econ ch17

Bertha bought 10 shares of iSnack stock for $1 per share. In one year, she sold 5 shares for $5 a share. During this year, the price level decreased from 147 to 140. What is Bertha's before-tax real capital gain? a.$5. b.$19. c.$21. d.$17.

$21 The inflation rate is 100 x ((140 - 147)/147) = -5%. Bertha paid $5 for five shares last year. Now, she sold them making 5 x $5 = $25, gaining $25 - $5 = $20. However, since the price level has decreased, Bertha is actually gaining more: $20 - ($20 x (-0.05)) = $21.

Bertha purchased 10 shares of BestSnack, Inc. stock for $200 per share; in one year, she sold the 10 shares for $220 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much tax does Bertha pay on her gain? a.$97 b.$200 c.$100 d.$1,067.

$100 Bertha's capital gain is ($220 - $200) x 10 = $200, of which the government takes 50%, leaving her with $200 x (1 - 0.50) = $100. Note that the remaining 3% is taken by inflation, not the government

Bertha bought 10 shares of iSnack stock for $1 per share. In one year, she sold 5 shares for $5 a share. During this year, the price level increased from 140 to 147. What is Bertha's before-tax real capital gain? a.5%. b.$20. c.$19. d.$25.

$19 The inflation rate is 100 x ((147 - 140)/140) = 5%. Bertha paid $5 for five shares last year. Now, she sold them for $5 per share, making 5 x $5 = $25 while gaining $25 - $5 = $20. Of her $20 gain, 5% is lost to inflation: $20 - $20 x 0.05 = $19.

Suppose the nominal interest rate is 6% and the inflation rate is 2%. What is the real interest rate? a.2% b.4% c.3% d.8%

4% The nominal interest rate is the interest rate you hear about at your bank, whereas the real interest rate corrects the nominal interest rate for the effect of inflation: Real interest rate = Nominal interest rate - Inflation rate = 6% - 2% = 4%.

Suppose the nominal interest rate is 8%, the inflation rate is 3% and the tax rate is 45%. What is after-tax real rate of interest? a.11% b.4.4% c.1.4%. d.5%

4.4% The government takes 45% of the nominal rate of 8%, leaving an after-tax nominal interest rate of only 8% - (8% x 0.45) = 4.4%. Thus the after-tax real interest rate is 4.4% - 3% = 1.4%.

Suppose the Consumer Price Index has increased from 100 to 105. What is the inflation rate? a.10.5% b.5% c.1.05% d.0.05%

5% Inflation is measured as a percentage change in the overall price level: 100 x ((105 - 100)/100) = 5%.

Which of the following describes the relationship between the value of money and the price level? a.As the price level falls, the value of money does not change. b.As the price level falls, the value of money rises. c.As the price level falls, the value of money falls. d.As the price level rises, the value of money rises.

As the price level falls, the value of money rises As the price level falls, the value of money rises because less money is needed to buy a representative basket of goods.

Why do people believe in the inflation fallacy? a.Nominal incomes fail to keep pace with rising prices. b.People appreciate the principle of monetary neutrality. c.People tend to forget that inflation in prices goes hand in hand with inflation in incomes. d.Because inflation does not in itself reduce people's real purchasing power.

People tend to forget that inflation in prices goes hand in hand with inflation in incomes When prices rise, buyers of goods and services are worse off but at the same time, sellers are better off. Because most people earn their incomes by selling their services, such as their labor, inflation in incomes goes hand in hand with inflation in prices. Thus, inflation does not in itself reduce people's real purchasing power.

During the 1770s, the United States ____ a.created the Internal Revenue Service. b.started the income tax. c.did not need to raise tax revenues because the budget was in surplus. d.relied heavily on the inflation tax.

relied heavily on the inflation tax The government relied heavily on the inflation tax to fund military spending because the new government was limited in its ability to raise revenues.

When higher inflation reduces the value of money, a.sunk costs rise. b.The inflation tax decreases. c.Shoeleather costs of inflation increase. d.The inflation fallacy does not hold.

shoeleather costs of inflation increase The cost of reduced money holdings due to high inflation rates is called the 'shoeleather cost' of inflation. People must make more frequent trips to the bank to get more cash, which, supposedly, causes shoes to wear out more quickly.

