ECO 202 HW 7
Based on the quantity theory of money, if velocity is constant, inflation is likely to occur when:
The money supply grows at a faster rate than real GDP.
Velocity is defined as
V = (P x Q) / M; V=(P x Y)/M
The quantity theory of money seeks to explain the connection between money and
prices
To decrease the money supply, the Federal Reserve could
raise the required reserve ratio.
The government budget constraint shows that a government has ________ ways to pay for government spending, and these ways are
three; collecting taxes, borrowing by issuing bonds, or printing money.
Governments sometimes allow hyperinflation to occur because
when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation.
The government budget constraint shows that a government has ________ way(s) to finance a budget deficit, and the/these way(s) is/are
two; borrowing by issuing bonds and printing money.
Suppose that velocity is 3 and the money supply is $600 million. According to the quantity theory of money, nominal output equals
$1.8 billion
Suppose a bank has $100,000 in checking account deposits with no excess reserves and the required reserve ratio is 5 percent. If the Federal Reserve lowers the required reserve ratio to 3 percent, then the bank will now have excess reserves of
$2,000
Using the following information what is the velocity of money? Component-Value: Money Supply - $1,900 Price Level - 1.74 Real GDP - $12,000 The velocity of money is equal to: ______ (enter your answer rounded to two decimal places).
10.99
If the money supply is growing at a rate of 5 percent per year, real GDP (real output) is growing at a rate of 1 percent per year, and velocity is constant, what will the inflation rate be?
4%
If the money supply is growing at a rate of 5 percent per year, real GDP (real output) is growing at a rate of 1 percent per year, and velocity is growing at 3 percent per year instead of remaining constant, what will the inflation rate be?
7%
In an article in the American Free Press, Professor Peter Spencer of York University in England is quoted as saying: "This printing of money 'will keep the [deflation] wolf from the door'." In the same article, Ambrose Evans-Pritchard, a writer for the London-based newspaper The Telegraph, is quoted as saying: "Deflation has...insidious traits. It causes shoppers to hold back. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop." Source: Doug French, "We Should Celebrate Price Deflation," American Free Press, November 17, 2008. ->What is price deflation? ->What is meant by Professor Spencer's statement "This printing of money 'will keep the [deflation] wolf from the door'"? ->Why would deflation cause "shoppers to hold back," and what does Evans-Pritchard mean when he says, "Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop"?
A fall in the price level. An increase in the money supply that exceeds the rate of growth of GDP will increase the price level. Consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further
If Irving Fisher was correct in his prediction about the value of velocity, then the quantity equation can be written to solve for the inflation rate as follows:
Inflation rate = Growth rate of the money supply - Growth rate of real output.
Which of the following is an appropriate policy for the Fed to pursue if it wants to increase the money supply?
decrease the interest rate it pays on reserves
Very high rates of inflation are called
hyperinflation
There is a strong link between changes in the money supply and inflation
in the long run
The quantity equation states that the
money supply times the velocity of money equals the price level times real output.
According to the quantity theory of money, if velocity does not change, when the money supply of a country increases, what will occur?
nominal GDP will increase
