ECN 211 Exam 3 Questions with Correct Answers Latest Update 2025/2026
When prices rise, it is rarely because products are more valuable but rather because the money
used to buy them is less valuable. Thus, inflation is more about the value of money than about
the value of goods. - Answers Classical theory of inflation:
- Answers An increase in the overall price level is equivalent to a proportionate fall in the value
of money.
there to be monetary equilibrium. - Answers Money supply and money demand need to balance
for
the price level is low, and the quantity of money demanded is low. Therefore, the money
demand curve slopes down in the graph. - Answers When the value of money is high,
(1) the quantity of money in the economy determines the price level (and the value of money),
and (2) an increase in the money supply increases the price level, which means that growth in
the money supply causes inflation. - Answers Thus, the conclusions of the quantity theory of
money are:
nominal variables (those measured in monetary units) and real variables (those measured in
physical units). - Answers The classical dichotomy suggests that economic variables can be
divided into two groups—
quantity of money. - Answers value of nominal variables is determined by and is proportional to
the
if the money supply doubles, prices double, wages double, and all dollar values double but real
output, employment, real interest rates, and real wages remain unchanged. - Answers known as
monetary neutrality,
- Answers Money is unlikely to be neutral in the short run, but it is likely to be neutral in the long
run.
(P × Y)/M or M × V = P × Y - Answers Velocity of money =
- Answers An inflation tax is a tax on people who hold money.
Recall that inflation is a tax on people who hold money. To avoid the tax, people hold less
money and keep more invested in interest-bearing assets when inflation is high than they do
when inflation is low. - Answers Shoeleather costs:
There are numerous costs associated with changing prices—the cost of printing new menus,
price lists, and catalogs; mailing costs to distribute them; the cost of advertising new prices; and
the cost of deciding the new prices themselves - Answers Menu costs:
Because it is costly to change prices, firms change prices as rarely as possible. - Answers
, Relative-price variability and the misallocation of resources:
Inflation raises the tax burden on income earned from saving and, thus, discourages saving and
growth. Inflation affects two types of taxes on saving: - Answers Inflation-induced tax
distortions:
the profits made from selling an asset for more than its purchase price. Nominal capital gains
are subject to taxation. - Answers Capital gains are
- Answers Nominal interest is taxed even though part of the nominal interest rate is to
compensate for inflation.
arbitrary redistribution of wealth: The costs of inflation previously described exist even if
inflation is stable and predictable. Inflation has an additional cost to the economy, however, if it
is unexpected because it arbitrarily redistributes wealth. - Answers A special cost of unexpected
inflation—
The Friedman rule argues that small and predictable deflation equal to the real interest rate
could be desirable because it would drive nominal interest rates to near zero, reducing
shoeleather costs. - Answers Deflation:
- Answers unexpected inflation works like a tax on money received in the future and a subsidy
to money paid in the future.
- Answers Economic fluctuations are irregular and unpredictable
- Answers Most macroeconomic quantities fluctuate together:
- Answers As output falls, unemployment rises
- Answers Classical theory is based on the classical dichotomy and monetary neutrality. Recall
that the classical dichotomy is the separation of economic variables into real and nominal, while
monetary neutrality is the property that changes in the money supply only affect nominal
variables, not real variables.
This model can be graphed with the price level, measured by the CPI or the GDP deflator, on the
vertical axis and real GDP on the horizontal axis. - Answers We use the model of aggregate
supply and aggregate demand to explain economic fluctuations.
- Answers The aggregate-demand curve shows the quantity of goods and services demanded
at each price level.
the quantity of goods and services households, firms, the government, and customers abroad
wish to buy at each price level. - Answers The aggregate-demand curve shows
The wealth effect. - Answers The price level and consumption:
When prices rise, it is rarely because products are more valuable but rather because the money
used to buy them is less valuable. Thus, inflation is more about the value of money than about
the value of goods. - Answers Classical theory of inflation:
- Answers An increase in the overall price level is equivalent to a proportionate fall in the value
of money.
there to be monetary equilibrium. - Answers Money supply and money demand need to balance
for
the price level is low, and the quantity of money demanded is low. Therefore, the money
demand curve slopes down in the graph. - Answers When the value of money is high,
(1) the quantity of money in the economy determines the price level (and the value of money),
and (2) an increase in the money supply increases the price level, which means that growth in
the money supply causes inflation. - Answers Thus, the conclusions of the quantity theory of
money are:
nominal variables (those measured in monetary units) and real variables (those measured in
physical units). - Answers The classical dichotomy suggests that economic variables can be
divided into two groups—
quantity of money. - Answers value of nominal variables is determined by and is proportional to
the
if the money supply doubles, prices double, wages double, and all dollar values double but real
output, employment, real interest rates, and real wages remain unchanged. - Answers known as
monetary neutrality,
- Answers Money is unlikely to be neutral in the short run, but it is likely to be neutral in the long
run.
(P × Y)/M or M × V = P × Y - Answers Velocity of money =
- Answers An inflation tax is a tax on people who hold money.
Recall that inflation is a tax on people who hold money. To avoid the tax, people hold less
money and keep more invested in interest-bearing assets when inflation is high than they do
when inflation is low. - Answers Shoeleather costs:
There are numerous costs associated with changing prices—the cost of printing new menus,
price lists, and catalogs; mailing costs to distribute them; the cost of advertising new prices; and
the cost of deciding the new prices themselves - Answers Menu costs:
Because it is costly to change prices, firms change prices as rarely as possible. - Answers
, Relative-price variability and the misallocation of resources:
Inflation raises the tax burden on income earned from saving and, thus, discourages saving and
growth. Inflation affects two types of taxes on saving: - Answers Inflation-induced tax
distortions:
the profits made from selling an asset for more than its purchase price. Nominal capital gains
are subject to taxation. - Answers Capital gains are
- Answers Nominal interest is taxed even though part of the nominal interest rate is to
compensate for inflation.
arbitrary redistribution of wealth: The costs of inflation previously described exist even if
inflation is stable and predictable. Inflation has an additional cost to the economy, however, if it
is unexpected because it arbitrarily redistributes wealth. - Answers A special cost of unexpected
inflation—
The Friedman rule argues that small and predictable deflation equal to the real interest rate
could be desirable because it would drive nominal interest rates to near zero, reducing
shoeleather costs. - Answers Deflation:
- Answers unexpected inflation works like a tax on money received in the future and a subsidy
to money paid in the future.
- Answers Economic fluctuations are irregular and unpredictable
- Answers Most macroeconomic quantities fluctuate together:
- Answers As output falls, unemployment rises
- Answers Classical theory is based on the classical dichotomy and monetary neutrality. Recall
that the classical dichotomy is the separation of economic variables into real and nominal, while
monetary neutrality is the property that changes in the money supply only affect nominal
variables, not real variables.
This model can be graphed with the price level, measured by the CPI or the GDP deflator, on the
vertical axis and real GDP on the horizontal axis. - Answers We use the model of aggregate
supply and aggregate demand to explain economic fluctuations.
- Answers The aggregate-demand curve shows the quantity of goods and services demanded
at each price level.
the quantity of goods and services households, firms, the government, and customers abroad
wish to buy at each price level. - Answers The aggregate-demand curve shows
The wealth effect. - Answers The price level and consumption:
