ECO_231 - CHAPTER 31
How might changes in the money supply be non-neutral in the short run?
As the amount of money circulating in the economy changes before prices respond, the purchases of consumers change accordingly, which leads producers to change production levels
Which of the following correctly represents deflation
TT < 0
A bank lends money for a year at an interest rate of 9% and the inflation rate for that year turns out to be 5%. What is the bank's real rate of return for that year?
4% ( 9% - 5%)
(Table:Consumer Price Index) refer to the CPI values in the table for the years 2005 to 2010. In which year(s) did the country experience disinflation
Both 2007 and 2009
Which of the following is a problem with deflation?
It raises the real cost of debt repayment
Which of the following statements highlights the difference between the CPI(consumer price index) and the GDP deflator?
The CPI measures the average prices of goods and services consumed by typical consumers, whereas the GDP deflator measures the average prices of all goods and services in the economy
If the money supply, the velocity of money, and the price level are fixed, then increases in real GDP:
are impossible because real GDP must also be fixed
Inflation refers to an increase in the:
average level of prices
Because of money illusion, inflation usually confuses:
consumers, workers, and firms
Money illusion occurs when people:
see changes in nominal prices and mistake them for changes in real prices
Why do we use the "real" prices of goods to measure how expensive things have become?
to see whether there have been any changes in our purchasing power
Debt monetization means that a government pays off its debt by:
increasing the money supply
The quantity theory of money is a theory of:
inflation
If the average price level rises from 120 in year 1 to 130 in year 2, the inflation rate between years 1 and 2 will be:
8.33% ( 130-120 = 10 then 10/120= .08333 x 100= 8.33%)
To compare the $1-an-hour your grandfather earned in 1950 with the $8-an-hour you earn today, you would need to:
calculate real wages in both 1950 and today
For a tax system in which higher income earners pay a larger share of their incomes in taxes, a higher inflation rate:
raises the tax burden on taxpayers
When the expected rate of inflation is higher than the actual rate of inflation, wealth is:
redistributed from borrowers to lenders
The case of hyperinflation in Zimbabwe in the late 2000's was an example of the effects of :
the government monetizing its debt
The text states, "inflation is a type of tax." This tax refers to_______ when inflation occurs
the lower purchasing power of money
In the quantity theory of money, growth of______ is the cause of inflation
the money supply
The quantity theory of money predicts that the main cause of inflation is increases in:
the money supply
The argument that "inflation is always and everywhere a monetary phenomenon" is consistent with:
teh quantity theory of money
(Table: Anticipating Inflation) Using the inflation data in the table above, assume that all loan contracts have fixed nominal interest rates of 10% and mature after one year. Which year did lenders gain relative to borrowers?
2003
If the money supply in a country is $200 million, the velocity of money is 5, and real GDP is 250 million, the price level of the country must be:
4.00
If the CPI was 100 in 2000 and 120 in 2010 and the price of a gallon of milk was $4.00 in 2000 and $4.80 in 2010, then in relative terms the real price of milk between 2000 and 2010:
Remained the same (20% for both)
Why could very high rates of inflation cause velocity to increase?
The more money loses its value, the faster people try to spend it
Which of the following is an example of money illusion assuming that inflation is 5%?
You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend
If you earned $10-an-hour in 2005 when the CPI was 100, and you earn $11-an-hour today when the CPI is 120, then your real wage rate has ________ since 2005.
decreased ( 20% to 10%)
High and volatile inflation
destroys the ability of market prices to send signals about the value of resources and opportunities.
Suppose the average level of prices increased from 100 to 110 between 2007 and 2008, and from 110 to 115 between 2008 and 2009. Between 2008 and 2009, there was:
disinflation
When disinflation arises unexpectedly, the real interest rate will___ the equilibrium rate, which will benefit____.
exceed ; lenders and harm borrowers
When we examine data from different countries, higher money growth has consistently been associated with:
higher inflation
For a given nominal interest rate, an increase in the inflation rate will cause real interest rates to
increase
According to the quantity theory of money, an increase in the money supply will cause the price level to:
increase by about the same percentage as the money supply
Current forcast's say that mild inflation is expected next year, If, however, deflation occurs instead:
lenders on existing fixed rate loans will gain while borrowers will lose
If the economy experiences unexpected inflation, then the real interest rate will be______ than its equilibrium rate, and wealth will be distributed from______.
less ; lenders to borrowers
If people expect an inflation rate of 3% and later it turns out to be 5%, then the real rate of return will be:
less than the equilibrium rate
Money illusion is a condition in which people
mistakenly confuse changes in nominal prices for changes in real prices
According to the quantity theory, what causes inflation in the long run?
money supply growth
The quantity theory of money implies that the money supply times the velocity of money equals:
nominal GDP