Chapter 11 - MONEY GROWTH AND INFLATION Flashcards
The inflation rate is the percentage change in either the?…
- CPI
- GDP deflator
- Other Index of the overall price level
More money causes the inflation.
What does a rise in the price level mean?
A rise in the price level means a lower value of money because each dollar in the wallet now buys a smaller quantity of goods and services.
How to calculate the value of money measured in terms of goods and services?
= 1/P
When the overall price level rises, the value of money falls.
What is Quantity theory of money ?
A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate.
What is Nominal variables?
Variables measured in monetary units.
What is Real variables?
Variables measured in physical units.
What is Classical dichotomy?
The theoretical separation of nominal and real variables.
What is Monetary neutrality?
The proposition that changes in the money supply do not affect real variables.
How to calculate the velocity of money? And what does the velocity of money mean?
Velocity of money is the rate at which money changes hands.
V = P*Y/M
V = velocity
P = price level
Y = Real GDP
M = Quantity of money
What is the Fisher effect?
Real interest rate = Nominal interest rate − Inflation rate
The one-for-one adjustment of the nominal interest rate to the inflation rate
What are shoe leather costs?
Resources wasted when inflation encourages people to reduce their money holdings.
What are menu costs?
Costs of changing prices
According to the quantity theory of money and the Fisher effect, what happens if the central bank increases the rate of money growth?
inflation and the nominal interest rate both increase
inflation and the real interest rate both increase
the nominal interest rate and the real interest rate both increase
inflation, the real interest rate, and the nominal interest rate all increase
inflation and the nominal interest rate both increase
Suppose that, because of inflation, a business in Pakistan must calculate, print, and mail a new price list to customers each month. Which of the following is this an example of?
menu costs
shoe-leather costs
arbitrary redistributions of wealth
costs due to inflation-induced tax distortions
menu costs
Which of the following is characteristic of an inflation tax?
a tax on people who hold money
usually employed by governments with balanced budgets
a tax on people who hold interest-bearing savings accounts
an explicit tax paid quarterly by businesses based on the amount of increase in the prices of their products
a tax on people who hold money
If the money supply grows by 7 percent and real output grows by 4 percent and velocity is constant, which one of the following is the amount that prices should rise by?
0 percent
3 percent
7 percent
11 percent
3 percent
Suppose the nominal interest rate is 7 percent while the money supply is growing at a rate of 5 percent per year. If the government increases the growth rate of the money supply from 5 percent to 9 percent, which of the following should the nominal interest rate become, in the long run, according to the Fisher effect?
4 percent
9 percent
11 percent
12 percent
11 percent
According to the quantity theory of money, if nominal GDP is $400, real GDP is $200, and the money supply is $100, then which of the following is correct?
the price level is 1/2, and velocity is 2
the price level is 1/2, and velocity is 4
the price level is 2, and velocity is 2
the price level is 2, and velocity is 4
the price level is 2, and velocity is 4
According to the quantity theory of money, which variable in the quantity equation is most stable over long periods of time?
money
velocity
price level
output
velocity
The classical principle of monetary neutrality states that changes in the money supply do not influence _____ variables and is thought most applicable in the _____ run.
nominal, short
nominal, long
real, short
real, long
real, long
Which one of the following is a reason that a country would employ an inflation tax?
The government has a balanced budget.
An inflation tax is the most equitable of all taxes.
The government does not understand the causes and consequences of inflation.
Government expenditures are high and the government has inadequate tax collections and difficulty borrowing.
Government expenditures are high and the government has inadequate tax collections and difficulty borrowing.
Suppose that, because of inflation, people in Venezuela economize on currency and go to the bank each day to withdraw their daily currency needs. Which one of the following is this an example of?
menu costs
shoe-leather costs
costs due to inflation-induced tax distortions
costs due to inflation-induced relative price variability that misallocates resources
shoe-leather costs
If the real interest rate is 4 percent, the inflation rate is 6 percent, and the tax rate is 30 percent, which one of the following is the after-tax real interest rate?
1 percent
2 percent
3 percent
4 percent
1 percent
If an economy always has inflation of 10 percent per year, which of the following costs of inflation will it NOT suffer?
shoeleather costs from reduced holdings of money
menu costs from more frequent price adjustment
distortions from the taxation of nominal capital gains
arbitrary redistributions between debtors and creditors
arbitrary redistributions between debtors and creditors
Which one of the following statements is true about a situation where real incomes are rising at 2 percent per year?
If inflation were 0 percent, people should receive raises of about 0 percent.
If inflation were 5 percent, people should receive raises of about 2 percent per year.
If inflation were 5 percent, people should receive raises of about 5 percent per year.
If inflation were 5 percent, people should receive raises of about 7 percent per year.
If inflation were 5 percent, people should receive raises of about 7 percent per year.
