e a collection of gold coins from the 1:th century. !omment on theirsuitability to ro#ide for you each of the three functions of money.Answer% &he coins are an ecetional store of #alue. &hey would ser#e well as a medium ofechange- eagerly acceted by most eole. &hey are a oor unit of account- since their #aluefluctuates a great deal relati#e to other goods. &he face #alue of the coins is not a reliable

indicator of their worth relati#e to other goods. &his is because they are #alued rimarily as astore of #alue ;and historical


5/21

,) &he 7>M! ________.A) meets four times a year to decide on how to conduct oen market oerations that influencethe money sulyB) meets si times a year to decide on how to conduct oen market oerations that influence themoney suly and interest rates

!) meets eight times a year to decide on how to conduct oen market oerations that influencethe money suly and interest rates") meets twel#e times a year to decide on how to conduct oen market oerations that influenceinterest rates$) none of the abo#eAnswer% !&oic% 5. &he 7ederal (eser#e 'ystem and the !ontrol of the Money 'uly

5) >en Market oerations consist mainly of ________.A) the go#ernment buying and selling ri#ate securities in the oen marketB) the 7ed buying and selling go#ernment securities in the oen market!) the go#ernment selling its own securities in the oen market") the 7ed setting rates for securities traded in the oen market$) none of the abo#eAnswer% B&oic% 5. &he 7ederal (eser#e 'ystem and the !ontrol of the Money 'uly

3) When the 7ed sells go#ernment securities in the oen market- the money suly ________because ________.A) decreases banks lose li*uidity- they make fewer loans and checking account deositsdecreaseB) increases banks gain li*uidity- they make more loans and checking account deosits increase!) increases banks lose li*uidity- they make more loans and checking account deosits increase") decreases banks gain li*uidity- they make fewer loans and checking account deositsdecrease$) none of the abo#eAnswer% A&oic% 5. &he 7ederal (eser#e 'ystem and the !ontrol of the Money 'ulyAA!'B% (eflecti#e &hinking

6) When the 7ed buys go#ernment securities in the oen market- the money suly ________because ________.A) decreases banks lose li*uidity- they make fewer loans and checking account deositsdecrease

B) increases banks gain li*uidity- they make more loans and checking account deosits increase!) increases banks lose li*uidity- they make more loans and checking account deosits increase") decreases banks gain li*uidity- they make fewer loans and checking account deositsdecrease$) none of the abo#eAnswer% B&oic% 5. &he 7ederal (eser#e 'ystem and the !ontrol of the Money 'ulyAA!'B% (eflecti#e &hinking

5



6/21

9) >en market oerations alter the money suly by ________.A) influencing banks8 ability to make loans to indi#iduals and cororationsB) adding currency to or withdrawing currency from banks8 #aults!) adding currency to or withdrawing currency from the checking accounts of indi#iduals andcororations

") influencing banks8 ability to make loans to the go#ernment$) none of the abo#eAnswer% A&oic% 5. &he 7ederal (eser#e 'ystem and the !ontrol of the Money 'uly

:) Which of the following is true for the $uroean !entral Bank ;$!B)?A) its eecuti#e board meets more often than the 7>M!B) each member country8s central bank has similar functions to the 7ederal (eser#e Banks!) it is housed in 7rankfurt- =ermany") all of the abo#e$) none of the abo#eAnswer% "&oic% 5. &he 7ederal (eser#e 'ystem and the !ontrol of the Money 'ulyAA!'B% (eflecti#e &hinking

10) Which of the following is true for the $uroean !entral Bank ;$!B)?A) its eecuti#e board meets less often than the 7>M!B) the members of its eecuti#e board ha#e lifetime aointments!) it is a more decentralied system than the 7ederal (eser#e") all of the abo#e$) none of the abo#eAnswer% !&oic% 5. &he 7ederal (eser#e 'ystem and the !ontrol of the Money 'ulyAA!'B% (eflecti#e &hinking

