Ch 7 - Money, inflation and welfare

Question 1

Neutrality is typically a _________ concept

Answer 1

Long term

Question 2

What is money neutrality?

Answer 2

In static equilibrium, all real variables (except real money supply) in the economy are independent of the quantity of nominal money and the price level is proportional to the quantity of money

Question 3

What is superneutrality?

Answer 3

The rate of growth of the quantity of money would also be neutral in the sense of affecting the rate of growth of the price level (inflation) but no real variables

Question 4

Why may superneutrality not hold even in a flexible price economy?

Answer 4

Expectations of the future growth rate of the quantity of money create expectations of inflation and expectations of inflation are not neutral

Question 5

What are nominal interest rates?

Answer 5

The money return an individual earns on an asset

Question 6

What are real interest rates?

Answer 6

Return to individuals on an investment in terms of the goods and services that can be purchased

Question 7

If everyone correctly forecasts the rate at which prices will rise over some period and acts on the basis of these expectations, inflation is said to be _________

Answer 7

Fully anticipated

Question 8

When inflation is fully anticipated, the ___________ is independent of the fully anticipated inflation rate

Answer 8

Real rate of interest

Question 9

There’s a ______ relationship between the real interest rate and output

Answer 9

Negative

Question 10

What is the Mundell Tobin effect?

Answer 10

Nominal interest rates would rise less than one-for-one with inflation because in response to inflation the public would hold less in money balances and more in other assets, which would drive interest rates down

Question 11

The opportunity cost to holding money balances is the _____

Answer 11

Nominal interest rate R

Question 12

What is meant by seignorage?

Answer 12

The ability of the government to acquire real resources at no cost through the process of money printing

Question 13

Seignorage is essentially a form of _______

Answer 13

Taxation

Question 14

How does the welfare cost of fully anticipated inflation arise?

Answer 14

Inflation raises the nominal interest rate, reducing the demand for real money balances and thus reducing the utility obtained from the use of money

Question 15

Welfare cost =

Answer 15

Loss of CS + loss of seignorage

Question 16

Efficiency of inflation tax =?

Answer 16

Change in DWL / Change in seignorage

Question 17

The _____ interest elastic the demand for money, the _________ efficient inflation tax is as a form of taxation

Answer 17

More, more

Question 18

What is hyperinflation?

Answer 18

A period of very rapid and rapidly accelerating inflation, leading to astronomical prices

Question 19

Hyperinflation is most often triggered due to _________

Answer 19

Political instability, where the gov is unable to finance its expenditure through money creation

Question 20

Very rapid but stable inflations can be explained in terms of a _______

Answer 20

Continuing but non-accelerating government deficit