1) Inflation is A) Best Understood by looking at the individual prices that make
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1) Inflation is A) Best Understood by looking at the individual prices that make up price index B) More about the value of money than about the value of goods C) More about the value of goods than about the value of money D) Viewed by most economists today as a phenomenon that cannot be explained by the ideas of the "classical" economists 2)Which of the following is accurate? A) Though monetary policy is neutral in the long run, it may have effects on real variables in the short run B) Monetary policy is neutral in both the short run and the long run C) Monetary policy has profound effects on real variables in both the short run and the long run D) Monetary policy has profound effects on real variables in the long run, but is neutral in the short run 3)The inflation of tax A) Each of these answers is correct B) Is the increase in income tax due to the lack of indexation C) Transfers wealth from the government to households D) Is a tax on everyone who holds money 4) Deflation A) Increases income and enhances the ability of debtors to pay off their debts B) Decreases income and enhances the ability of debtors to pay off their debts C) Increases income and reduces the ability of debtors to pay off their debts D) Decreases income and reduces the ability of debtors to pay off their debts 5) According to quantity theory of money, a 2% increase in the money supply: A) Causes the price level to rise by 2% B) Causes the price level to fall by 2% C) Leaves the price level unchanged D) Causes the price level to rise by less than 2% 6) True or False suppose the nominal interest rate is 10%, the tax rate on interest income is 28%, and the inflation rate is 6%. Then the after tax real-interest rate is -3.2%Explanation / Answer
1) B
Inflation describes about the amount of goods that a particular amount of money can buy, so it cannot be viewed by looking at individual prices as the value of any good depends on it's demand, supply etc, and it does not correspond to value of goods as again value of good can vary by demand and supply, so inflation is about the purchasing power of money and so corresponds to value of money rather than goods.
2)A
In the long run there is no variation in the parameters of an economy as they include both adverse and favourable periods but however in the short run to control an economy in the adverse periods we have to tighten the monetary policies and thus eradicate the negative impact on economy, so it has profound effect in short run.
3)D
Inflation tax is refered to as the financial loss incurred by all the cash holders due to inflation, it is because due to inflation the purchasing power of money decreases and so the cash holders will have to pay more to get particular amount of goods and this is not relevant to the tax that we pay to government.
4) D
Deflation means falling prices and which means lower income to firms (may be even loss) which will reflect on the income earned by households(paid to them by firms), so it reduces income of people and the purchasing power actually increases because of fall of prices and the effect depends on both the variations (may get cancelled out), but the amount paid by debtors remain constant while the value for money increase, so the total effect can be considered as reduction in ability.
5)D
If the money supply is increased by 2% then the liquidity of cash is more which will lead to inflation because of the ability of the customers to buy goods at a higher price, so price level definitely rises but we have to consider the taxes paid by customers on the extra 2% earning and so the price level will not rise by 2% but a lower value than that
6)FALSE
Consider an example in which we lend 100 dollars and as the nominal interest rate is 10% the interest earned is $10 and out of which 28%(i.e $2.8) goes as tax, then we have $7.2 interest and now considering inflation rate as 6% gives that $6 is wastage as the value for money is less due to inflation and so the real interest we earn will be 7.2-6 => $1.2 which means real interest rate of 1.2%.
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