Macroeconomics Chapter 12

Suppose the nominal interest rate is 4 percent and the inflation rate is 5 percent. The real interest rate is:

-1 percent

If a lender expects an inflation rate of 5 percent but the inflation rate unexpectedly increases to 7 percent and if the nominal interest rate was 10 percent, what is the real rate of interest earned?

3 percent

If a lender expects an inflation rate of 5 percent and asks for a nominal interest rate of 10 percent, then the lender expects to earn a real interest rate of:

5 percent.

If the average level of prices in an economy equals 100, the money supply equals $100,000, and the level of real output equals $5,000, then the velocity of money is:

5.

Between 1960 and 1990, Argentina's money supply grew at approximately 80 percent. According to the quantity theory of money, inflation rates in Argentina should have been approximately:

80 percent.

_ is a decrease in the average level of prices, whereas ______ is a reduction in the inflation rate.

Deflation; disinflation

The ratio of nominal GDP to real GDP multiplied by 100 is the:

GDP deflator

Suppose the nominal GDP of a country is $500 billion. If the velocity of money in the country is 10, then the country's money supply should equal

$50 billion.

The case of hyperinflation in Zimbabwe in the late 2000s was an example of the effects of:

the government monetizing its debt

In the equation Mv = PYR, M stands for:

the money supply

The Fisher equation implies that if expected inflation is higher than actual inflation, then:

the real interest rate will be greater than the equilibrium interest rate.

When computing the consumer price index, the Bureau of Labor Statistics takes into account changes in the:

type of goods and the quality of goods.

Fisher Effect

will rise with expected inflation

Inflation is an increase in the:

average level of prices.

The average price for a basket of goods bought by a typical U.S. consumer is measured by the:

consumer price index.

If the supply of loanable funds increases and the demand for loanable funds decreases at the same time, interest rates will

decrease

In times of financial panic, we expect the velocity of money to:

decrease

If you earned $10 an hour in 2005, when the CPI was 100, and earn $11 an hour today, when the CPI is 120, your real wage rate has ______ since 2005.

decreased 10 percent

When disinflation arises unexpectedly, the real interest rate will ______ the equilibrium rate, which will benefit ______.

exceed; lenders and harm borrowers

Which type of inflation is described as worrisome and costly?

high and volatile

Even moderate inflation typically:

increases the amount of taxes that people pay.

In the long run, the quantity theory of money says that the growth rate of the money supply will be approximately equal to the:

inflation rate.

The Supply Curve for savings indicates that the higher the interest rate, the

larger the quantity saved; Because the supply curve slopes up. That means that as the real interest rate rises, the quantity supplied of loans (which is the same as the quantity saved) increases.

Which of the following is NOT a price index used to measure inflation?

manufacturing price index

Nobel Prize-winning economist Milton Friedman says, "Inflation is always and everywhere a:

monetary phenomenon

When economists state that money is neutral, they mean that the:

money supply does not affect real GDP or unemployment.

The quantity theory states that money is neutral:

only in the long run but not in the short run.

As a result of the changing variety and quality of goods that the typical consumer purchases each year, many economists argue that the CPI might:

overstate inflation.

Monetizing the debt occurs when a government:

pays off its debts by printing money.

When inflation functions as a type of tax, which of the following groups of people will be taxed?

people who hold currency and coins in their wallet, purse, or at home

Negative real rates of interest tend to:

reduce economic growth.

High and volatile rates of inflation (even when expected) will typically: I. reduce real rates of return. II. decrease the number of long-term contracts. III. arbitrarily redistribute wealth.

II and III only

Inflation interferes with the price system in which costly way?

Inflation distorts price signals, making it difficult for consumers to tell if the price increase is due to scarcity or inflation, and react appropriately.

The quantity theory of money assumes that the velocity of money:

Is relatively stable

The quantity theory of money assumes that real GDP:

Is relatively stable.

Quantity Theory Of Money

MV = PY M= money supply V= velocity P= price level Yr=real GDP *both sides of the equation equal minimal GDP*