11) !urrent 7ederal (eser#e olicy focuses on interest rates- rather than on monetary aggregates-because ________.A) monetary aggregates do not ro#ide clear or consistent signals to guide olicymakersB) oen market oerations affect interest rates more directly than they affect monetaryaggregates!) according to the 7isher effect- the interest rate is a key determinant of the inflation rate") all of the abo#e$) none of the abo#eAnswer% A

&oic% 5. &he 7ederal (eser#e 'ystem and the !ontrol of the Money 'uly

3



7/21

1) Both the 7ederal (eser#e 'ystem in the Cnited 'tates and the $uroean !entral Bank arecomrised of geograhically disersed Banks. Dow might such decentraliation contribute tosuccessful monetary olicy?Answer% &he economies of both the C.'. and $uroe encomass many regions with distincteconomic secialiations- income le#els- demograhics- etc. olicymakers need to be aware of

this heterogeneity and of how the olicies under consideration might imact some regionsdifferently than others. Da#ing had a role in the design and selection of olicies- officials andcitiens at the regional le#el will be more willing and able to suort and to imlement theolicies.&oic% 5. &he 7ederal (eser#e 'ystem and the !ontrol of the Money 'ulyAA!'B% (eflecti#e &hinking

5.+ Measuring Money

1) &he 7ed8s narrowest measure of money is ________.A) M1B) M!) M+") all of the abo#e$) none of the abo#eAnswer% A&oic% 5.+ Measuring Money

) M1 differs from M because ________.A) M includes comonents that are less li*uid than any comonent of M1B) M1 does not include sa#ings deosits and M does!) M1 is included in M but M has more comonents") all of the abo#e$) none of the abo#eAnswer% "&oic% 5.+ Measuring Money

+) M1 differs from M because ________.A) M1 includes demand deosits and M does notB) M1 includes currency held by the nonbank ublic and M includes only currency held bybanks!) M1 includes non interestEbearing checking accounts and M includes interest bearing timedeosit accounts") all of the abo#e

$) none of the abo#eAnswer% !&oic% 5.+ Measuring Money

6



8/21

,) M1 differs from M because ________.A) M1 is less li*uid than MB) M1 includes demand deosits and M does not!) M1 includes only the most li*uid forms of money and M includes all of M1 and some lessli*uid items

") all of the abo#e$) none of the abo#eAnswer% !&oic% 5.+ Measuring Money

5) M1 does not include cash that is held in A&Ms or bank #aults- because ________.A) no one really owns that moneyB) that money is included in M!) that money earns no interest") the right to access that money is counted already as bank deosits$) none of the abo#e

Answer% "&oic% 5.+ Measuring Money

3) 7inancial inno#ations such as direct deosit of aychecks- electronic ayment of bills- andautomated teller machines ;A&Ms) ha#e likely ________.A) had minimal effect on M1 and MB) reduced the sie of M relati#e to M1!) increased both M1 and M relati#e to ="") caused the growth rates of M1 and M to become more stable$) reduced the sie of M1 relati#e to MAnswer% $&oic% 5.+ Measuring MoneyAA!'B% (eflecti#e &hinking

6) &yically- when someone borrows money from a bank- M ________- because ________.A) increases the money is held for a while in a li*uid formB) decreases the money is held for a while in a li*uid form!) does not change the loan affects only the subcategories within M") decreases of the decline in the bank8s #ault cash$) none of the abo#eAnswer% A&oic% 5.+ Measuring Money

9) Which of these transactions results in an increase in M1?A) withdrawal of F100 cash from your checking accountB) certificate of deosit matures- adding F50 to your checking account!) deositing a bank loan of F,00 into your sa#ings account") deositing a F+00 aycheck into your sa#ings account$) none of the abo#eAnswer% B&oic% 5.+ Measuring Money

9



9/21

:) Which of these transactions results in an increase in M?A) certificate of deosit matures- adding F50 to your checking accountB) withdrawal of F100 cash from your checking account!) deositing a bank loan of F,00 into your sa#ings account") deositing a F+00 aycheck into your sa#ings account

