Chapter 12

Question 1

what determines the price level in the long run

Answer 1

Money supply, velocity of money, RGDP

Question 2

real variables

Answer 2

• measure in physical units or base year dollars
• relative to some other points in time other than the present
• more useful for comparisons
• transforms nominal value by taking price level changes into account
• ex, real wages, real interest rates, real GDP

Question 3

nominal variables

Answer 3

• variables measured in monetary units or current dollars
• price you see when purchasing something, the value you received when paid
• Nominal wages, nominal interest rates, money supply

Question 4

what is monetary neutrality in reference to real variables

Answer 4

any change in money supply will only affect other nominal variables but not real variables since it does not change resources or technology

Question 5

quantity theory of money

Answer 5

MV = PY

Question 6

what is velocity

Answer 6

speed at which money circulates in an economy and influences the relationship between the money supply and prices. A stable velocity contributes to a more predictable relationship, while fluctuations in velocity can complicate the understanding of the money-prices relationship, especially in the short run.

Question 7

what is 1/P =

Answer 7

value of dollar measured in good

Question 8

M affects primarily

Answer 8

P and Y when V is stable

Question 9

if Y is constant

Answer 9

inflation rate = money supply growth rate

Question 10

what is the inflation fallacy a fallacy

Answer 10

inflation doesn’t normal reduce purchasing power of peoples income or wealth but many people think inflation erodes their ability to buy goods and services

Question 11

what is the inflation fallacy

Answer 11

normally when there is inflation nominal wages increase as much as prices and real wages, so that you purchasing power remains constant. inflation is a general increase in ALL prices

Question 12

real wage =

Answer 12

nominal wage - (nominal wage * inflation rate)

Question 13

why can inflation be seen as a tax

Answer 13

inflation increases money supply = increases prices. when people see increasing prices they think they have lost purchasing power but as long as inflation is expected they have not. people who hold money see it as a tax rather than wealth

Question 14

what causes hyperinflation

Answer 14

tax revenue is low and govt can’t borrow money so they print money to pay for its spending when government does this excessively this causes hyper inflation

Question 15

what is the relationship between inflation and interest rate (fisher effect)

Answer 15

increase in inflation = increase in nominal interest rate, but real interest rate on wealth is unchanged. in long run changes in money affect inflation and nominal rates but not real rates, due to sticky wages

Question 16

as long as inflation is expected nominal wages and rates

Answer 16

will adjust with inflation

Question 17

inflation doesn’t reduce purchasing power as long as

Answer 17

its expected and there are interest bearing assets

Question 18

What are the costs of expected inflation

Answer 18

shoe leather, menu costs, misallocation of resources from increasing variability

Question 19

shoe leather costs

Answer 19

• resources wasted when inflation encourages people to reduce their money holdings
• time and transaction costs of more trips to bank and cost of transferring money to interest bearing assets

Question 20

menu costs

Answer 20

cost of changing prices. it costs money and time to relabel prices of g and s for a biz

Question 21

misallocation of resources from increasing variability

Answer 21

resources are not being used in the most effective/efficient way. changes are becoming more unpredictable. Prices of resources could be changing faster than outputs