Macro Econ Chapter 12

Select the correct definition of inflation.

A general and ongoing rise in the average level of prices in an economy

What is a real price?

A real price refers to a price that has been adjusted to account for inflation

What is the neutrality of money with respect to the quantity theory of money?

All of the above

What is inflation? Which of the examples provides the best evidence that inflation has occurred?

An increase in the overall price level A person whose salary has increased is able to purchase fewer goods and services

What does the term money neutrality mean? If money is neutral, what does this imply about the use of monetary policy?

Changes in the money supply have no real effects on the economy in the long run Monetary policy is more effective in the short term than the long term

There is a persistent fear that there will be a high level of deflation. Many economists warn that it may be worse for the economy than if there is high inflation. Suppose that Herb is in debt and has to pay a 4.50% nominal interest rate. He expected inflation to be 2.50%. Instead, inflation is −3.00% (deflation). What is the real interest rate that Herb expected to pay? Round your answer to two decimal places. What is the real interest rate that Herb is actually paying? Round your answer to two decimal places. Because the economy is experiencing deflation of −3.00% instead of inflation of 2.50%, Herb's real interest rate, compared to what he expected to pay, has.....

Expected real = nominal - expected inflation 4.50 - 2.50 = 2.00 Actual real = nominal - actual inflation 4.50 - (-3.00) 4.50 + 3.00 = 7.50 Increased, so Herb feels poorer

The people described spent their money during different time periods. Label each of their scenarios as to whether they bought their goods during a time of inflation, deflation, or price stability. Peter is a compulsive gamer. He decides to buy World of Warcraft, all of its expansions, Starcraft 2, a PS3, a Wii, and an Xbox 360, since prices in general have been rising at an alarming rate. Melissa decides to start her own personal library by amassing a private collection of books and magazines about world religions, cooking, comics, and economics. As she reads an issue of The Economist, she discovers that overall price levels have changed only 0.01% in the past two years, and decides it does not matter whether she starts the project now or later. Linda postpones her wedding even though most food prices and most service prices were dropping this year, which would help keep the cost of the wedding down. Out of these individuals, whose money gained the most value during their time period?

Inflation Price Stability Deflation Linda's money gained the most value

The Fisher Effect equation can be used to determine the real interest rate. Use this equation to determine the answer to the question. If the nominal interest rate is 0.120, and the inflation rate is 0.005, what is the real interest rate?

Real interest = nominal - inflation .120 - .005 = .115

You are considering purchasing a car, and you are offered a loan with a nominal interest rate of 7%. Assume inflation is expected to average 3% over the life of the loan. What is the real interest rate?

Real interest = nominal - inflation 7 - 3 = 4

Refer to the hypothetical data in the table to answer the three questions. Year; Nominal interest rate; real interest rate; inflation rate 2017 - 3% , ? , 3% 2018 - 1% , 3% , ? 2019 - ? , 7% , 9% What was the real interest rate in 2017? What was the inflation rate in 2018? What was the nominal interest rate in 2019?

Real interest = nominal - inflation 3 - 3 = 0 Inflation = nominal - real 1 - 3 = -2 Nominal interest = real interest + inflation 7 + 9 = 16

In a macroeconomic context, choose the best definition for the term velocity.

The rate at which money circulates through an economy

Find the velocity of money when 𝑀=$722, 𝑃=109, and 𝑌R=$43. M is the money supply, v is the velocity of money, P is the price level, and YR is the real gross domestic product (GDP). Round your answer to 2 decimal places.

V = PY / M (109)(43) / 722 4,687 / 722 6.49

Determine if the people in the example have benefited (i.e., are winners) or have been harmed (i.e., are losers) by unexpected inflation.

Winners - Joy, who borrowed $40,000 to pay for her college education The United States federal government, which has almost $15 trillion in debt in 2011 Losers - Herb, who keeps his savings in an old coffee can Third National, a bank that loaned many people money for home purchases Karen, a retired school teacher who relies upon her fixed pension to pay for her expenses

Suppose you are considering putting your savings in an investment fund. Scenario A projects stable prices, and therefore, low returns. Scenario B involves high inflation and, consequently, high returns. In both cases, the capital earnings tax rate is 26.0%. Scenario; Inflation; Nominal rate of return Calculate the nominal and real after-tax returns for both scenarios. Please include at least two numbers after the decimal point for your answers. Do not round your answers. In Scenario A, what is the nominal after-tax rate of return? In Scenario A, what is the real after-tax rate of return? In Scenario B, what is the nominal after-tax rate of return? In Scenario B, what is the real after-tax rate of return?

nominal after tax rate of return = nominal rate of return * (1- capital earnings) Real after tax rate of return = nominal after tax rate of return - inflation 6 * (1 - 0.26) = 4.44 4.44 - 2.5 = 1.94 18.50 * (1 - 0.26) = 13.69 13.69 - 15 = -1.31