ECO Chapter 5
in the long run, according to the quantity theory of money and classical macroeconomic theory, if velocity is constant, then ________ determines real GDP and ________ determines nominal GDP
the productive capability of the economy; the money supply
the ex ante real interest rate is based on _______ inflation, while ex pose real interest rate is based on _______ inflation
expected; annual
your father tells you that when he was your age, he worked for only $4 an hour. he suggests that you are lucky to have a job that pays $9 an hour
inconvenience of a changing price level
the demand for real money balances is generally assumed to:
increase as real income increases
in the classical model, according to the quantity theory of money and the fisher equation, an increase in money growth increases:
the nominal interest rate
grandma buys an annuity for $100,000 from an insurance company, which promises to pay $10,000 a year for the rest of her life. After buying it, she is surprised that high inflation triples the price level over the next few years.
unexpected inflation
the inflation tax is paid
by all holders of money
according to the quantity theory of money and the fisher equation, if money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase:
5 percent
consider the money demand function that takes the form M|P = KY wehre m is the quanity of money, P is the price level, k is constant, and y is the real output. if the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average inflation in this economy?
7 percent
if nominal wages cannot be cut, then the ily way to reduce real wages is by:
adjustments via inflation
gita lives in an economy with an inflation rate of 10%. over the past year, she earned a return of $50,000 on her million dollar portfolio of stocks and bonds. because her tax rate is 20%, she paid $10,00 to the government
altered tax liability
if the demand for real money balances is proportional to real income, velocity will:
be constant
in the case of an unanticipated increase in inflation
creditors with an unindexed contract are hurt because they get less than they expected in real terms
if the money supply is held constant, then an increase in the nominal interest rate will _______ the demand for money and ________ the price level
decrease; increase
if inflation was 6 percent last year and a worker received a 4 percent nominal wage increase last year, then the worker's real wage
decreased 2 percent
inflation _______ the variability of relative prices and ______ the efficiency of the allocation of resources
increases; decreases
a small country might want to use the money of a large country rather than print its own money if the small country
is likely to be unstable, whereas the large country is likely to be stable
the classical ditchotomy
is said to hold when the values to real variables can be determined without any reference to nominal variables or the existence of money
according to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices _______ each year and give workers _______ raises
less; smaller
because inflation has risen, a clothing company decides to issue a new catalog monthly instead of quarterly
menu costs
the characteristic of the classical model that the money supply does not affect real variables is called
monetary neutrality
hyperinflations ultimately are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is frequently a government's
need to generate revenue to pay for spending
Maria lives in an economy with hyperinflation. each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value
shoeleather costs
Given that M | P = KY, when demand for money parameter, k, is large the velocity of money is _______, and money is changing hands ________.
small; infrequently
if the nominal interest rate increases, then:
the demand for money decreases