$) none of the abo#eAnswer% !&oic% 5.+ Measuring Money

10) 2f the euro relaces the C.'. dollar as the world8s most oular currency- that will likely________.A) reduce M1- without affecting MB) reduce M- without affecting M1!) cause a temorary increase in M1") affect neither M1 nor M$) none of the abo#e

Answer% $&oic% 5.+ Measuring MoneyAA!'B% (eflecti#e &hinking

11) As of 010 the outstanding C.'. currency is F96 billion- which imlies that the tyical C.'.citien holds F-900 in cash. 2s this an accurate inference? Why?A) @es because di#iding total currency of F96 billion by total C.'. oulation in 010 roughlyworks out to F-900 er ersonB) o because criminals and foreigners hold large sums of dollars- so the a#erage citien holdsfar less.!) o because the a#erage citien robably does not ha#e F900 in her checking account toback u all that cash") @es because the 7ed rarely makes accounting mistakes when comuting M1$) none of the abo#eAnswer% B&oic% 5.+ Measuring Money

1) &he rincial reason;s) that so much C.'. currency is held outside the C.' is ;are) ________.A) many eole around the world trust the C.'. dollar more than any other currencyB) banks all around the world find it con#enient to hold large amounts of C.'. dollars!) C.'. citiens and cororations send a lot of dollars abroad") all of the abo#e$) none of the abo#e

Answer% A&oic% 5.+ Measuring Money

:



10/21

1+) (ecent financial turmoil has caused many eole to increase sa#ing and to refer assets thatare ercei#ed to be relati#ely safe and li*uid. What are the likely effects on M1 and M?Answer% 2ncreased sa#ing imlies reduced consumtion- so holding of the most li*uid assets-M1- should decline. 2nstead- eole will hold more of the less li*uid- interestEbearing assetswithin M. 2f eole are shifting away from illi*uid assets like cororate stock in fa#or of assets

like money market mutual fund shares- then M should rise.&oic% 5.+ Measuring MoneyAA!'B% (eflecti#e &hinking

1,) !redit cards are a oular means of ayment. Why are credit card accounts not included inM1 or M? Are credit cards of no rele#ance to these money measures?Answer% A urchase using a credit card is the same as taking out a loan. 2n the transaction- nomedium of echange asses between the buyer and the seller. At a later time- the seller recei#es aayment- and the buyer must gi#e a corresonding amount to the credit card issuer. &he use ofcredit cards does tend to reduce M1 relati#e to M- since many transactions can be co#ered by asingle monthly ayment on ones credit card account- reducing the desired *uantities of cash and

checking account balances.&oic% 5.+ Measuring MoneyAA!'B% (eflecti#e &hinking

5., Guantity &heory of Money

1) &he *uantity theory of money ________.A) is the roduct of classical economistsB) links total income to a country8s suly of money!) is deri#ed from the e*uation of echange") all of the abo#e$) none of the abo#eAnswer% "&oic% 5., Guantity &heory of Money

) &he *uantity theory of money ________.A) is the roduct of Heynesian economistsB) links total income to a country8s suly of money!) elains why the e*uation of echange is true by definition") all of the abo#e$) none of the abo#eAnswer% B&oic% 5., Guantity &heory of Money

10



11/21

+) &he *uantity theory of money ________.A) was best elained by 7isher8s book"The Purchasing Power of Money"B) links total money suly to a country8s demand for money!) elains why the e*uation of echange is true by definition") all of the abo#e

$) none of the abo#eAnswer% A&oic% 5., Guantity &heory of Money

,) &he *uantity theory of money elains how ________ deends on ________.A) real =" the money sulyB) the rice le#el the demand for money!) the money suly the #elocity of money") all of the abo#e$) none of the abo#eAnswer% $

&oic% 5., Guantity &heory of Money

5) &he #elocity of money ________.A) reresents the a#erage number of times a dollar turns o#er through the yearB) ro#ides the link between the money suly and nominal income!) times the money suly should e*ual total income according to the e*uation of echange") all of the abo#e$) none of the abo#eAnswer% "&oic% 5., Guantity &heory of Money