Bertha owns a pastry shop and café in an economy that is prone to rapid inflation. If Bertha reprints her menu every month, a.she bears a high menu cost and the relative price of her pastries is too low. b.she bears a high menu cost and the relative price of her pastries is too high. c.she bears a high menu cost but the relative price of her pastries is accurate. d.the price of her pastries will be too high in January and much lower in December.

the bears a high menu cost and the relative price of her pastries is too low Market economies rely on relative prices to allocate scarce resources as consumers decide what to buy by comparing the quality and prices of various goods and services. Inflation distorts relative prices, consumer decisions are distorted and markets are less able to allocate resources to their best use. Updating her menu frequently during the year, Bertha keeps her relative prices in check with inflation but her menu costs--the costs of printing new price lists, sending them to dealers and customers, advertising, etc.-will increase.

Which of the following describes the Fisher effect? a.Neither real variables, nor nominal variables are influenced by the monetary system. b.The nominal interest rate adjusts to the inflation rate. c.The growth rate of the money supply is negatively related to the velocity of money. d.Real variables are heavily influenced by the monetary system.

the nominal interest rate adjusts to the inflation rate When the Fed increases the rate of money growth, the long-run result is both a higher inflation rate and a higher nominal interest rate. The adjustment of the nominal interest rate to the inflation rate is called the Fisher effect, after Irving Fisher (1867-1947), the economist who first studied it.

Which of the following describes the money equilibrium in the long run? a.The Fed will inevitably increase the money supply. b.The quantity of money that people want to hold equals the quantity of money supplied by the Fed. c.People will want to hold more money than the Fed has created. d.People will want to hold less money than the Fed has created.

the quantity of money that people want to hold equals the quantity of money supplied by the Fed In the long run, money supply and money demand are brought into equilibrium by the overall level of prices. At the equilibrium price level, the quantity of money that people want to hold exactly balances the quantity of money supplied by the Fed.

Which of the following theories explains the long-run determinants of the price level and the inflation rate? a.The disequilibrium theory of money and inflation b.The quantity theory of money c.The price-index theory of money d.The theory of hyperinflation

the quantity theory of money Most economists today rely on the quantity theory of money to explain the long-run determinants of the price level and the inflation rate. According to this theory, the quantity of money available in an economy determines the value of money, and growth in the quantity of money is the primary cause of inflation.

Which of the following theories can explain both inflation and hyperinflation? a.The Ad-AS model. b.The quantity theory of money. c.The aggregate demand theory. d.The utility theory.

the quantity theory of money The quantity theory of money asserts that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate.

Bertha purchased 100 shares of BestSnack, Inc. stock for $20 per share; in one year, she sold the 100 shares for $25 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much did Bertha earn? a.$500 b.$250 c.$242.5. d.$1,250.

$242.5 Bertha's capital gain is ($25 - $20) x 100 = $500, of which the government takes 50%, leaving her with $500 x (1 - 0.50) = $250. Of this amount, 3% is lost to inflation, which means that Bertha earns only $250 x (1 - 0.03) = $242.5.

Bertha purchased 100 shares of BestSnack, Inc. stock for $20 per share; in one year, she sold the 100 shares for $25 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much tax does Bertha pay on her gain? a.$97 b.$200 c.$250 d.$242.5.

$250 Bertha's capital gain is ($25 - $20) x 100 = $500, of which the government takes 50%, leaving her with $500 x (1 - 0.50) = $250. Note that the remaining 3% is taken by inflation, not the government.

Bertha purchased 10 shares of BestSnack, Inc. stock for $200 per share; in one year, she sold the 10 shares for $220 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much does Bertha earn? a.$100 b.$200 c.$97 d.$1,067.

$97 Bertha's capital gain is ($220 - $200) x 10 = $200, of which the government takes 50%, leaving her with $200 x (1 - 0.50) = $100. Of this amount, inflation takes another 3%: $100 x (1 - 0.03) = $97.

