ECO Chapter 5

in the long run, according to the quantity theory of money and classical macroeconomic theory, if velocity is constant, then ________ determines real GDP and ________ determines nominal GDP

the productive capability of the economy; the money supply

the ex ante real interest rate is based on _______ inflation, while ex pose real interest rate is based on _______ inflation

expected; annual

your father tells you that when he was your age, he worked for only $4 an hour. he suggests that you are lucky to have a job that pays $9 an hour

inconvenience of a changing price level

the demand for real money balances is generally assumed to:

increase as real income increases

in the classical model, according to the quantity theory of money and the fisher equation, an increase in money growth increases:

the nominal interest rate

grandma buys an annuity for $100,000 from an insurance company, which promises to pay $10,000 a year for the rest of her life. After buying it, she is surprised that high inflation triples the price level over the next few years.

unexpected inflation

the inflation tax is paid

by all holders of money

according to the quantity theory of money and the fisher equation, if money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase:

5 percent

consider the money demand function that takes the form M|P = KY wehre m is the quanity of money, P is the price level, k is constant, and y is the real output. if the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average inflation in this economy?

7 percent

if nominal wages cannot be cut, then the ily way to reduce real wages is by:

adjustments via inflation

gita lives in an economy with an inflation rate of 10%. over the past year, she earned a return of $50,000 on her million dollar portfolio of stocks and bonds. because her tax rate is 20%, she paid $10,00 to the government

altered tax liability

if the demand for real money balances is proportional to real income, velocity will:

be constant

in the case of an unanticipated increase in inflation

creditors with an unindexed contract are hurt because they get less than they expected in real terms

if the money supply is held constant, then an increase in the nominal interest rate will _______ the demand for money and ________ the price level

decrease; increase

if inflation was 6 percent last year and a worker received a 4 percent nominal wage increase last year, then the worker's real wage

decreased 2 percent

inflation _______ the variability of relative prices and ______ the efficiency of the allocation of resources

increases; decreases

a small country might want to use the money of a large country rather than print its own money if the small country

is likely to be unstable, whereas the large country is likely to be stable

the classical ditchotomy

is said to hold when the values to real variables can be determined without any reference to nominal variables or the existence of money

according to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices _______ each year and give workers _______ raises

less; smaller

because inflation has risen, a clothing company decides to issue a new catalog monthly instead of quarterly

menu costs

the characteristic of the classical model that the money supply does not affect real variables is called

monetary neutrality

hyperinflations ultimately are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is frequently a government's

need to generate revenue to pay for spending

Maria lives in an economy with hyperinflation. each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value

shoeleather costs

Given that M | P = KY, when demand for money parameter, k, is large the velocity of money is _______, and money is changing hands ________.

small; infrequently

if the nominal interest rate increases, then:

the demand for money decreases