3) &he #elocity of money ________.A) reresents the a#erage number of times a dollar is sent in a gi#en yearB) ro#ides the link between the money suly and money demand!) times the money suly should e*ual real ="") all of the abo#e$) none of the abo#eAnswer% A&oic% 5., Guantity &heory of Money

6) &he e*uation of echange ________.A) states that the *uantity of money multilied by #elocity must e*ual nominal income in a gi#enyear

B) describes a relationshi that is true by definition!) shows that real =" must e*ual real money balances times the number of times a dollar turnso#er in a year") all of the abo#e$) none of the abo#eAnswer% "&oic% 5., Guantity &heory of Money

11



12/21

9) &he e*uation of echange ________.A) states that the *uantity of money di#ided by #elocity must e*ual nominal income in a gi#enyearB) is only an identity if we do not understand the determinants of #elocity!) shows that nominal income must e*ual real money balances times the number of times a

dollar turns o#er in a year") all of the abo#e$) none of the abo#eAnswer% B&oic% 5., Guantity &heory of Money

:) According to 2r#ing 7isher- #elocity ________.A) is determined by institutions that affect the way indi#iduals transactB) is affected by institutions only gradually!) is assumed constant in the short run") all of the abo#e

$) none of the abo#eAnswer% "&oic% 5., Guantity &heory of Money

10) According to 2r#ing 7isher- #elocity ________.A) is determined by the way banks alone conduct transactionsB) e*uals the number of transactions times the a#erage rice er transaction all di#ided by totalmoney balances!) can change #ery *uickly on short notice") all of the abo#e$) none of the abo#eAnswer% B&oic% 5., Guantity &heory of Money

11) &he *uantity theory of money ________.A) is formulated in terms of aggregate outut because the nominal #alue of transactions isdifficult to measureB) assumes that the nominal #alue of transactions are a constant ortion of aggregate outut!) assumes #elocity is constant in the short run") all of the abo#e$) none of the abo#eAnswer% "&oic% 5., Guantity &heory of Money

1



13/21

1) &he *uantity theory of money ________.A) is formulated in terms of aggregate outut because the nominal #alue of transactions isdifficult to measureB) tells us how much money is held for a gi#en amount of nominal sending!) imlicitly tells us the *uantity of money that eole want to hold

") all of the abo#e$) none of the abo#eAnswer% "&oic% 5., Guantity &heory of Money

1+) &he *uantity theory of money tells us that real money balances are roortional to income-since ________.A) #elocity is assumed constant in the short runB) the suly and demand of money are e*ual in e*uilibrium!) changes in the *uantity of money lead to roortional changes in the rice le#el") all of the abo#e

$) none of the abo#eAnswer% "&oic% 5., Guantity &heory of Money

1,) 7rom the e*uation of echange- if both nominal income and the *uantity of money ;M)trile- the rice le#el ;) increases by 50 ercent and #elocity ;I) remains constant- then realoutut ;@)________.A) also trilesB) increases by 50 ercent!) doubles") decreases by 50 ercent$) none of the abo#eAnswer% !&oic% 5., Guantity &heory of Money

15) 7rom the e*uation of echange- if both nominal income and the *uantity of money ;M)double- the rice le#el ;) decreases by 50 ercent and #elocity ;I) remains constant- then realoutut ;@)________.A) also doublesB) triles!) *uadrules") decreases by 50 ercent$) none of the abo#eAnswer% !&oic% 5., Guantity &heory of Money

1+



14/21

13) 7rom the e*uation of echange- if both real income ;@) and the *uantity of money ;M)double and the rice le#el ;) remains constant- then #elocity ;I)________ and nominal income________.A) remains constant doublesB) doubles remains constant

!) doubles doubles") decreases by 50 ercent *uadrules$) none of the abo#eAnswer% A&oic% 5., Guantity &heory of Money

