macroeconomics ch. 30

When prices are falling, economists say that there is

deflation

The classical dichotomy refers to the idea that the supply of money

determines nominal variables, but not real variables

The principle of monetary neutrality implies that an increase in the money supply will

increase the price level, but not real GDP

The price level is a

nominal variable

Inflation can be measured by the

percentage change in the consumer price index

Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, then there is an excess Figure 30-2. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes.

supply of money that is represented by the distance between points A and B

The velocity of money is

the average number of times per year a dollar is spent

The Fisher effect says that

the nominal interest rate adjusts one for one with the inflation rate

Refer to Figure 30-2. What quantity is measured along the horizontal axis?

the quantity of money

Refer to Figure 30-3. What quantity is measured along the vertical axis?

the value of money

The nominal interest rate is 6 percent and the inflation rate is 3 percent. What is the real interest rate?

3 percent

The nominal interest rate is 6 percent and the real interest rate is 2.5 percent. What is the inflation rate?

3.5 percent

If M = 2,000, P = 2.25, and Y= 6,000, what is velocity?

6.75

If the price level increased from 120 to 130, then what was the inflation rate?

8.3 percent

The classical theory of inflation

All of the above are correct

The inflation tax

All of the above are correct

Which of the following would decrease the value of money?

Money demand exceeds money supply

The term hyperinflation refers to

a period of very high inflation

The quantity theory of money

can explain both moderate inflation and hyperinflation