Suppose the Consumer Price Index has increased from 105 to 107. What is the inflation rate? a.0.98% b.1.9% c.-1.9% d.7.00%

1.9% Inflation is measured as a percentage change in the overall price level: 100 x ((107 - 105)/105) = 1.9%.

The real interest rate is 4%, inflation is 2%, and the marginal income tax rate is 25%. What is after-tax real rate of interest? a.4.5% b.6% c.2.5% d.25%

2.5% The income tax treats this entire nominal interest of 4% + 2% = 6% as income, the government takes 25% of it, leaving an after-tax nominal interest rate ofonly 6% - (6% x 0.25) = 4.5%. The after-tax real interest rate is 4.5% - 2% = 2.5%.

Suppose P is the price level (the GDP deflator), Y the quantity of output (real GDP), V is velocity, and M the quantity of money if M = 600, V = 5, and Y = 1000, what is the price level? a.500 b.3 c.3,000 d.0.6

3 Based on the quantity equation, P = (V x M) / Y = (5 * 600) / 1,000 = 3.

The real interest rate is 5%, inflation is 3%, and the marginal income tax rate is 25%. What is after-tax real rate of interest? a.6% b.8% c.3% d.2%

3% The income tax treats this entire nominal interest of 5% + 3% = 8% as income, the government takes 25% of it, leaving an after-tax nominal interest rate of only 8% - (8% x 0.25) = 6%. The after-tax real interest rate is 6% - 3% = 3%.

The nominal interest rate is 10%, inflation is 4%, the marginal income tax rate is 25%. What is after-tax real rate of interest? a.4% b.7.5% c.3.5% d.25%

3.5% The government takes 25% of the nominal rate of 10%, leaving an after-tax nominal interest rate of only 10% - (10 x 0.25) = 7.5%. Thus the after-tax real interest rate is 7.5% - 4% = 3.5%.

Suppose the price level has increased from 103 to 107. Which of the following is the inflation rate? a.0.96% b.3.88% c.-3.74% d.4.03%

3.88% Inflation is measured as a percentage change in the overall price level: 100 x ((107 - 103)/103) = 3.88%.

Consider an economy producing only widgets, which cost $2 each. If you have $100, what is the real value of the money you hold? a.$200. If the price of widgets increases, you will need less money. b.50 widgets. If the price of widgets increases, you will need more money. c.$200. If the price of widgets increases, you will need more money. d.50 widgets. If the price of widgets increases, you will need less money.

50 widgets. If the price of widgets increases, you will need more money Real variables are measured in physical units. Thus in real terms, $100 is equivalent to $100/$2 = 50 widgets. When the price level rises, the dollars in your wallet are less valuable because you can afford fewer widgets.

Suppose P is the price level (the GDP deflator), Y the quantity of output (real GDP), and M the quantity of money. If M = 1,000, P = 2, and Y= 3,000, what is velocity (V)? a.1.5 b.6 c.3 d.0.002

6 The velocity of money is calculated by dividing the nominal value of output (nominal GDP) by the quantity of money. If P is the price level (the GDP deflator), Y the quantity of output (real GDP), and M the quantity of money, then V = (P x Y)/M = (2 x 3,000)/1,000 = 6.

The nominal interest rate is 8%, inflation is 1%, the marginal income tax rate is 10%. What is after-tax real rate of interest? a.8% b.7.2% c.6.2% d.2%

6.2% The government takes 10% of the nominal rate of 8%, leaving an after-tax nominal interest rate of only 8% - (8% x 0.10) = 7.2%. Thus the after-tax real interest rate is 7.2% - 1% = 6.2%.

The nominal interest rate is 12%, inflation is 3%, the marginal income tax rate is 10%. What is after-tax real rate of interest? a.10.8% b.12% c.7.8%. d.3%

7.8% The government takes 10% of the nominal rate of 12%, leaving an after-tax nominal interest rate of only 12% - (12% x 0.10) = 10.8%. Thus the after-tax real interest rate is 10.8% - 3% = 7.8%.

