Question

7. According to the textbook, which of the following statements is (are) correct?

(x) A period of hyperinflation is a period of extraordinarily high inflation and there was an obvious case of hyperinflation in Zimbabwe in the early part of the current century.

(y) Data on hyperinflation, as illustrated in the textbook, indicates that the money supply growth rate was essentially parallel to the inflation rate during periods of hyperinflation.

(z) An extraordinarily high rate of inflation in Germany during the years following World War I likely contributed to the rise of Nazism and World War II.

A. (x), (y) and (z)

B. (x) and (y) only

C. (x) and (z) only

D. (y) and (z) only

E. (z) only

6. According to the principle of monetary neutrality, which of the following increases when the money supply increases?

(w) real interest rate

(x) real GDP

(y) real wages

(z) nominal interest rate

A. (w), (x), (y) and (z)

B. (w), (x) and (y) only

C. (w), (y) and (z) only

D. (y) and (z) only

E. (z) only

5. Alice puts money in a savings account at her bank earning 7 percent. One year later Alice takes her money out and notes that while her money was earning interest, prices rose 2 percent. As a result, Alice has

A. 5 percent more money with which she can purchase 7 percent more goods.

B. 5 percent more money with which she can purchase 3 percent more goods.

C. 5 percent more money with which she can purchase 2 percent more goods.

D. 7 percent more money with which she can purchase 5 percent more goods.

E. 7 percent more money with which she can purchase 2 percent fewer goods

Answer 1

7. Statement X is correct as there was hyperinflation in Zimbabwe during the first part of the current century.

Statement Y is incorrect because although increase in money supply is the reason for rise in inflation, we cannot say whether there is any parallel relation between money supply growth and rise in inflation.

Statement Z is correct as hyperinflation caused political instability and deteriorating economic conditions in Germany. This paved the way for Nazism and world war 2.

Here, option C is the correct answer.

6. According to the principle of monetary neutrality, with increase in money supply, nominal interest rates fall. Again, with increase in money supply, real interest rate, real GDP and real wages increases.

Here, option B is the correct answer.

5. With 7 percent interest rate, Alice will be earning 7 percent more money, but, with 2 percent rise in prices in the meantime, Alice will be able to purchase 7-2 = 5 percent more goods.

Here, only option D is correct.