Macro Chapter 12

In interest rate equations used in the chapter, what represents the inflation rate?

Pi

Which situation is a consequence of price signals being difficult to interpret because of inflation?

Resources are wasted in activities that appear profitable but in fact are not. (Inflation confuses consumers, workers, firms, and entrepreneurs.) Resources flow more slowly to profitable uses. (Inflation confuses consumers, workers, firms, and entrepreneurs)

Using the information provided in the table, the real equilibrium rate of return H is equal to:

-6 percent. This is deflation. Recall that i = Eπ + r equilibrium, thus 4 percent = 1 percent + r equilibrium.

The key identity that relates to the velocity of money is:

M × v = P × YR. In the quantity theory of money, it is assumed that the velocity of money and real GDP are fixed.

What relationship exists between nominal interest rates and the expected rate of inflation?

Nominal interest rates tend to increase with higher expected inflation rates. This is known as the Fisher effect.

Suppose you buy a share of stock at a price of $100 and a year later it is worth $125. Suppose further that the rate of inflation for the year is 10 percent. If you are subject to a 15 percent capital gains tax, how much would your tax burden be if you only had to pay capital gains tax on the real return on your stock?

$2.25 25 - 10 = 15; 15 * 0.15 = 2.25 Inflation interacts with other taxes, such as capital gains taxes, to redistribute wealth in ways that do not make economic sense.

Suppose you buy a share of stock at a price of $100 and a year later it is worth $125. Suppose further that the rate of inflation for the year is 10 percent. If you are subject to a 15 percent capital gains tax, how much is your total tax burden?

$3.75 $125 * 0.1 = 12.5; 12.5 - 10 = 2.5; 2.5 * 1.5 = 0.375 Inflation interacts with other taxes, such as capital gains taxes, to redistribute wealth in ways that do not make economic sense.

Suppose that for an imaginary economy, the velocity of money is equal to 6 and the money supply is $1.5 billion. If the price level in this economy is equal to 2, the real GDP in this economy is equal to:

$4.5 billion. ($1.5 billion × 6) ÷ 2.00 = $9 billion ÷ 2.00 = $4.5 billion.

Suppose that for an imaginary economy, the velocity of money is equal to 6 and the money supply is $1.5 billion. If the price level in this economy is equal to 2, the nominal GDP in this economy is equal to:

$9 billion. M × v = P × YR. The right-hand side of this identity represents nominal GDP: $1.5 billion × 6 = $9 billion.

The formula for the inflation rate is:

(P2 − P1) ÷ P1 or ((P2 - P1) / P1) *100 The average level of prices is measured using a price index.

Which country's episode of hyperinflation is the largest on record?

Hungary From 1945 to 1946, the cumulative rate of inflation in Hungary was 1.3 × 1024.

Refer to the following table, which gives the CPI and the prices of three goods for a hypothetical economy over three years. What happened to the real price of good B between year 1 and year 2?

The real price fell, because the price did not change and the CPI rose. Between the two years, the CPI rose by 5 percent and the good's price did not rise.

Refer to the following table, which gives the CPI and the prices of three different goods for a hypothetical economy over three years. What happened to the real price of good A between year 1 and year 2?

The real price rose, because the price rose faster than did the CPI. Between the two years, the CPI rose by 5 percent and the good's price rose by 7.5 percent.

If individuals choose to hold onto their money, afraid to spend it, what impact would this have on the velocity of money?

The velocity of money would decrease. In the Great Depression, many people in the United States behaved in precisely this way, and the decrease in monetary velocity helped cause a deflation.

What effect would unexpected inflation have on the real return that lenders receive on the loans they've made?

Unexpected inflation will reduce the real return that lenders receive on the loans they've made. Assuming the nominal interest rate on previous loans is fixed, unexpected inflation benefits borrowers and hurts lenders.

Which country had the highest inflation rate in 2016?

Venezuela According to Table 31.1, Venezuela had the highest inflation rate of 475.806 percent.