Which of the following describes the relationship between the value of money and the price level? a.As the price level falls, the value of money does not change. b.As the price level rises, the value of money falls. c.As the price level falls, the value of money falls. d.As the price level rises, the value of money rises.

As the price level rises, the value of money falls As the price level rises, the value of money falls because more money is needed to buy a representative basket of goods.

Bertha lends $1,000 to Danko for 2 years and charges an annual interest rate of 6%. Bertha had anticipated the inflation rate of 2%, but it actually turned to be 2.5%. In two years, as a result of the higher-than-expected inflation, a.Both Bertha and Danko are worse off. b.Bertha is better off at the expense of Danko. c.Danko is better off at the expense of Bertha. d.Both Bertha and Danko are better off.

Danko is better off at the expense of Bertha Higher than expected inflation makes borrowers better off at the expense of the lenders because it diminishes the real value of the debt: Danko can repay the loan in dollars that are less valuable than anticipated. Therefore Danko is better off at the expense of Bertha. This is because the real interest rate is the difference between the nominal interest rate and the inflation rate.

There are no costs of deflation. True False

False Deflation causes the value of debts to increase in real terms, transferring money from debtors to creditors. It also has menu costs and relative price variability

In the U.S., people are required to pay taxes on real capital gains irrespective of their nominal capital gains. True False

False One example of how inflation discourages saving is the tax treatment of capital gains-the profits made by selling an asset for more than its purchase price. In the U.S., people are required to pay taxes on nominal capital gains, irrespective of their real capital gains.

When inflation was expected to be high and it turns out to be low, wealth is redistributed from creditors to debtors. True False

False Unexpected changes in prices redistribute wealth among debtors and creditors. Lower than expected inflation makes lenders (creditors) better off at the expense of the borrowers (debtors) because it increases the real value of the debt as the real interest rate is the difference between the nominal interest rate and the inflation rate.

Bertha took out a 5-year fixed-interest-rate loan. She has anticipated the inflation rate of 2% but it actually turned to be 4%. a.Her real interest rate was lower than expected, and the real value of the loan is higher than expected. b.Her real interest rate was higher than expected, and the real value of the loan is lower than expected. c.Her real interest rate was lower than expected, and the real value of the loan is lower than expected. d.Her real interest rate was higher than expected, and the real value of the loan is higher than expected.

Her real interest rate was lower than expected, and the real value of the loan is lower than expected Unexpected changes in prices redistribute wealth among debtors and creditors. Higher than expected inflation makes debtors (borrowers) better off at the expense of the creditors (lenders) because it diminishes the real value of the debt: Borrowers can repay the loan in dollars that are less valuable than they anticipated as the real interest rate is the difference between the nominal interest rate and the inflation rate.

Which of the following is an example of menu costs? a.Firms monitoring their workers. b.Workers signaling their abilities. c.Stores advertising new prices. d.Firms paying efficiency wages to their workers.

Stores advertising new prices Menu costs include the costs of deciding on new prices, printing new price lists and catalogs, sending these new price lists and catalogs to dealers and customers, advertising the new prices, and even dealing with customer annoyance over price changes.

Which of the following describes the effect of a decrease in the money supply? a.The money supply curve shifts to the right, the price level increases causing the value of money to decrease. b.The money supply curve shifts to the left, the price level decreases causing the value of money to increase. c.The money supply curve shifts to the right, the price level decreases causing the value of money to increase. d.The money supply curve shifts to the left, the price level increases causing the value of money to decrease.

The money supply curve shifts to the left, the price level decreases causing the value of money to increase A decrease in the money supply shifts the money supply curve to the left, the value of money and the price level adjust to bring supply and demand back into balance. Now there are fewer dollars chasing the same number of goods and services. The price level decreases, making each dollar more valuable.

Which of the following describes the effect of an increase in the money supply? a.The money supply curve shifts to the left, the price level decreases causing the value of money to increase. b.The money supply curve shifts to the right, the price level increases causing the value of money to decrease. c.The money supply curve shifts to the right, the price level decreases causing the value of money to increase. d.The money supply curve shifts to the left, the price level increases causing the value of money to decrease.

