5. Inflation- part 2

Devoting resources to avoiding the costs of expected inflation leads to:

economic inefficiency

Inflation ______ the variability of relative prices and ______ allocative efficiency

increases; decreases

Variable inflation hurts both debtors and creditors because:

most debtors and creditors are risk averse

The general demand function for real balances depends on the level of income and the:

nominal interest rate

The opportunity cost of holding money is the:

nominal interest rate

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the:

real interest rate is constant

In the classical model, according to the quantity theory and the Fisher equation, an increase in money growth increases:

the nominal interest rate

If the demand for money depends on the nominal interest rate, then via the quantity theory and the Fisher equation, the price level depends on:

both the current and expected future money supply

One possible benefit of moderate inflation is:

better functioning labor markets

In the case of an unanticipated inflation:

creditors with an unindexed contract are hurt because they get less than they expected in real terms

According to the Fisher effect, the nominal interest rate moves one-for-one with changes in the:

expected inflation rate

The ex ante real interest rate is equal to the nominal interest rate:

minus the expected inflation rate

6. If the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and ______ the price level.

decrease; increase

The costs of reprinting catalogs and price lists because of inflation are called: A) menu costs. B) shoeleather costs. C) variable yardstick costs. D) fixed costs

A) menu costs

The inconvenience associated with reducing money holdings to avoid the inflation tax is called: A) menu costs. B) shoeleather costs. C) variable yardstick costs. D) fixed costs.

B) shoeleather costs

Survey evidence indicates that economists worry ______ the general public does about prices increasing more rapidly than their incomes.

less than

According to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices ______ each year and give workers ______ raises.

less; smaller

The costs of unexpected inflation, but not of expected inflation, are:

the arbitrary redistribution of wealth between debtors and creditors

If the nominal interest increases, then:

the demand for money decreases

A variable rate of inflation is undesirable because:

variable inflation leads to greater uncertainty and risk than under constant inflation

The real return on holding money is:

minus the inflation rate

According to the quantity theory and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase:

3 percent

According to the quantity theory a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation a 5 percent increase in the rate of inflation increases the nominal interest rate by _____.

5;5

All of the following are costs of fully expected inflation except that expected inflation: A) causes lower real wages. B) leads to shoeleather costs. C) increases menu costs. D) leads to taxing of nominal capital gains that are not real.

A) causes lower real wages

According to the classical theory of money, inflation does not make workers poorer because wages increase:

in proportion to the increase in the overall price level