Money, Inflation, Quantity Theory

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 percent

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

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 ratio of money supply to nominal GDP is exactly constant.

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.

The M2 money supply is defined to include​ ___________.

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

Seignorage is the​ ____________.

difference between the cost of printing paper money and the value of the goods and services that the government can purchase with the newly printed money.

growth rate of money supply is

equal to nominal GDP

inflation rate =

growth rate of money supply - growth rate of real GDP

The quantity equation states that the

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

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

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

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.

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 williing to hire workers, thus stimulating economic activity.

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

The growth rate of real GDP LESS THAN the growth rate of money supply.

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

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

growth rate of nominal GDP =

inflation + Growth rate of real GDP

The real wage is the​ ____________.

inflation-adjusted wage

Hyperinflation is most likely caused by​ ____________.

large budget deficits financed by printing more money