Chapter 17

Suppose the nominal interest rate is 7% while the money supply is growing at a rate of 5% per year. Assuming real output remains fixed, if the government increases the growth rate of the money supply from 5% to 9%, the Fisher effect suggests that, in the long run, the nominal interest rate should become

11%

If the real interest rate is 4%, the inflation rate is 6%, and the tax rate is 20%, what is the after-tax real interest rate?

2%

Countries that employ an inflation tax do so because

government expenditures are high and the government has inadequate tax collections and difficulty borrowing.

In the long run, inflation is caused by

governments that print too much money

When prices rise at an extraordinarily high rate, it is called

hyperinflation

Which of the following statements about inflation is not true?

inflation reduces people's real purchasing power because it raises the cost of the things people buy

If the money supply grows 5 percent, and real output grows 2 percent, prices should rise by

less than 5 percent

Suppose that, because of inflation, a business in Russia must calculate, print, and mail a new price list to its customers each month. This is an example of

menu costs

The quantity equation states that

money x velocity = price level x real output

Suppose that, because of inflation, people in Brazil economize on currency and go to the bank each day to withdraw their daily currency needs. This is an example of

shoeleather costs

Velocity is

the annual rate of turnover of the money supply

In the long run, the demand for money is most dependent upon

the level of prices

An example of a real variable is

the ratio of the value of wages to the price of soda

If the price level doubles,

the value of money has been cut by half

If actual inflation turns out to be greater than people had expected, then

wealth was redistributed to borrowers from lenders

If the nominal interest rate is 6% and the inflation rate is 3%, the real interest rate is

3%

If money is neutral,

a change in the money supply only affects nominal variables such as prices and dollar wages

The quantity theory of money concludes that an increase in the money supply causes

a proportional increase in prices

An inflation tax is

a tax on people who hold money

Which of the following costs of inflation does not occur when inflation is constant and predictable?

arbitrary redistributions of wealth