Econ Chapter 17
Suppose monetary neutrality holds and velocity is constant. A 5 percent increase in the money supply
increases the price level by 5 percent.
According to monetary neutrality and the Fisher effect, an increase in the money supply growth rate eventually increases
inflation and nominal interest rates, but does not change real interest rates.
The real interest rate is 8 percent and the nominal interest rate is 10.5 percent. Is there inflation or deflation? What is the inflation or deflation rate?
inflation; 2.5 percent.
When the money market is drawn with the value of money on the vertical axis, the price level increases if
money demand shifts left and decreases if money supply shifts left.
Economic variables whose values are measured in monetary units are called
nominal variables.
Economic variables whose values are measured in goods are called
real variables.
People can reduce the inflation tax by
reducing cash holdings.
The Fisher effect
says there is a one adjustment of the nominal interest rate to the inflation rate.
When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve sells bonds, then the money supply curve
shifts left, causing the price level to fall.
The price level falls. This might be because the Federal Reserve
sold bonds which reduced the money supply.
Menu costs refers to
the cost of more frequent price changes induced by higher inflation
Nominal GDP measures
the dollar value of the economy's output of final goods and services.
Consider the money market drawn with the value of money on the vertical axis. If money demand is unchanged and the price level rises, then
the money supply must have increased, perhaps because the Fed bought bonds.
What quantity is measured along the horizontal axis? (Refer to Figure 30-2)
the quantity of money
What quantity is measured along the vertical axis? (Refer to Figure 30-3)
the value of money.
The shoe leather cost of inflation refers to
the waste of resources used to maintain lower money holdings.
The term "hyperinflation" refers to
a period of very high inflation
Deflation
decreases income and reduces the ability of debtors to pay off their debts.
When prices are falling, economists say that there is
deflation.
When the money market is drawn with the value of money on the vertical axis, if money demand shifts leftward, then initially there is an
excess supply of money which causes the price level to rise.
Suppose an economy produces only ice cream cones. If the price level rises, the value of currency
falls, because one unit of currency buys fewer ice cream cones.
If the Fed increases the money supply, then 1/P
falls, so the value of money falls.
If the relevant money-demand curve is the one labeled MD1, then the equilibrium value of money is (Refer to Figure 30-2)
0.5 and the equilibrium price level is 2.
The nominal interest rate is 3 percent and the inflation rate is 2 percent. What is the real interest rate?
1 percent.
The nominal interest rate is 3.5 percent and the inflation rate is 2 percent. What is the real interest rate?
1.5 percent.
If P denotes the price of goods and services measured in terms of money, then
1/P represents the value of money measured in terms of goods and services.
Suppose the relevant money-demand curve is the one labeled MD1; also suppose the economy's real GDP is 30,000 for the year. If the money market is in equilibrium, then how many times per year is the typical dollar bill used to pay for a newly produced good or service? (Refer to Figure 30-2)
12.
If the relevant money-supply curve is the one labeled MS1, then the equilibrium price level is (Refer to Figure 30-3)
2 and the equilibrium value of money is 0.5.
If the price level increased from 120 to 150, then what was the inflation rate?
25 percent.
The nominal interest rate is 4.5 percent and the inflation rate is 0.9 percent. What is the real interest rate?
3.6 percent.
The nominal interest rate is 6 percent and the inflation rate is 2 percent. What is the real interest rate?
4 percent.
The nominal interest rate is 5 percent and there is a deflation rate of 2 percent. What is the real interest rate?
7 percent.
Suppose the relevant money-demand curve is the one labeled MD1; also suppose the velocity of money is 3. If the money market is in equilibrium, then the economy's real GDP amounts to (Refer to Figure 30-2)
7,500.
The classical theory of inflation
All of the above are correct
Open-market purchases by the Fed make the money supply
increase, which makes the value of money decrease.
The inflation tax
is a tax on everyone who holds money.