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Multiple Choice Quiz
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1
According to the quantity theory of money, the rate of inflation can be determined by the following equation
A)π = y – m + v
B)π = y – m - v
C)π = m + y - v
D)π = m - y + v
2
Looking at the U.S. economy from 1960 to 1990 we realize that
A)the income velocity showed a steady increase over time
B)the link between growth in M2 and the inflation rate was fairly close but not precise
C)the federal government never had a surplus until late in 1990
D)the debt-income ratio steadily increased
3
The inflation tax revenue is defined as
A)(inflation rate)*(real monetary base)
B)(inflation rate)*(change in money supply)
C)(inflation rate)*(income tax rate)
D)(inflation rate)*(real income tax revenue)
4
Changes in budget deficits are linked to money growth when
A)the central bank targets monetary aggregates
B)the central bank targets interest rates
C)the central bank sells government securities as soon as interest rates increase
D)the deficit is financed by borrowing from the domestic public
5
Irresponsible fiscal policy creates a dilemma for a central bank, since refusal to monetize a deficit will
A)cause a crowding out of private spending, leading to lower living standards in the future
B)induce the public to hold on to money, which will decrease the income velocity of money
C)force the government to sell some of its real assets, such as government-owned land
D)lower bond holdings by the private sector, which will lower consumption spending
6
Which of the following inflation rates would be considered hyperinflation?
A)20% per year
B)100% per year
C)1,000% per year
D)All of the above
7
According to monetarists, which of the following must be small?
A)inflation
B)money growth
C)changes in money growth
D)changes in velocity
8
Which of the following is NOT a cost associated with hyperinflation?
A)High long-term unemployment
B)Frequent trips to the grocery store
C)Frequent trips to the bank
D)Menu costs
9
The government budget constraint is defined as
A)budget deficit = sales of bonds + inflation
B)budget deficit = sales of bonds + increase in M
C)budget deficit = tax revenue + inflation
D)budget deficit = sales of bonds – inflation
10
Suppose a policy reduces inflation from 12 percent to 7 percent over the course of 2 years but also reduces GDP from full potential output to 4 percent below potential output in the first year and to 10 percent below potential in the second year. What is the sacrifice ratio of the 2-year policy?
A)4/5
B)2
C)1
D)14/5





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