Chapter 16: The Dynamics of Inflation and Unemployment

The links the money supply, velocity, and the nominal GDP.

quantity equation

In the past 30 years there have been cases of hyperinflation.

several

Suppose that velocity is 3 and the money supply is $500 million. According to the quantity theory of money, nominal output equals:

$1.5 billion.

The equation of exchange is:

M x V = P x Q

The inverse relationship between unemployment and inflation is known as the;

Phillips curve

Nominal wages are wages expressed in dollars.

current

If the inflation rate is 6 percent and the nominal rate of interest is 4 percent, then the real interest rate is __________.

-2 percent

Hyperinflation exists when the inflation rate exceeds per month.

50%

Which of these is the most desirable measure to stop hyperinflation?

Eliminate the government deficit

Which of these predictions can be made using the growth rates associated with the quantity equation?

If the money supply grows at a faster rate than real GDP, there will be inflation.

Which of these statements about interest rates and inflation is true?

If there is zero inflation, the nominal interest rate is equal to the real interest rate.

The economist that is considered the founder of monetarism is __________.

Milton Friedman

maintains that the public forms reasonable accurate forecasts about inflation and economic activity.

The rational expectations theory

Velocity is defined as:

V = (P x Q) / M

In the short run, a policy of easy money leads to:

faster money growth, lower interest rates, and higher output

In the long run, the rate of inflation is determined by the __________.

growth of the money supply

According to rational expectations theory, any announced policy change will:

have no impact on output.

The stated rate of interest on a loan is the __________.

nominal interest rate

Economic variables that are calculated in current year prices are referred to as __________ variables, while variables that have been corrected to account for the effects of inflation are __________ variables.

nominal, real

A Phillips curve is a curve showing the __________.

short-run relationship between the unemployment rate and the inflation rate

If the Federal Reserve increases the money supply at 5% a year, in the long run there will be __________.

something less than 5% annual inflation