ECON 300 Ch 7 HW

Hyperinflations occur because​ of:

a rapidly increasing growth rate of the money​ supply, often due to persistent budget deficits.

Over the long run and across​ countries, there is evidence of​ ________ between the growth rate of the money supply and the inflation rate.

a strong link

Reserves are a bank​ ________ consisting of​ ________.

asset; vault cash plus bank deposits with the Federal Reserve

The quantity equation states that the

money supply times the velocity of money equals the price level times real GDP.

Seigniorage is also known as the inflation tax because it

reduces the purchasing power of money

In​ 1864, the Confederate government attempted to reduce inflation by reducing the money supply by approximately​ one-third. The Confederacy forced paper currency to be converted into bonds by a specific date​ (or converted at a penalty after that​ date). What do you expect that the immediate effect of this policy would​ be?

should be to further fuel inflation by increasing the incentive to spend money before the date at which it must be converted.

Seigniorage is

the​ government's profit from issuing fiat money.

If the money supply grows at​ 6% and the inflation rate is​ 2%, the quantity theory predicts that the change in real GDP will be

​4%.

According to the quantity theory of​ money, if the money supply grows at​ 25% and the inflation rate is​ 20%, the growth in real GDP is

​5%.

Of the three actions that can decrease the money​ multiplier, the one most responsible for the drop in value of the money multiplier during the financial crisis of 2007-2009 was the increase in

​banks' ratio of excess​ reserves-to-deposits.

If the excess reserves−to−deposit ratio decreases and the monetary base is​ unchanged, the value of the money multiplier will​ ________ and the value of the money supply will​ ________

​increase; increase

Hyperinflation occurs when the inflation rate rises above ______ per month.

50%

What three actions by households and​ firms, banks, or the Federal Reserve will cause the value of the money multiplier to increase​?

A decrease by households and firms in their holdings of currency relative to their holdings of checking account​deposits; a decrease in​banks' ratio of excess​reserves-to-deposits; and a decrease in the​Fed-mandated required reserve ratio.

As of​ mid-2012, banks continued to hold large amounts of excess​ reserves, leading to concern that potential increases in lending activity could increase the money supply and the inflation rate.

A reduction in excess​ reserves, ceteris paribus​, would increase the money multiplier, leading to an increase in the money supply

What effect do these things have on economic​ growth?

A reduction in investment reduces the capital​ stock, which reduces both current output and future growth.

What is the value of a Unit of account

A way of measuring value in an economy in terms of money.

Five characteristics are specified for an asset to be used as a medium of exchange. Select those from the following list that are not among these five characteristics. A. Convertible, so that it is redeemable for a precious metal. B. Acceptable to most people. C. Non-reproducible, so that counterfeiting is impossible. D. Standardized, so that any two units are identical. E. Divisible, because prices of goods and services vary.

A. Convertible, so that it is redeemable for a precious metal. C. Non-reproducible, so that counterfeiting is impossible.

The idea of​ shoe-leather costs is that people wear out their shoes going back and forth to the bank. While people are unlikely to actually wear out their shoes in this​ way, which of the following is an example of costs that you might incur by trying to reduce the costs to you of​ inflation?

All of the above.

What is the function of the Standard of deferred payment

An asset that facilitates transactions over time.

What three actions by households and​ firms, banks, or the Federal Reserve will cause the value of the money multiplier to decrease​?

An increase by households and firms in their holdings of currency relative to their holdings of checking account​ deposits; an increase in​ banks' ratio of excess ​reserves-to-deposits; and an increase in the​ Fed-mandated required reserve ratio.

Even when it is​ expected, inflation can be costly to an economy because it ​(Check all that apply​.) A. redistributes income from lenders to borrowers. B. enables government to profit from issuing fiat money at the expense of the holders of money. C. produces tax distortions that may reduce the level of saving and investment in the economy. D. induces households and firms to hold less​ money, thereby necessitating more frequent trips to the bank. E. generates menu costs that can distort relative prices and thus impair the efficiency of markets.

