Chapter 34 - Inflation, Deflation and Macro Policy
Under what conditions would lenders not lose out in inflation?
If the interest rate were indexed to inflation. If the lender was able to adjust the interest rate periodically.
What does the quantity theory predict will happen to inflation if the money supply falls 6 percent?
Inflation will fall correct by 6 correct percent.
If people's expectations of inflation didn't change, would the economy move from a short-run to a long-run Phillips curve?
No
Inflation has
both benefits and costs
According to the quantity theory of money, inflation is attributable to increases in:
the money supply in excess of increases in real GDP.
A reason why the quantity theory of money is problematic is that:
the velocity of money has fluctuated over time.
Why do lenders tend to lose out in an unexpected inflation?
Because the money that is repaid to lenders is worth less.
If you base your expectations of inflation on what has happened in the past, what kind of expectations are you demonstrating?
Extrapolative expectations. Adaptive expectations.
Inflation, on average, makes people neither richer nor poorer. Therefore it has no cost. True or false? Explain.
False, because prices no longer carry as useful information and there are redistributional effects.
What are two reasons why the quantity theory of money is problematic?
The relationship between the money supply and inflation does not always hold. The velocity of money is not constant.
What three assumptions turn the equation of exchange into the quantity theory of money?
Velocity is constant. Real income is independent of the money supply. The direction of causation is from money to prices.
What are the distributional effects of asset inflation caused by an increase in the money supply?
Wealth is distributed from more cautious to less cautious individuals.
When inflation is unexpected it tends to hurt
people who save money in financial institutions
A cost of inflation is that it:
reduces the informational content of prices.