Money, Inflation, Quantity Theory
According to the quantity theory of money, ____________.
in the long run, the growth in the money supply is directly related to the inflation rate.
This implies that if the money supply grows by 10 percent, then nominal GDP needs to grow by
10 percent
Imagine that the chairperson of the Federal Reserve announced that, as of the following day, all currency in circulation in the United States would be worth 10 times its face denomination. For example, a $10 bill would be worth $100; a $100 bill would be worth $1,000, etc. Furthermore, the balance in all checking and savings accounts is to be multiplied by 10 as will the balance of all outstanding debts. So, if you have $500 in your checking account, as of the following day, your balance would be $5,000, etc. Would you actually be 10 times better off on the day the announcement took effect?
No, because all prices would increase by a factor of 10 as well, keeping the real value of your money constant.
Which of the following equations is the equation for velocity in the quantity theory of money?
Nominal GDP / Money Supply
According to the quantity theory of money, inflation is caused by
the money supply growing faster than real GDP.
Recall the discussion in the chapter about the "quantity theory of money." The quantity theory of money assumes that ____________.
the ratio of money supply to nominal GDP is exactly constant.
Are the predictions of the quantity theory of money borne out by historical data?
Yes, the long-run data show a one-for-one growth rate of money supply and inflation.
The M2 money supply is defined to include ___________.
currency in circulation, checking accounts, savings accounts, traveler's checks, and money market accounts
Seignorage is the ____________.
difference between the cost of printing paper money and the value of the goods and services that the government can purchase with the newly printed money.
growth rate of money supply is
equal to nominal GDP
inflation rate =
growth rate of money supply - growth rate of real GDP
The quantity equation states that the
money supply times the velocity of money equals the price level times real output.
If the growth rate of money supply is larger than the growth rate of real GDP, the inflation rate is
positive
Fiat money is ____________.
something that is used as legal tender by government decree and is not backed by a physical commodity
According to the quantity theory of money, the inflation rate is
the gap between the growth rate of money supply and the growth rate of real GDP
How does fiat money differ from commodities like gold and silver that were used as money?
Fiat money is intrinsically worthless, whereas gold and silver have intrinsic value.
If fiat money is intrinsically worthless, then why is it valuable?
Fiat money is used as legal tender by government decree and other people will accept it as payment for transactions.
What is the significance of the real wage as it relates to inflation?
Since an increase in inflation reduces the real wage that firms must pay, firms are more williing to hire workers, thus stimulating economic activity.
if the inflation rate is positive, what must be true?
The growth rate of real GDP LESS THAN the growth rate of money supply.
It follows that the growth rate of money supply and the growth rate of nominal GDP will be the same. In this case, inflation is ____________.
equal to the gap between the growth rate of money supply and the growth rate of real GDP.
growth rate of nominal GDP =
inflation + Growth rate of real GDP
The real wage is the ____________.
inflation-adjusted wage
Hyperinflation is most likely caused by ____________.
large budget deficits financed by printing more money