The money supply curve shifts to the right, the price level increases causing the value of money to decrease An increase in the money supply shifts the money supply curve to the right, the value of money and the price level adjust to bring supply and demand back into balance. An increase in the money supply makes dollars more plentiful, the price level increases, making each dollar less valuable.

Which of the following is the immediate effect of a monetary injection? a.The money supply decreases, whereas the economy's ability to supply goods and services does not change. b.The money supply increases, whereas the economy's ability to supply goods and services does not change. c.Both the money supply and the economy's output increase. d.The money supply increases, whereas the economy's ability to supply goods and services declines.

The money supply increases, whereas the economy's ability to supply goods and services does not change The immediate effect of a monetary injection is to create an excess supply of money. The economy's ability to supply goods and services, however, does not change as it is determined by the available labor, physical capital, human capital, natural resources, and technological knowledge. None of these is altered by the injection of money.

Which of the following explains why the supply curve for money is vertical? a.The quantity of money supplied is fixed by the quantity theory of money. b.The quantity of money supplied is fixed by the Federal Reserve. c.The quantity of money supplied is fixed by the consumer demand. d.Regardless of the price level, people want to hold a larger quantity of money when each dollar buys less.

The quantity of money supplied is fixed by the Federal Reserve If the horizontal axis shows the quantity of money and the vertical axis shows the price level, the supply curve for money is vertical because the quantity of money supplied is fixed by the Federal Reserve. Note that the demand curve for money is downward sloping because people want to hold a larger quantity of money when each dollar buys less.

When deciding how much to save, people care most about before-tax nominal interest rates. True False

True The income tax treats the nominal interest earned on savings as income, even though part of the nominal interest rate merely compensates for inflation. Because the after-tax real interest rate provides the incentive to save, saving is much less attractive in the economy with high inflation.

When inflation rises, the nominal interest rate rises, and people desire to hold less money True False

True With the high inflation rate, people do not have the luxury of holding cash as a store of value. Rather they have to quickly convert cash into goods or keep it in the bank to earn some interest. Either way, people will hold less money.

Which of the following describes the meaning of the demand for money? a.The total quantity of financial assets that people want to hold. b.Wealth that people want to hold in liquid form. c.Income that people want to earn per year. d.Currency the Federal Reserve prints.

Wealth that people want to hold in liquid form The demand for money reflects how much wealth people want to hold in liquid form. For example, the amount of cash that people hold in their wallets depends on how much they rely on credit cards and on whether an automatic teller machine is easy to find.

Suppose P denotes the price of goods and services measured in terms of money. a.P can be interpreted as the inflation rate. b.A decrease in the value of money is associated with an increase in P. c.A decrease in the value of money is associated with a decrease in P. d.An increase in the value of money is associated with an increase in P.

a decrease in the value of money is associated with an increase in P If P is the price of goods and services measured in terms of money, then 1/P is the value of money measured in terms of goods and services. If P decreases, the value of money increases. And vice versa.

The principle of monetary neutrality implies that a.an increase in the money supply will increase the price level and real GDP. b.an increase in the money supply will increase the price level, but not real GDP. c.a decrease in the money supply will increase the price level, but not real GDP. d.an increase in the money supply will decrease the price level, but not real GDP.

an increase in the money supply will increase the price level, but not real GDP The classical dichotomy implies that changes in the supply of money affect nominal variables but not real ones. When the central bank doubles the money supply, the price level doubles, the dollar wage doubles, and all other dollar values double. However, real variables, such as production, employment, real wages, and real interest rates, are unchanged.

Which of the following describes monetary neutrality? a.Changes in the supply of money affect real variables in the short-run but not in the long-run. b.Changes in the supply of money affect nominal variables but not real ones. c.Changes in the money supply affect only real variables but have no effect on nominal variables. d.Changes in the money supply immediately affect the economy's ability to supply goods and services.

changes in the supply of money affect nominal variables but not real ones Changes in the supply of money affect nominal variables but not real ones. When the central bank doubles the money supply, the price level doubles, the dollar wage doubles, and all other dollar values double. Real variables, such as production, employment, real wages, and real interest rates, are unchanged. The irrelevance of monetary changes for real variables is called monetary neutrality.

