Ch. 8

If the price level in year 1 was equal to 100 and the price level in year 2 was equal to 1,000, in year 2 the country is experiencing:

hyperinflation ages 206-207. The inflation rate is measured with the annual percentage change in the price level . In this case, the inflation rate is 900%. An episode of extremely high inflation is known as hyperinflation.

The monetary base contains elements that are more liquid than M2.

true Page 210. The broader measures of the money supply (M2 is broader than the monetary base) contain accounts that are less liquid. Thus, the monetary base is more liquid.

Which of the following will have a real effect on the United States economy?

Page 215-216. Changes in the money supply will have no real effect on the economy unless the relative price of goods is changed. None of the three changes alter relative prices.

the quantity theory of money says that a doubling of the growth rate in the money supply will, in the long run, lead to

a doubling of inflation. Page 213. In the long run, changes in the growth rate of money will lead to a one-for-one change in the inflation rate.

If real GDP is growing at a rate of 2 percent, the central bank should grow the money supply at a rate of 2 percent to keep prices unchanged.

true Page 213. Prices are stable if the inflation rate is 0 percent and this occurs when the growth rate in the money supply is equal to the growth rate of real output.

Suppose the government decides to spend $500 million on infrastructure improvement projects. Part of the financing will be from additional borrowing in the amount of $200 million. An increase in taxes will bring an extra $200 million. If the government decides to print new money to finance the rest, how much will the seignorage be?

$100 million Page 221. Apply equation 8.7, where G = $500 million, T = $200 million, = ΔB = $200 million and is the unknown variable. Solving from yields = $100 million.

Suppose that nominal GDP is $5,000 and the velocity of money is equal to 5. According to the quantity theory of money, what is the amount of money in circulation?

$1000 Page 211. Apply equation 8.1, where Mt is the unknown variable, Vt = 5, and PtYt = $5,000. Solving for Mt yields Mt = $1,000.

Which of the following people benefits from a surprise increase in inflation?

A person who borrowed large amounts of money on a fixed payment schedule Pages 218-219. Borrowers with fixed interest rate loans are winners because they can repay their debts using the newer and cheaper dollars.

According to the quantity theory of money, increases in the money supply and in real GDP will cause inflation.

false Page 212-213. After solving the quantity theory of money model, we realize that increases in the money supply and decreases in real GDP will cause inflation.

Empirically, money is neutral in the short run as well as the long run.

false Page 215-216. The neutrality of money fails in the short run, because nominal prices do not respond immediately to changes in the money supply.

Price differences over time are actually larger than the raw difference in prices between any two years, because inflation has eroded the value of the dollar over time.

false Pages 208-209. Because inflation has eroded the value of the dollar, price differences between a good purchased in 1950 and today are actually smaller than they seem after adjusting.

The inflation tax will affect an individual who holds all his assets in artwork.

false Pages 221-222. Holders of currency only pay the inflation tax. Because all prices in the economy are influenced by the inflation tax, the value of the artwork changes proportionately with all other prices.

A country experiencing a hyperinflation is likely to:

have another hyperinflation after the current problem is solved. Pages 223-224. Hyperinflations are usually a recurring phenomenon because it is difficult to end a hyperinflation. Fiscal stability is not easily restored and coordination problems not easily overcome.

A government is more likely to utilize the inflation tax if

it is running a budget deficit. lenders worry that the government will not pay back its debts. politicians will not raise taxes, because they cannot be reelected if they do. Pages 221-222. The inflation tax is likely to be used as a last resort. If deficits are high and additional borrowing and taxing are impossible, the inflation tax will be used to raise revenue.

The wholesale price of one pound of coffee was 8.25 cents in 1900 and $1.50 in 2015. If the CPI was 3.43 for 1900 and 100 for 2015, coffee was

less expensive in 2015 compared to 1900. Pages 208-209. We can find the equivalent 2015 value of the 1900 price using the equation: value in 1900* (CPI2015/CPI1900). Thus, the equivalent 2015 value of $0.0825 is $2.41, which makes coffee less expensive in 2015. FEEDBACK: Pages 208-209. We can find the equivalent 2015 value of the 1900 price using the equation: value in 1900*(CPI2015/CPI1900). Thus, the equivalent 2015 value of $0.0825 is $2.41, which makes coffee less expensive in 2015.

Under the classical dichotomy, which of the following does not determine real GDP in the long run?

the aggregate price level Pages 211-212. In the long run, real GDP is only determined by real considerations and not on variables, such as money or the aggregate price level.

The Great Inflation of the 1970s was partially caused by:

the inflation tax used to finance the Vietnam War. increases in oil prices. a money supply that was growing too quickly. Pages 225. Both "increases in oil prices" and "a money supply that was growing too quickly" are correct. Increase in oil prices spurred inflation while the Federal Reserve made mistakes in running a monetary policy that was too loose.

In the long run, the key determinant of the price level is

the money supply Pages 212-213. The price level is determined by the money supply, while the inflation rate is pinned down by the growth rate in the money supply.

If the real interest rate is 3 percent and the nominal interest rate is 1 percent then the economy is experiencing deflation according to the Fisher equation.

true Page 216. The inflation rate is equal to the nominal interest rate minus the real interest rate, which is negative in this example.