Hw. Ch. 12

In a small economy, the quantity of money circulating in the economy is $2.5 million. Real GDP for the current year is $5 million, and the price level is 2. What is the velocity of money?

4

Why could very high rates of inflation cause velocity to increase?

People try to spend their money before it loses too much value.

Inflation generally causes the taxes paid by individuals and business firms to

increase

According to the quantity theory of money, an increase in the money supply causes an increase in

prices

What two components of the quantity theory of money are assumed to be stable?

real GDP and the velocity of money

For a given nominal interest rate, an increase in the inflation rate will cause real interest rates to

decrease

In a small economy, the money supply is $400,000, and the velocity of money is 3. The current price level in the economy is 1. What is the level of real GDP in this economy?

$1.2 million

In a small economy, the rate of money growth for the current year is 2 percent. Velocity of money circulation is stable. Inflation is expected to be about 1.5 percent over the current year. What is the short run economic growth rate?

0.5 percent

Table: Consumer Price Index Year CPI Value 2005 195.3 2006 201.6 2007 207.3 2008 215.3 2009 214.5 2010 218.1 Reference: Ref 12-1 (Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. What was the approximate inflation rate over the period 2009 to 2010?

1.68 percent

If a price index increased from 400 to 440 over the course of a year, then the inflation rate is

10 percent.

Table: Polish Inflation Year Inflation Rate (Annual Percent Change) 1985 15.1% 1990 585.8% 1999 7.3% 2002 1.9% 2003 0.8% Source: International Monetary Fund (www.imf.org) Reference: Ref 12-2 (Table: Polish Inflation) This table shows actual inflation data for different periods of Polish history. Which year can you identify as hyperinflationary?

1990

Table: Anticipating Inflation Year Predicted Inflation Rate Actual Inflation Rate 2000 3% 3% 2001 3% 2% 2002 7% 9% 2003 5% 4% 2004 4% 7% Reference: Ref 12-4 (Table: Anticipating Inflation) Using the inflation data in the table above, assume that all loan contracts had fixed nominal interest rates of 10 percent and matured after one year. In which year did lenders receive exactly the amount of real interest they expected?

2000

Table: Anticipating Inflation Year Predicted Inflation Rate Actual Inflation Rate 2000 3% 3% 2001 3% 2% 2002 7% 9% 2003 5% 4% 2004 4% 7% Reference: Ref 12-4 (Table: Anticipating Inflation) Using the inflation data in the table above, assume that all loan contracts had fixed nominal interest rates of 10 percent and matured after one year. In which year given below did borrowers gain relative to lenders?

2002

Table: Consumer Price Index Year CPI Value 2005 195.3 2006 201.6 2007 207.3 2008 215.3 2009 214.5 2010 218.1 Reference: Ref 12-1 (Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. What was the approximate inflation rate over the period 2007 to 2008?

3.85 percent

Which index measures price increases that typical American consumers face when shopping?

CPI

Which answer best explains why prices of some popular goods have fallen over time?

Certain technological advances have offset scarcity.

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

Commodity Consumption Indicator (CCI)

Which of the following is an example of money illusion assuming that inflation is 5 percent?

You receive a 5 percent raise on your part-time job and start spending extra money on entertainment every weekend.

The argument that "money is neutral in the long run" means that an increase in the money supply can

increase real GDP only temporarily.

Debt monetization means that a government pays off its debt by

increasing the money supply.

What do we call an increase in the average level of prices in an economy?

inflation

Hyperinflation refers to the case in which inflation

is extremely high.

In the long run, money

is neutral.

A major problem with inflation is that after it starts

it is difficult to stop without experiencing high unemployment.

The quantity theory of money describes the relationship between

money velocity, money, real output, and prices.

Money illusion occurs when people

see changes in nominal prices and mistake them for changes in real prices.

Which of the three price indexes measures the average price level of the largest total number of goods?

the GDP deflator

The actual real rate of return for lenders is equal to

the nominal rate of return minus the inflation rate.

What is the Fisher effect?

the tendency of nominal interest rates to rise with higher expected inflation rates

The average number of times a dollar is spent on final goods and services during a year is

the velocity of money.