CHAPTER 17 ECON

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

11 percent

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

2 percent

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

3 percent

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

the level of prices

Fisher effect

the one-for-one adjustment of the nominal interest rate to the inflation rate

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.

An inflation tax is "paid" by those who hold money because inflation reduces the value of their money holdings.

true

Countries that spend more money than they can collect from taxing or borrowing tend to print too much money, which causes inflation. Answer

true

If the money supply is $500, real output is 2,500 units, and the average price of a unit of real output is $2, the velocity of money is

true

If the price level were to double, the quantity of money demanded would double because people would need twice as much money to cover the same transactions.

true

Inflation reduces the relative price of goods whose prices have been temporarily held constant to avoid the costs associated with changing prices.

true

The Fisher effect suggests that, in the long run, if the rate of inflation rises from 3 percent to 7 percent, the nominal interest rate should increase 4 percentage points, and the real interest rate should remain unchanged.

true

nominal variables

variables measured in monetary units ($)

Real Variables

variables measured in physical units

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

wealth was redistributed to borrowers from lenders.

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.

principle of monetary neutrality

an increase in the rate of money growth raises the rate of inflation but does not affect any real variable

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

arbitrary redistributions of wealth

the quantity theory of money

developed by 18th century philosopher david hume and the classical economists

An increase in the price level is the same as a decrease in the value of money.

false

If inflation turns out to be higher than people expected, wealth is redistributed to lenders from borrowers.

false

If the nominal interest rate is 7 percent and the inflation rate is 5 percent, the real interest rate is 12 percent.

false

Inflation erodes the value of people's wages and reduces their standard of living.

false

Inflation tends to stimulate saving because it raises the after-tax real return to saving.

false

Monetary neutrality means that a change in the money supply doesn't cause a change in anything at all.

false

The quantity theory of money suggests that an increase in the money supply increases real output proportionately.

false

The shoeleather costs of inflation should be approximately the same for a medical doctor and for an unemployed worker.

false

in the long run, an increase in the money supply tends to have an effect on real variables but no effect on nominal variables.

false

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 Answer

hyperinflation

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

shoe leather costs

the quantity of money theory

suggests economic variables be divided into two groups nominal and real variable now called the classical dichotomy

velocity is

the annual rate of turnover of the money supply.

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.