B. enables government to profit from issuing fiat money at the expense of the holders of money. C. produces tax distortions that may reduce the level of saving and investment in the economy. D. induces households and firms to hold less​ money, thereby necessitating more frequent trips to the bank. E. generates menu costs that can distort relative prices and thus impair the efficiency of markets.

Which of the following best explains why the monetary base is often called​ "high-powered money"?

Because an increase in the monetary base can result in a much larger increase in the money supply.

Why does hyperinflation cause misallocation of​ resources?

Because it distorts relative prices.

Why does hyperinflation reduce saving and​ investment?

Because the future value of​ savers' money will be so much less than the current value.

The two types of assets that have the five characteristics specified for an asset to be used as a medium of exchange are

Commodity money and fiat money.

The government of Zimbabwe authorized many stores to make transactions in foreign currencies. What difficulties would this cause stores and​ consumers? A. If wages are paid in Zimbabwean​ dollars, consumers would have to convert their wages into other currencies. B. Stores would have to be familiar with the exchange rates between the Zimbabwean dollar and other currencies. C. Stores would have to reprice their goods in terms of other currencies. D. All of the above.

D. All of the above.

Explain under what circumstances lenders gain and borrowers lose if the actual inflation rate differs from the expected inflation rate.

Lenders gain and borrowers lose when expected inflation exceeds actual inflation.

Explain under what circumstances lenders lose and borrowers gain if the actual inflation rate differs from the expected inflation rate.

Lenders lose and borrowers gain when actual inflation exceeds expected inflation.

The Federal Reserve publishes data on the M2 money supply even though​ currency, checking account​ deposits, and​ traveler's checks, which are the most liquid of​ assets, are already measured in M1. The Fed does this because

M2 is a broader measure of the money supply and therefore may convey additional information about economic activity that is not embodied in M1.

Explain how the rapid increase in the money supply combined with wartime scarcity of goods would cause prices to escalate.

More money​ "chases" fewer or the same number of​ goods, which causes prices to rise.

What is the function of a Medium of exchange

Something that is generally accepted as payment for goods and services.

What is the function of a Store of value

The accumulation of wealth by holding dollars or other assets that can be used to buy goods and services in the future.

​"It is a waste of resources to print Zimbabwe dollar notes now. Who accepts a currency that loses value by almost 100 percent​ daily?" Why would printing notes be a waste of​ resources?

The value of​ paper, ink, and printing time might be greater than the value of the note.

Suppose that the inflation rate turns out to be higher than expected. For investors who bought bonds issued when the inflation rate was expected to be lower​, this news is

bad since the real return on their investment will be lower than they anticipated.

Most economists agree that the Federal Reserve determines the inflation rate in the long run since most

believe that the quantity theory of money accurately predicts changes in the inflation rate in the long run.

The quantity​ theory's predictions of inflation are

considerably better over the long run than they are over short periods.

If the required reserve ratio increases and the monetary base is​ unchanged, the value of the money multiplier will​ ________ and the value of the money supply will​ ________

decline; decline

The money supply will decrease if

either the monetary base or the money multiplier decreases in value.

According to the Fisher​ effect, the nominal interest rate will decrease by 1​% if the

expected inflation rate decreases by 1​%.

According to the Fisher​ effect, the nominal interest rate will increase by 2​% if the

expected inflation rate increases by 2​%.

According to the Fisher​ effect, the nominal interest rate will decrease by 3​% if the

expected inflation rate decreases by 3%

According to the Fisher​ effect, the nominal interest rate will decrease by 5​% if the

expected inflation rate decreases by 5​%.

Suppose that the inflation rate turns out to be lower than expected. For investors who bought bonds issued when the inflation rate was expected to be higher​, this news is

good since the real return on their investment will be higher than they anticipated.

The purchase of Treasury securities by the Federal Reserve​ will, in​ general,

increase the quantity of reserves held by banks.

In the long​ run, an increase in the growth rate of the money supply causes the inflation rate to​ ________, which then causes the nominal interest rate to​ ________.

increase; increase

A government may risk experiencing hyperinflation by printing money rather than issuing bonds to finance a large budget deficit because

investors refuse to buy the​ government's bonds on the belief that they will never be paid back.