2.  What is the basic idea behind the non-neutrality of money?

a.    Money is not useful in a market economy.

b.    When the money supply is increased, inflation takes place (given the demand for money does not increase along with the money supply).

c.    When the money supply is increased, inflation takes place (given the demand for money does not increase along with the money supply) and other effects in the economy occur as well.

d.    Some people are affected by an increase in the money supply, while others are not.

e.    None of the above makes sense.

3.  In year 1 (one year after the base year), the consumer price index (CPI) is 105 and in year 2 (two years after the base year) the CPI is 112.  If Sarah earns $50,000 in year 1, what is the minimum salary she must earn in year 2 to keep up with inflation?

a.  $56,000

b.  $47,345

c.  $52,804

d.  $53,500

e.  None of the above is correct

ANSWER:

4.  If the consumer price index was 160 in 2010 and 175 in 2011, the rate of inflation between these two years was:

a.  15%

b.  20%

c.  80%

d.  180%

e.  None of the above is correct

ANSWER:

5.  When looking at the CPI, the base year's index is always equal to:

a.  200

b.  0

c.  100

d.  1

e.  None of the above is correct

ANSWER:

6.  The nominal interest rate on a bank loan is 5.00% per year. Expected inflation is 2.50% per year. What is the real rate of return (the real interest rate) the bank is trying to earn?

a.  -0.75%

b. 0.0%

c. 1.25%

d. 2.50%

e. None of the above

ANSWER:

7.  If Bob buys a bond from a firm, he is:

a.  borrowing money from the firm

b.  a partial owner of the firm and has a claim on the firm's profits

c.  lending money to the firm

d.  sacrificing future consumption for current consumption of goods and services

e.  none of the above

ANSWER:

8.  According to our class discussions, which of the following is true?

a.  Unions do not cause inflation.

b.  A freeze in Florida will cause inflation.

c.  An increase in the minimum wage will cause inflation.

d.  An increase in the money supply will certainly mean more wealth for all of the people in a country

e.  None of the above is true

ANSWER:

9.  Which institution is in charge of the U.S. government's budget (not coming up with the budget, but receiving and disbursing the funds)?

a. the White House

b. the Federal Reserve System (FED)

c. the U.S. Treasury

d. the Department of Defense

e. none of the above makes sense

ANSWER:

10.  A bond:

a. always leads to a capital loss for the holder

b. allows a firm to sell part of their capital

c. is the only way a private firm can raise funds

d. is debt financing for a firm or a government

e. none of the above makes sense

ANSWER:

11.  Which of the following statements is true?

a. government issues both bonds and stocks

b. when a private firm issues a stock, the firm is going into debt

c. selling stock is considered "equity" financing

d. selling a bond is considered "equity" financing

e. more than one answer is true

ANSWER:

12. When the actual inflation rate is greater than the expected inflation rate, which of the following is most likely to suffer?

a.  Those who lend at a fixed interest rate

b.  Those who borrow at a fixed interest rate

c.  People who barter

d.  Employers who hire workers with long-term labor contracts

e.  None of the above makes sense