Midterm 1

Question 1

An increase in the price of imported cameras is captured by the CPI but not by the GDP deflator.

Answer 1

T

Question 2

An increase in the price of helicopters purchased by the UK armed forces is captured by the CPI.

Answer 2

F

Question 3

Because an increase in petrol prices causes consumers to ride their bikes more and drive their cars less, the CPI tends to underestimate the cost of living.

Answer 3

F

Question 4

An increase in the price of diamonds will have a greater impact on the CPI than an equal percentage increase in the price of food because diamonds are so much more expensive.

Answer 4

F

Question 5

The “base year” in a price index is the benchmark year against which other years are compared.

Answer 5

T

Question 6

If the CPI rises at 5 percent per year, then every individual in the country needs exactly a 5 percent increase in their income for their standard of living to remain constant.

Answer 6

F

Question 7

The producer price index (PPI) is constructed to measure the change in price of total production.

Answer 7

F

Question 8

If the Office of National Statistics fails to recognize that recently produced cars can be driven for many more miles than older models, then the CPI tends to overestimate the cost of living.

Answer 8

T

Question 9

If your wage rises from €500 per week to €625 per week while the CPI rises from 112 to 121, you should feel an increase in your standard of living.

Answer 9

T

Question 10

The largest category of goods and services in the CPI is food and non-alcoholic beverages.

Answer 10

F

Question 11

It is impossible for real interest rates to be negative.

Answer 11

F

Question 12

If the nominal interest rate is 12 percent and the rate of inflation is 7 percent, then the real rate of interest is 5 percent.

Answer 12

T

Question 13

If lenders demand a real rate of return of 4 percent and they expect inflation to be 5 percent, then they should charge 9 percent interest when they extend loans.

Answer 13

T

Question 14

If borrowers and lenders agree on a nominal interest rate and inflation turns out to be greater than they had anticipated, lenders will gain at the expense of borrowers.

Answer 14

F

Question 15

If workers and firms agree on an increase in wages based on their expectations of inflation and inflation turns out to be less than they expected, workers will gain at the expense of firms.

Answer 15

T

Question 16

Money and wealth are the same thing.

Answer 16

F

Question 17

Fiat money is money that is used in Italy.

Answer 17

F

Question 18

Commodity money has value independent of its use as money.

Answer 18

T

Question 19

A depository institution is one that accepts deposits, and so provides people with a safe place to keep their money, but does not make loans.

Answer 19

T

Question 20

When you are willing to go to sleep tonight with £100 in your wallet and you have complete confidence that you can spend it tomorrow and receive the same amount of goods as you would have received had you spent it today, money has demonstrated its function as a medium of exchange.

Answer 20

F

Question 21

Money has three functions: It acts as a medium of exchange, a unit of account, and a hedge against inflation.

Answer 21

F

Question 22

The Bank of England is the central bank of the United Kingdom and its Monetary Policy Committee comprises members appointed by the Bank and by the Chancellor of the Exchequer (the UK finance minister).

Answer 22

T

Question 23

If there is 100 per cent reserve banking, the money supply is unaffected by the proportion of its money that the public chooses to hold as currency rather than as bank deposits.

Answer 23

T

Question 24

A repurchase agreement is an agreement between the central bank and a commercial bank whereby a bond or other non-monetary asset is sold by one to the other with an agreement to reverse the transaction a short time later.

Answer 24

T

Question 25

The central bank cannot control the amount of money that the economy’s commercial banks lend because the banks may choose what proportion of deposits to hold as reserves.

Answer 25

T

Question 26

If the central bank wishes to contract the money supply, it could do any of the following: sell government bonds, raise the reserve requirement, and raise the refinancing rate.

Answer 26

T

Question 27

When the central bank in an economy raises the refinancing rate it encourages commercial banks to reduce their lending, thereby tending to reduce the money supply.

Answer 27

T

Question 28

An increase in the price level is the same as a decrease in the value of money.

Answer 28

T

Question 29

The quantity theory of money suggests that an increase in the money supply increases real output proportionately.

Answer 29

F

Question 30

If the price level were to double, the quantity of money demanded would double because people would need twice as much money to cover the same transactions.

Answer 30

T

Question 31

In the long run, an increase in the money supply tends to have an effect on real variables but no effect on nominal variables.

Answer 31

F

Question 32

If the money supply is €500, real output is 2,500 units, and the average price of a unit of real output is €2, the velocity of money is 10.

Answer 32

T

Question 33

The Fisher effect suggests that, in the long run, if the rate of inflation rises from 3 per cent to 7 per cent, the nominal interest rate should increase by 4 percentage points and the real interest rate should remain unchanged.

Answer 33

T

Question 34

An inflation tax is paid by those that hold money because inflation reduces the value of their money holdings.

Answer 34

T

Question 35

Monetary neutrality means that a change in the money supply doesn’t cause a change in anything at all.

Answer 35

F

Question 36

Inflation erodes the value of people’s wages and reduces their standard of living.

Answer 36

T

Question 37

Inflation reduces the relative price of goods whose prices have been temporarily held constant to avoid the costs associated with changing prices.

Answer 37

T

Question 38

The shoeleather costs of inflation should be approximately the same for a medical doctor and for an unemployed worker.

Answer 38

F

Question 39

Inflation tends to stimulate saving because it raises the after tax real return to saving.

Answer 39

F

Question 40

Governments that spend more money than they can raise from taxing or borrowing tend to print too much money which causes inflation.

Answer 40

T

Question 41

If inflation turns out to be higher than people expected, wealth is redistributed to lenders from borrowers.

Answer 41

F

Question 42

If the nominal interest rate is 7 per cent and the inflation rate is 5 per cent, the real interest rate is 12 per cent.

Answer 42

F