16) 2n the *uantity theory of money- which of these #ariables is endogenous?A) the rice le#elB) the #elocity of money!) real outut") the money suly

$) none of the abo#eAnswer% A&oic% 5., Guantity &heory of Money

19) 2n the *uantity theory of money- the assumtion that aggregate outut is fied is based on the#iew that ________.A) wages and rices are erfectly fleible in the long runB) the #elocity of money is constant in the short run!) the demand for real money balances is roortional to income") changes in the *uantity of money lead to roortional changes in the rice le#el$) none of the abo#eAnswer% A&oic% 5., Guantity &heory of Money

1:) &he *uantity theory of money ________.A) is used by classical economist to elain how changes in the *uantity of money lead toroortional changes in the rice le#el.B) gi#es mathematical grounding for the #iew that a country8s central bank determines thegeneral rice le#el through control of the money suly.!) imlies that changes in the money suly ha#e no long run imact on real #ariables") all of the abo#e$) none of the abo#eAnswer% "&oic% 5., Guantity &heory of MoneyAA!'B% (eflecti#e &hinking

1,



15/21

0) &he *uantity theory of money ________.A) is used by classical economists to elain how fre*uent changes in #elocity lead to infre*uentchanges in the rice le#el.B) gi#es mathematical grounding for the #iew that a country8s central bank determines thegeneral rice le#el through control of the money suly.

!) imlies that changes in the money suly ne#er ha#e an imact on real #ariables") all of the abo#e$) none of the abo#eAnswer% B&oic% 5., Guantity &heory of MoneyAA!'B% (eflecti#e &hinking

1) &he roosition that changes in the money suly ha#e no longErun effect on real #ariables isknown as the ________.A) classical dichotomyB) *uantity theory of money

!) neutrality of money") 7isher effect$) none of the abo#eAnswer% !&oic% 5., Guantity &heory of Money

) &he roosition that the amount of goods and ser#ices roduced in an economy in the longrun is not affected by the rice le#el is known as the ________.A) neutrality of moneyB) classical dichotomy!) *uantity theory of money") 7isher effect$) none of the abo#eAnswer% B&oic% 5., Guantity &heory of Money

+) &he roosition that the #elocity of money is fairly constant in the long run is known as the________.A) neutrality of moneyB) classical dichotomy!) *uantity theory of money") 7isher effect$) none of the abo#eAnswer% $&oic% 5., Guantity &heory of Money

15



16/21

,) &he *uantity theory of money ________.A) imlies that inflation e*uals the ratio of the growth rates of the money suly and of realincomeB) ro#ides central banks with a tool to re#ent the rate of inflation from fluctuating!) imlies that- in the long run- changes in the money suly will be matched by changes in real

income") all of the abo#e$) none of the abo#eAnswer% $&oic% 5., Guantity &heory of MoneyAA!'B% (eflecti#e &hinking

5) &he *uantity theory of money ________.A) focuses mainly on the close link between short run fluctuations in #elocity and the rice le#elB) works #ery well for the C.'. but it does not hold emirically for other countries in the longrun

!) ro#ides a long run theory of inflation because it is based on the assumtion that rices andwages are fully fleible") all of the abo#e$) none of the abo#eAnswer% !&oic% 5., Guantity &heory of MoneyAA!'B% (eflecti#e &hinking

3) &he *uantity theory of money ________.A) suggests that inflation is always and e#erywhere a monetary henomenon which has beenshown to always be suorted by the dataB) #alidates the classical assumtion that wages and rices are comletely fleible in the shortrun!) ro#ides a better descrition of short run fluctuations in inflation and money growth than thelink between these #ariables in the long run") all of the abo#e$) none of the abo#eAnswer% $&oic% 5., Guantity &heory of MoneyAA!'B% (eflecti#e &hinking

