chap 11

Question 1

inflation

Answer 1

inc in price lvl, measured by CPI or GDP deflator

determined by growth of money supply

Question 2

quantity theory of money

Answer 2

the quantity of money available determines price lvl

growth rate determines inflation

Question 3

transactions and demand for money

Answer 3

ppl demand money to make transactions

quantity of money needed depends on avg price lvl

if price lvl up, more money is needed for a transaction, ppl hold onto their money

Question 4

money supply curve

Answer 4

fixed by boc, vertical line

Question 5

hyperinflation

Answer 5

inflation exceed 50%/month

Question 6

effects of monetary injection

Answer 6

when boc inc money supply, shift right

ppl have too much money
- inc demand for g/s
- dec demand for money

causes g/s price to inc, bcs productivity doesn’t change

dec value of money

Question 7

2 properties of quantity theory of money

Answer 7

1. variables are nominal or real
2. inflation is a monetary phenomenon

Question 8

real variables

Answer 8

measured in physical units

i.e. coconuts produced

Question 9

nominal variables

Answer 9

measured in monetary units

i.e. profit from coconuts

Question 10

monetary neutrality

Answer 10

proposes that real variables are not affected by changes in money supply

Question 11

classical dichotomy

Answer 11

separating variables into real or nominal

Question 12

velocity of money

Answer 12

rate at which money changes hands/number of times it’s used to buy g/s

Question 13

P

Answer 13

price lvl

Question 14

M

Answer 14

quantity of money

Question 15

V

Answer 15

velocity

Question 16

PY

Answer 16

nominal GDP

Question 17

Y

Answer 17

real GDP

Question 18

quantity equation

Answer 18

relates quantity of money, velocity, and dollar value of economy’s output of g/s

Question 19

inflation tax

Answer 19

revenue gov raises by creating money

gov uses it to pay for their spendings

Question 20

fisher effect

Answer 20

adjustment of nominal interest rate direction to inflation rate

nominal IR adjusts so real IR is not affected (bcs of money neutrality)

Question 21

inflation fallacy

Answer 21

when price inc, purchasing power dec

sellers gain more

inflation reduces purchasing power

Question 22

shoeleather costs

Answer 22

resources wasted when inflation makes ppl dec money holdings

greater cost of holding money bcs of inc infaltion rate and IRs

Question 23

menu costs

Answer 23

costs of changing prices i.e. reprinting menus

Question 24

relative price variability and misallocation of resources

Answer 24

inflation causes relative prices to vary more, harder to make economic decisions

need relative prices to allocate scarce resources

Question 25

inflation-induced tax distortion

Answer 25

inflation produces inc income tax rate

Question 26

confusion and inconvenience

Answer 26

inflation erodes real value of money

Question 27

arbitrary redistribution of wealth

Answer 27

unexpected inflation redistributes wealth when unneeded

cannot predict inflation rate
- purchasing power to borrowers if rate is higher
- pp to savers if lower than expected

Question 28

deflation may be worse

Answer 28

deflation usually comes as a surprise

redistributes wealth from borrowers to savers