money, inflation & quantity theory

Money functions as a medium of exchange when you​ ___________.

buy jeans at the mall.

The M2 money supply is defined to include​ ___________.

currency in circulation, checking accounts, savings accounts, traverlers' checks, and money market accounts

According to the quantity theory of​ money, ____________.

in the long run, the growth in the money supply is directly related to the inflation rate

This implies that if the money supply grows by 10​ percent, then nominal GDP needs to grow by

10%

Using the quantity​ equation, if the velocity of money grows at 5​ percent, the money supply grows at 10​ percent, and real GDP grows at 4​ percent, then the inflation rate will be

11%

According to the quantity theory of​ money, what must the growth rate of the money supply be given the following​ information? The growth rate of real GDP is 2.3​%. The growth rate of nominal GDP is 5.1​%. The nominal interest rate is 4.0​%. The real interest rate is 1.2​%. The money supply​ (M2) is ​$10,612 ​(in billions) According to the quantity theory of​ money, the growth rate of the money supply must be

4.0 - 1.2 = 2.8 2.8 + 2.3 = 5.1%

According to the quantity theory of​ money, what is the inflation​ rate? Use the information given above and calculate the inflation rate. According to the quantity theory of​ money, the inflation rate is

4.0 - 1.2 = 2.8%

According to the quantity theory of​ money, inflation is caused by

the money supply growing faster than real GDP

Recall the discussion in the chapter about the​ "quantity theory of​ money." The quantity theory of money assumes that​ ____________.

the ration of money supply to nominal GDP is exactly constant

What are the functions of money in a modern​ economy? ​(Check all that apply​.)

unit of account, store of value, medium of exchange

Are the predictions of the quantity theory of money borne out by historical​ data?

yes, the long-run data show a one-for-one growth rate of money supply and inflation

Barter is a method of exchange whereby goods or services are traded directly for other goods or services without the use of money or any other medium of exchange. Suppose you need to get your house painted. You register with a barter Web site and want to offer your car cleaning services to someone who will paint your house in return. What are the problems you are likely to​ encounter? ​(Check all that apply​.)

It might be difficult to agree on how many car washes is equivalent to painting a house.; It may take a lot of time to negotiate and finally settle on a deal that you both find fair.; You might find it difficult to find someone who needs you to wash his car and is willing to paint your house in return.

What is the significance of the real wage as it relates to​ inflation?

Since an increase in inflation reduces the real wage that firms must​ pay, firms are more willing to hire​ workers, thus stimulating economic activity.

how does fiat money differ from commodities like gold and silver that were used as money?

fiat money is intrinsically worthless, whereas gold and silver have intrinsic value

If fiat money is intrinsically​ worthless, then why is it​ valuable?

fiat money is used as legal tender by government decree and other people will accept it as payment for transactions

The real wage is the​ ____________.

inflation-adjusted wage

The quantity equation states that the

money supply times the velocity of money equals the price level times real output.

Imagine that the chairperson of the Federal Reserve announced​ that, as of the following​ day, all currency in circulation in the United States would be worth 10 times its face denomination. For​ example, a​ $10 bill would be worth​ $100; a​ $100 bill would be worth​ $1,000, etc.​ Furthermore, the balance in all checking and savings accounts is to be multiplied by 10 as will the balance of all outstanding debts.​ So, if you have​ $500 in your checking​ account, as of the following​ day, your balance would be​ $5,000, etc. Would you actually be 10 times better off on the day the announcement took​ effect?

no, because all prices would increase by a factor of 10 as well, keeping the real value of your money constant

Which of the following equations is the equation for velocity in the quantity theory of​ money?

nominal GDP / money supply

If the growth rate of money supply is larger than the growth rate of real​ GDP, the inflation rate is

positive

Fiat money is​ ____________.

something that is used as legal tender by government decree and is not backed by a physical commodity

t follows that the growth rate of money supply and the growth rate of nominal GDP will be the same. In this​ case, inflation is​ ____________.

the equal to the gap between the growth rate of money supply and the growth rate of real GDP

According to the quantity theory of​ money, the inflation rate is

the gap between the growth rate of money supply and the growth rate of real GDP

If the inflation rate is positive​, what must be​ true?

the growth rate of real GDP < the growth rate of money supply

Some barter Web sites allow the use of​ "barter dollars." The registration fee that you pay to a barter Web site gets converted into barter dollars that can be exchanged with other users to buy goods and services. Would the use of barter dollars resolve the problems you identified​ above?

​Yes, because you could both pay and be paid in​ "barter dollars."