The immediate effect of a monetary injection increases the economy's ability to supply goods and services. True False

false The immediate effect of a monetary injection is an excess supply of money. The economy's ability to supply goods and services, however, does not change as it is determined by the available labor, physical capital, human capital, natural resources, and technological knowledge. None of these is altered by the injection of money.

As the price level increases, the value of money increases. True False

false The price level can be viewed in two ways: 1. The price of a basket of goods and services or 2. A measure of the value of money. When the price level rises, the price of a basket of goods has increased. On the other hand, the price level is also a measure of the value of money. A rise in the price level means a lower value of money because each dollar in your wallet now buys a smaller quantity of goods and services.

Bertha took out a 5-year fixed-interest-rate loan. She has anticipated the inflation rate of 3% but it actually turned to be only 2%. a.Her real interest rate was lower than expected, and the real value of the loan is higher than expected. b.Her real interest rate was higher than expected, and the real value of the loan is lower than expected. c.Her real interest rate was higher than expected, and the real value of the loan is higher than expected. d.Her real interest rate was lower than expected, and the real value of the loan is lower than expected.

her real interest rate was higher than expected, and the real value of the loan is higher than expected Unexpected changes in prices redistribute wealth among debtors and creditors. Lower than expected inflation makes lenders better off at the expense of the borrowers because it increases the real value of the debt as the real interest rate is the difference between the nominal interest rate and the inflation rate.

Which of the following is true about inflation and relative prices? a.Higher inflation increases the relative-price variability improving the resource allocation. b.Higher inflation decreases the relative-price variability distorting the resource allocation. c.Higher inflation increases the relative-price variability distorting the resource allocation. d.Lower inflation increases the relative-price variability distorting the resource allocation.

higher inflation increases the relative-price variability distorting the resource allocation Market economies rely on relative prices to allocate scarce resources as consumers decide what to buy by comparing the quality and prices of various goods and services. As high inflation distorts relative prices, consumer decisions are distorted and markets are less able to allocate resources to their best use.

Which of the following reforms would allow for the taxation of only real interest earnings? a.Allow investing only in government bonds. b.Pay workers only real wages. c.Indexing the tax system to take into account the effects of inflation. d.Eliminating the marginal tax rate.

indexing the tax system to take into account the effects of inflation The tax laws could be reformed to adjust the purchase price using a price index and assess the tax only on the real gain. In the case of interest income, the government could tax only real interest income by excluding that portion of the interest income that merely compensates for inflation.

Which of the following is true about the inflation tax in the United States? a.It falls most heavily on those who hold little of currency and account for a large share of U.S. government revenue. b.It falls most heavily on those who hold a lot of currency but accounts for a small share of U.S. government revenue. c.It falls most heavily on those who hold a lot of currency and account for a large share of U.S. government revenue. d.It falls most heavily on those who hold little of currency but accounts for a small share of U.S. government revenue.

it falls most heavily on those who hold a lot of currency but accounts for a small share of US government revenue When the government prints money, the price level rises, and the dollars in your wallet are less valuable. Thus, the inflation tax is like a tax on everyone who holds money. Thus it is said that by printing money, the government levies an inflation tax. In the United States in recent years, the inflation tax has been a trivial source of revenue for the government.

As inflation rises, a.menu costs increase, whereas shoeleather costs of inflation decrease. b.menu costs and shoeleather costs of inflation decrease. c.menu costs and shoeleather costs of inflation increase. d.menu costs decrease, whereas shoeleather costs of inflation increase.

menu costs and shoeleather costs of inflation increase The shoeleather costs of inflation can be substantial as people do not have the luxury of holding cash as a store of value but have to quickly convert cash into goods or keep it in the bank and earn some interest. The time and effort expended to reduce money holdings are a waste of resources. Menu costs include the costs of deciding on new prices, printing new price lists and catalogs, sending these new price lists and catalogs to dealers and customers, advertising the new prices, and even dealing with customer annoyance over price changes. Inflation increases the menu costs that firms must bear as prices change more frequently.

