Chapter 30

Over the past 80 years, the overall price level in the U.S. has experienced a(n)

17-fold increase.

On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. ​ draw a graph which shows a vertical line, m s 1, that extends from point 10000 on the horizontal axis, a second vertical line, m s 2, that extends from point 15000 on the horizontal axis, to the right of m s 1, and a curved line, m d, falling from left to right. m d intersects m s 1 at (10000, 0.5). m d intersects m s 2 at (15000, 0.33). Refer to Figure 30-3. If the relevant money-supply curve is the one labeled MS1, then the equilibrium price level is

2 and the equilibrium value of money is 0.5.

The nominal interest rate is 3.5 percent and the inflation rate is 1.5 percent. What is the real interest rate?

2 percent

Inflation costs are minimized under which inflation rate?

5 percent

Which of the following helps to explain why the inflation fallacy is a fallacy?

Nominal incomes tend to rise at the same time that the price level is rising.

Shawn puts money into an account. One year later he sees that he has 6 percent more dollars and that his money will buy 5 percent more goods.

The nominal interest rate was 6 percent and the inflation rate was 1 percent.

Your nominal wage increases from $12 per hour to $13 per hour. At the same time, the price level increases from 140 to 147. As a result,

The number of dollars you receive increases and the purchasing power of the dollars you receive increases.

Which of the following is not implied by the quantity equation?

With constant money supply and velocity, an increase in output creates a proportional increase in the price level.

Suppose that M is fixed. According to the quantity equation, which of the following would make the price level higher?

Y falls or V rises

The term hyperinflation refers to

a period of very high inflation

On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. ​ draw a graph which shows a vertical line, m s 1, that extends from point 10000 on the horizontal axis, a second vertical line, m s 2, that extends from point 15000 on the horizontal axis, to the right of m s 1, and a curved line, m d, falling from left to right. m d intersects m s 1 at (10000, 0.5). m d intersects m s 2 at (15000, 0.33). Refer to Figure 30-3. Which of the following events could explain a shift of the money-supply curve from MS1 to MS2?

an open-market purchase of bonds by the Federal Reserve

If the economy unexpectedly went from inflation to deflation,

creditors would gain at the expense of debtors.

When prices are falling, economists say that there is

deflation.

A decrease in the money supply creates an excess

demand for money that is eliminated by falling prices.

If Y and V are constant and M doubles, the quantity equation implies that the price level

doubles.

Which of the following are U.S. taxpayers allowed to adjust for inflation for the purpose of income taxes?

either interest income nor capital gains.

Suppose an economy produces only ice cream cones. If the price level rises, the value of currency

falls, because one unit of currency buys fewer ice cream cones.

​The primary cause of inflation is

growth in the quantity of money.

Wealth is redistributed from debtors to creditors when inflation was expected to be

high and it turns out to be low.

In 1898, prospectors on the Klondike River discovered gold. This discovery caused an unexpected price level

increase that benefited debtors at the expense of creditors.

The source of hyperinflations is primarily

increases in money-supply growth

When the price level rises, the number of dollars needed to buy a representative basket of goods

increases, and so the value of money falls.

As the price level decreases, the value of money

increases, so people must hold less money to purchase goods and services.

Norma receives an increase in her nominal income. She complains that the current inflation rate of six percent erodes the real purchasing power of her additional nominal income. This is true

only if the increase in her nominal income is less than six percent.

To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the

quantity theory of money

When inflation rises, the nominal interest rate

rises, and people desire to hold less money

he Fisher effect

says there is a one for one adjustment of the nominal interest rate to the inflation rate.

The supply of money is determined by

the Federal Reserve System.

The supply of money increases when

the Federal Reserve purchases bonds

The velocity of money is

the average number of times each dollar in the money supply is used to purchase goods and services included in GDP

Nominal GDP measures

the dollar value of the economy's output of final goods and services.

The idea that inflation by itself reduces people's purchasing power is called

the inflation fallacy.

If velocity and output were nearly constant, then

the inflation rate would be about the same as the money supply growth rate.

The inflation tax refers to

the revenue a government creates by printing money.

The economy of Mainland uses gold as its money. If the government discovers a large reserve of gold on their land

the supply of money increases and the value of money falls.

Figure 30-3. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. ​ draw a graph which shows a vertical line, m s 1, that extends from point 10000 on the horizontal axis, a second vertical line, m s 2, that extends from point 15000 on the horizontal axis, to the right of m s 1, and a curved line, m d, falling from left to right. m d intersects m s 1 at (10000, 0.5). m d intersects m s 2 at (15000, 0.33). Refer to Figure 30-3. What quantity is measured along the vertical axis?

the value of money

In order to maintain stable prices, a central bank must

tightly control the money supply.

The primary reason people hold money is

to use it as a medium of exchange

According to the principle of monetary neutrality, a decrease in the money supply will not change

unemployment.