Deflation is:

a decrease in the average level of prices. When there is deflation, the rate of inflation is negative.

If we assume that the velocity of money is stable, there is:

a direct relationship of money and nominal GDP. If the velocity of money is stable, then changes in the money supply directly change nominal GDP.

Disinflation is:

a reduction in the inflation rate. Moderate decreases in velocity or in the growth rate of the money supply would cause disinflation, not deflation.

Nobel Prize winner Milton Friedman famously said: "Inflation is _____ a _____ phenomenon."

always and everywhere; monetary This is one of the most important truths in macroeconomics.

If the inflation rate is negative, it is safe to conclude that there has been:

deflation. Deflation is a decrease in the average level of prices.

A reduction in the inflation rate is called:

disinflation. Moderate decreases in velocity or in the growth rate of the money supply would cause disinflation, not deflation.

If the inflation rate is positive, it is safe to conclude that there has been:

inflation. Inflation results from having more money chasing the same amount of goods

An increase in the average level of prices is defined as:

inflation. Inflation results from having more money chasing the same amount of goods.

Unexpectedly high inflation transfers wealth from:

lenders to borrowers. (Unexpectedly high inflation would redistribute wealth from lenders to borrowers.) the public to the government. (Inflation is a type of tax.)

Money illusion occurs because:

prices are signals, and inflation makes price signals more difficult to interpret. Money illusion occurs when people mistake changes in nominal prices for changes in real prices.

In interest rate equations used in the chapter, what represents the rate of return?

r A lowercase r represents the rate of return in the interest rate equations.

When inflation occurs, it is usually the case that:

some prices have gone up and others have fallen. At any one point in time, some prices are going up and some are going down

The velocity of money is:

the average number of times a dollar is spent on final goods and services in a year. The factors that determine the velocity of money change over time, but only slowly.

When price signals are difficult to interpret:

the market system doesn't work as well. When price signals are difficult to interpret, resources are wasted in activities that appear profitable but in fact are not.

If a government combines high inflation with controls on nominal interest rates:

the real rate of return will be negative. If inflation rises but the nominal interest rate doesn't, the real rate of return can fall until it becomes negative.

In order to conclude that hyperinflation has occurred, it would have to be the case that the inflation rate was:

very, very high. Hyperinflation refers to very rapid inflation. See Table 31.2 for a comparison of episodes of hyperinflation.

If for a certain economy the growth rate of the money supply is 4 percent, the growth rate of the velocity of money is 0 percent, the rate of inflation is 3.2 percent, and the real growth rate is ______ percent, then the quantity theory of money holds.

0.8 This is because 4 + 0 = 3.2 + 0.8.

Using the information provided in the table, the real equilibrium rate of return G is equal to:

3 percent. Recall that i = Eπ + r equilibrium, thus 4 percent = 1 percent + r equilibrium.

Refer to the following table, which gives the CPI for the years 2004 through 2011. What was the rate of inflation between 2007 and 2008?

3.9 percent (215.3 − 207.3) ÷ 207.3 = 0.039, which is 3.9 percent.

Suppose that for an imaginary economy, the velocity of money is equal to 8 and the money supply is $1.2 billion. The nominal GDP of this economy is:

9.6 Billion 1.2 * 8 = 9.6 Billion

Which situation is NOT a consequence of price signals being difficult to interpret because of inflation?

Borrowers benefit, and lenders are harmed. Redistribution of wealth between lenders and borrowers is a consequence of inflation, but it is not necessarily related to difficult-to-interpret price signals.

Which situation is one of the costs of inflation covered in the textbook?

Inflation can lead to a breakdown of financial intermediation. High and volatile inflation makes long-term lending very difficult. Inflation redistributes wealth throughout society in arbitrary ways. Inflation is a type of tax, so it transfers wealth from the public to the government.

Which country had the lowest inflation rate in 2016?

Japan Japan had the lowest rate of −0.162 percent. Refer to Table 12.1.