economics chapter 12

In a small economy, the money supply is $400,000, and the velocity of money is 3. The current average price level in the economy is 1. What is the level of real GDP in this economy?

$1.2 million

Suppose the nominal GDP of a country is $500 billion. If the velocity of money in the country is 10, then the country's money supply will equal:

$50 billion.

If the money supply is $375 million, the velocity of money is 5, and real GDP is $12.5 million, what is the average price level?

150

Jordan loaned Taylor $1,200 on March 15, 2009. Taylor returned $1,260 on March 14, 2010. Inflation was 2% over the 1-year period. What is the real interest rate that Taylor paid?

3%

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%

Deflation

A situation in which prices are declining

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.

Consumer Price Index (CPI)

a measure of the overall cost of the goods and services bought by a typical consumer

GDP deflator

a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

A real price is:

a price that has been corrected for inflation

Producer Price Index (PPI)

an average of the prices received by producers of goods and services at all stages of the production process

Inflation

an increase in the average level of prices

Inflation is:

an increase in the average level of prices of goods and services

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

The primary reason we think of inflation as bad even when nominal wages rise with it is that it

distorts the information delivered by prices.

When the price of a good in Russia increases from 20 rubles to 20 million rubles in a single year, the nation is experiencing:

hyperinflation.

Debt monetization means that a government pays off its debt by

increasing the money supply.

Money illusion is:

mistaking changes in nominal prices for changes in real prices.

With respect to real output, in the long run, money is:

neutral.

Inflation Rate Formula

percentage change in price index from one year to the next(Current year CPI ) - (Earlier Year CPI) / (Earlier Year CPI) x100

According to the quantity theory of money, an increase in the money supply causes an increase in _____ over the long run.

prices

monetizing the debt

process of creating enough additional money to offset federal borrowing so that interest rates remain unchanged

When the expected rate of inflation is higher than the actual rate of inflation, wealth is

redistributed from borrowers to lenders.

The quantity theory of money predicts that the main cause of inflation is increases in:

the money supply.

real rate of return

the nominal rate of return minus the inflation rate

Fisher effect

the one-for-one adjustment of the nominal interest rate to the inflation rate

Disinflation

the process of bringing the inflation rate down (more moderate)

nominal rate of return

the rate of return that does not account for inflation

The average number of times a dollar is spent on final goods and services during a year is the:

velocity of money.

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.