The inflation tax is not exactly like other taxes because ____ a.it is a sin tax. b.it is a tax on an activity that the government wants to reduce. c.it is easy to compute the revenues. d.no one receives a bill from the government for the tax.

no one receives a bill from the government for the tax When the government raises revenue by creating money, it is taxing everyone who holds money, but nobody receives a bill for the tax.

Which of the following explains why the demand curve for money is downward sloping? a.People want to hold a larger quantity of money when each dollar buys more. b.People want to hold a larger quantity of money when each dollar buys less. c.The quantity of money supplied is fixed by the consumer demand. d.The quantity of money supplied is fixed by the Federal Reserve.

people want to hold a larger quantity of money when each dollar buys less Suppose the horizontal axis shows the quantity of money and the vertical axis shows the price level on a graph. Then the demand curve for money is downward sloping because people want to hold a larger quantity of money when each dollar buys less, since the value of money increases when the price level decreases. Note that the supply curve for money is vertical because the quantity of money supplied is fixed by the Federal Reserve.

Which of the following describes how inflation can be measured? a.Change in the price of a specific commodity. b.Percentage change in the GDP deflator. c.A ratio of the price of a specific commodity over the consumer price index. d.Change in the GDP deflator.

percentage change in the GDP deflator Inflation is measured as a percentage change in the consumer price index (CPI), the GDP deflator, or some other index of the overall price level

Which of the following describes how inflation is usually measured? a.Change in the price of a specific commodity. b.Percentage change in the consumer price index. c.Percentage change in the price of a specific commodity. d.Change in the GDP deflator.

percentage change in the consumer price index Inflation is measured as a percentage change in the consumer price index (CPI), the GDP deflator, or some other index of the overall price level.

One cost of deflation is ____ a.that it discourages consumption. b.the redistribution of wealth toward debtors and away from creditors. c.a tax on those who hold money. d.the redistribution of wealth toward creditors and away from debtors.

the redistribution of wealth toward creditors and away from debtors Deflation causes the value of debts to increase in real terms, transferring money from debtors to creditors.

As the price level increases, a.the value of money decreases but the quantity of money does not change. b.the value of money decreases. c.the value of money does not change but the quantity of money decreases. d.the quantity of money decreases.

the value of money decreases The primary reason people hold money is to use it as a medium of exchange. As the price level increases, the value of money decreases, so people must hold more money to purchase goods and services.

As the price level decreases, a.the value of money increases but the quantity of money must not change. b.the value of money increases. c.the value of money decreases. d.the quantity of money increases.

the value of money increases The primary reason people hold money is to use it as a medium of exchange. As the price level decreases, the value of money increases, so people must hold less money to purchase goods and services.

When inflation turns out to be higher than expected, wealth is redistributed from lenders to borrowers. True False

true Higher than expected inflation makes borrowers better off at the expense of the lenders because it diminishes the real value of the debt: Borrowers can repay the loan in dollars that are less valuable than they anticipated as the real interest rate is the difference between the nominal interest rate and the inflation rate.

An increase in the value of money decreases the price of goods and services measured in terms of money. True False

true If P is the price of goods and services measured in terms of money, then 1/P is the value of money measured in terms of goods and services. If P decreases, the value of money increases. And vice versa.

In the U.S., the income tax treats the nominal interest earned on savings as income, even though part of the nominal interest rate merely compensates for inflation. True False

true The income tax treats the nominal interest earned on savings as income, even though part of the nominal interest rate merely compensates for inflation. Because the after-tax real interest rate provides the incentive to save, saving is much less attractive in the economy with high inflation.

When inflation was expected to be high and it turns out to be low, wealth is redistributed from debtors to creditors. True False

true Unexpected changes in prices redistribute wealth among debtors and creditors. Lower than expected inflation makes lenders (creditors) better off at the expense of the borrowers (debtors) because it increases the real value of the debt as the real interest rate is the difference between the nominal interest rate and the inflation rate.