mylab macro study plan 14.5
The quantity theory of money is better able
to explain the inflation rate in the long run.
During the German hyperinflation of the 1920s, many households and firms in Germany were hurt economically; however, people with debt actually benefited some from the hyperinflation.
true
Why would deflation cause "shoppers to hold back," and what does Evans-Pritchard mean when he says, "Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop"?
Consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further.
________ is caused by central banks increasing the money supply at a rate far in excess of the growth rate of real GDP.
Hyperinflation
If Irving Fisher was correct in his prediction about the value of velocity, then the quantity equation can be written to solve for the inflation rate as follows:
Inflation rate = Growth rate of the money supply - Growth rate of real output.
Very high rates of inflation are called
hyperinflation.
There is a strong link between changes in the money supply and inflation
in the long run.
What is price deflation?
A fall in the price level.
Governments sometimes allow hyperinflation to occur because
when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation.
Suppose that velocity is 3 and the money supply is $600 million. According to the quantity theory of money, nominal output equals
$1.8 billion
What is meant by Professor Spencer's statement "This printing of money 'will keep the [deflation] wolf from the door'"?
An increase in the money supply that exceeds the rate of growth of GDP will increase the price level.
During the Civil War, the Confederate States of America printed lots of its own currency—Confederate dollars—to fund the war. By the end of the war, nearly 1.5 billion paper dollars had been printed by the Confederate government. How would such a large quantity of Confederate dollars have affected the value of the Confederate currency?
It would have generated high inflation and therefore decreased the value of the Confederate currency.
How does the quantity theory provide an explanation about the cause of inflation?
The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.
Velocity is defined as
V = (P × Y)/M
An article in the Wall Street Journal in 2017 about Venezuela notes that: "The economy has shrunk by an estimated 27% since 2013. The International Monetary Fund says inflation this year will hit 720%." Are these facts related? Briefly explain.
Yes, high inflation diminishes the ability of the Venezuelan currency to function as money, leading to lower output growth.
According to the quantity theory of money, if velocity does not change, when the money supply of a country increases, what will occur?
nominal GDP will increase
During the years from 2010 to 2016, the average annual growth rate of M1 was 10.3 percent, while the inflation rate as measured by the GDP deflator averaged 1.6 percent. These values are
not included in the quantity equation.