6) Dow ha#e financial inno#ations such as direct deosit of aychecks- electronic ayment ofbills- and automated teller machines ;A&Ms) affected the #elocity of money and the demand forreal money balances?Answer% Because of these inno#ations- each unit of money is more *uickly and easily a#ailablefor transactions. $ach unit of money is transacted more fre*uently- so #elocity is increased. Agi#en #olume of transactions can be accomlished with fewer units of money- so the demand forreal balances is reduced.&oic% 5., Guantity &heory of MoneyAA!'B% (eflecti#e &hinking

13



17/21

9) 'uose @ J 100- J 90- and I J +.. 2f @ rises to 105- and the inflation rate is 10 ercent-what is the new #alue of M?Answer% 105 K 99 J :-,0 J M K +.. M J -996.5. $*ui#alently- 100 K 90 J M K +.- so M J-500. 'ince K @ rises from 9-000 to :-,0- an increase of 15.5L- M must rise by 15.5L J-500 K 1.155 J -996.5

&oic% 5., Guantity &heory of MoneyAA!'B% Analytical 'kills

5.5 Dyerinflation- 2nflation and 2nterest (ates

1) Dyerinflation tyically ________.A) describes eriods of etreme rice increases of o#er 50L er month or 1-000L er yearB) is a a result of etreme eriods of money growth that tend to come only from large fiscalimbalances!) affects both oor and de#eloed economies") all of the abo#e

$) none of the abo#eAnswer% "&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

) &he main reason that hyerinflation renders a currency worthless is that ________.A) the go#ernment cannot rint money fast enough to kee u with the rising ricesB) laws against raising rices are easily e#aded!) reducing go#ernment eenditures is olitically unoular") the go#ernment8s official inflation rate is always a gross understatement$) as soon as inflation seems out of control- e#eryone knows that the currency will soon losewhate#er #alue it has todayAnswer% $&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

+) &he real interest rate ________ inflation ________.A) is unaffected in the long run by because of the classical dichotomyB) mo#es one for one with eected in the long run!) always increases with but because of the 7isher effect lower eected inflation ensues") all of the abo#e$) none of the abo#eAnswer% A&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

16



18/21

,) &he real interest rate ________ inflation ________.A) subtracted from the nominal rate yields eected according to the 7isher e*uationB) mo#es one for one- in the long run- with eected according to the classical dichotomy!) always increases with but because of the 7isher effect lower eected inflation ensues") all of the abo#e

$) none of the abo#eAnswer% A&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

5) &he 7isher effect ________.A) comes from combining the 7isher e*uation and the classical dichotomyB) redicts that in the long run nominal rates will rise with increases in eected inflation!) shows that in high inflation we tyically see high nominal rates") all of the abo#e$) none of the abo#eAnswer% "&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

3) 2nflation ________.A) is costly because the classical dichotomy may not always holdB) that is anticiated ;or eected) can be costly!) is costly for many reasons but chief among them is that inflation makes it more difficult tolan for the future") all of the abo#e$) none of the abo#eAnswer% "&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

6) With increases in inflation demand for money that does not earn a return decreases. !arryingless cash in our ockets means higher ________.A) shoeEleather costsB) menu costs!) caital gain ta bills") all of the abo#e$) none of the abo#eAnswer% A

&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

19



19/21

9) With high inflation ________.A) stock market in#estors are always worse off than consumers and householdsB) roducers are always worse off than consumers!) creditors are always worse off than debtors") all of the abo#e

$) none of the abo#eAnswer% !&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

:) 2nflation might lead to ________ because ________.A) lower demand for stocks of ta distortionsB) lower demand for cash money does not tyically yield interest!) uncertain or une#en demand for goods higher fluctuations in relati#e rices make it harderfor consumers to comare among goods and make rational consumtion decisions") all of the abo#e

$) none of the abo#eAnswer% "&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

10) 2nflation might lead to ________ because ________.A) higher demand for stocks as the rice le#el increases so do stock ricesB) higher roduction costs businesses ha#e to ad#ertise more often due to faster rice re#isions!) lower transaction costs we would hold less cash") all of the abo#e$) none of the abo#eAnswer% B&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

