mylab macro study plan 14.5

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The quantity theory of money is better able

to explain the inflation rate in the long run.

During the German hyperinflation of the​ 1920s, many households and firms in Germany were hurt​ economically; however, people with debt actually benefited some from the hyperinflation.

true

Why would deflation cause​ "shoppers to hold​ back," and what does​ Evans-Pritchard mean when he​ says, "Once this psychology gains a​ grip, it can gradually set off a​ self-feeding spiral that is hard to​ stop"?

Consumers delay​ purchases, expecting prices to fall​ more, and the lack of demand causes prices to fall further.

​________ is caused by central banks increasing the money supply at a rate far in excess of the growth rate of real GDP.

Hyperinflation

If Irving Fisher was correct in his prediction about the value of​ velocity, then the quantity equation can be written to solve for the inflation rate as​ follows:

Inflation rate​ = Growth rate of the money supply - Growth rate of real output.

Very high rates of inflation are called

hyperinflation.

There is a strong link between changes in the money supply and inflation

in the long run.

What is price​ deflation?

A fall in the price level.

Governments sometimes allow hyperinflation to occur because

when governments want to spend more than they collect in​ taxes, central banks increase the money supply at a rate higher than GDP​ growth, often resulting in hyperinflation.

Suppose that velocity is 3 and the money supply is​ $600 million. According to the quantity theory of​ money, nominal output equals

$1.8 billion

What is meant by Professor​ Spencer's statement​ "This printing of money​ 'will keep the​ [deflation] wolf from the​ door'"?

An increase in the money supply that exceeds the rate of growth of GDP will increase the price level.

During the Civil​ War, the Confederate States of America printed lots of its own currency—Confederate dollars—to fund the war. By the end of the​ war, nearly 1.5 billion paper dollars had been printed by the Confederate government. How would such a large quantity of Confederate dollars have affected the value of the Confederate​ currency?

It would have generated high inflation and therefore decreased the value of the Confederate currency.

How does the quantity theory provide an explanation about the cause of ​ inflation?

The quantity equation shows that if the money supply grows at a faster rate than real​ GDP, then there will be inflation.

Velocity is defined as

V = (P × Y)/M

An article in the Wall Street Journal in 2017 about Venezuela notes​ that: "The economy has shrunk by an estimated ​27% since 2013. The International Monetary Fund says inflation this year will hit​ 720%." Are these facts​ related? Briefly explain.

Yes, high inflation diminishes the ability of the Venezuelan currency to function as​ money, leading to lower output growth.

According to the quantity theory of​ money, if velocity does not​ change, when the money supply of a country​ increases, what will​ occur?

nominal GDP will increase

During the years from 2010 to​ 2016, the average annual growth rate of M1 was 10.3​ percent, while the inflation rate as measured by the GDP deflator averaged 1.6 percent. These values are

not included in the quantity equation.


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