ECON #5

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is:

-4 percent.

In the case of an unanticipated inflation:

creditors with an unindexed contract are hurt because they get less than they expected in real terms.

If consumption depends positively on the level of real balances, and real balances depend negatively on the nominal interest rate in a neoclassical model, then:

a rise in money growth leads to a fall in consumption and a rise in investment.

One possible benefit of moderate inflation is:

better functioning labor markets.

Formula for Velocity

Velocity = Value of All Transactions / Money Supply

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the:

real interest rate is constant.

If velocity is constant and, in addition, the factors of production and the production function determine real GDP, then:

the price level is proportional to the money supply.

The demand for real money balances is generally assumed to:

increase as real income increases.

The classical dichotomy:

is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money.

To end a hyperinflation, a government trying to reduce its reliance on seigniorage would:

raise taxes and cut spending.

The inflation tax is paid:

by all holders of money.

The income velocity of money increases and the money demand parameter k ____ when people want to hold ____ money.

decreases; less

When a person purchases a 90-day Treasury bill, he or she cannot know the:

ex post real interest rate.

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

If the Fed announces that it will raise the money supply in the future but does not change the money supply today:

both the nominal interest rate and the current price level will increase.

The concept of monetary neutrality in the classical model means that an increase in the money supply will increase:

nominal interest rates.

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.

In the classical model, according to the quantity theory and the Fisher equation, an increase in money growth increases:

nominal interest rate.

The opportunity cost of holding money is the:

nominal interest rate.

The transactions velocity of money indicates the ____ in a given period, while the income velocity of money indicates the ___ in a given period.

number of times a dollar bill changes hands; number of times a dollar bill enters someone's income.

The rate of inflation is:

the percentage change in the level of prices.