11) 2nflation ________.A) is more costly when it is anticiated than when it comes as a surriseB) makes it more difficult to lan for the future- whether it is a surrise or not.!) induces distortions in the money and goods market but not the labor market") all of the abo#e$) none of the abo#eAnswer% B&oic% 5.5 2nflation

AA!'B% (eflecti#e &hinking

1:



20/21

1) 2nflation leads to ________.A) increased #ariability of relati#e rices only when it is anticiatedB) increased #ariability of relati#e rices only when it is unanticiated!) increased #ariability of relati#e rices whether inflation is anticiated or not") lower #ariability of the general rice le#el only when it is #ery high

$) none of the abo#eAnswer% !&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

1+) 2nflation may imose little- if any- cost on the economy- if ________.A) laws against ecessi#e rice increases are enforced effecti#elyB) the go#ernment subsidies menu costs!) rice increases are fully anticiated") the 7isher effect holds true$) the rate of rice increase is so slow that eole do not feel comelled to alter their beha#ior

Answer% $&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

1,) "uring the =reat 2nflation of the 1:60s- ;a) the growth rates of M1 and M were higher thanre#iously- and ;b) the growth rate of M was much higher than the growth rate of M1. $lainhow the high inflation of the decade relates to each of these facts .Answer% By the *uantity theory of money- raid growth of the money suly ;relati#e to thegrowth rate of aggregate outut) causes the inflation rate to be high. When inflation is high-holding cash and nonEinterest bearing deosits is costly- so eole shift as much money asossible into interestEbearing accounts- so the narrow monetary aggregate M1 does not grow asfast as the broader aggregate M. By the 7isher effect- nominal interest rates rise with eectedinflation- so interestEbearing accounts ro#ide some comensation for inflation.&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

15) 2nflation interferes with the functions of money. Which of the three functions is imaired-e#en when the inflation rate is *uite low? !onsidering higher rates of inflation- which function isaffected net? Which function of money is the last to suffer substantial damage from inflation?Answer% A conse*uence of e#en low inflation is to undermine money8s function as a store of#alue. At somewhat higher rates- inflation comlicates the use of money as a unit of account-because of increased #ariability of relati#e rices. As the inflation rate goes higher- money losesits ability to ser#e as a medium of echange.

&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

0



21/21

13) Dow might inflation- e#en if fully anticiated- re#ent the classical dichotomy from holding-e#en in the long run?Answer% &he classical dichotomy asserts that outut is determined solely by the aggregateroduction function and the *uantities of factors a#ailable. 2nflation is like a negati#e technologyshock that lowers roducti#ity. 'hoeEleather and menu costs reresent uses of resources that add

nothing to aggregate outut. Because rice increases throughout the economy are sread out o#ertime- it is rational to react to the temorary changes in relati#e rices- e#en if the changes areknown to be temorary. &his causes distortions in the allocation of resources- and temorary-rational distortions are distortions- nonetheless.&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

16) Cnanticiated inflation always benefits somebody- so the o#erall cost cannot be higher thanit is for anticiated inflation. !omment.Answer% 2t is true that mistaken eectations of inflation cause one arty to a transaction to get abetter deal than intended- at the eense of the other arty. But the true #alue of that better deal is

reduced by the fact that neither arty knows- in ad#ance- who will win. 7ew workers- foreamle- would refer to be aid on the basis of a lottery in which losing is as likely as winning.Moreo#er- unanticiated inflation is difficult to recognie- e#en after the fact. 2f the sie of yournominal wage increase eceeds your eectation of inflation- does that mean your real wage ishigher- or that your eectation was mistaken? By the time you figure it out- you may ha#e madea wrong decision.&oic% 5.5 2nflationAA!'B% (eflecti#e &hinking

5.3 2nflation and 2nterest (ates

1) &here are no *uestions for this section.Answer%

5.6 &he !ost of 2nflation

1) &here are no *uestions for this section.Answer%

1

Date post:	02-Jun-2018
Category:	Documents
Upload:	lejla-hodzic
View:	265 times
Download:	2 times

Chapter 5 Mishkin (5)

Documents