Chapter 12:Inflation and the Quantity Theory of Money

Question 1

What is inflation?

Answer 1

an increase in the general or average level of prices

Question 2

What is the inflation rate?

Answer 2

percentage increase in the average level of prices over a period of time

Question 3

How do you calculate the inflation rate?

Answer 3

Take the difference between year 1 and 2 and divide by year 1
(P2-P1)/P1 *100

Question 4

What is the consumer price index?

Answer 4

measure the average price for a basket of goods and service bought by a typical American consumer

Question 5

In waht way is the consumer price index weighted?

Answer 5

So that an increase in the price of a major item counts for more than an increase in the price of a minor item

Question 6

What is the GDP deflator?

Answer 6

The ratio of nominal to real GDP multiplied by 100. This covers all final goods

Question 7

What are the producer price indexes?

Answer 7

They measure the average price received by producers

Question 8

What are producer price indexes often used for?

Answer 8

To calculate changes in the cost of inputs

Question 9

What is a real price?

Answer 9

a price that has been corrected for inflation. This is used to compare the prices of goods over time

Question 10

What two things does the quantity theory of money do?

Answer 10

1. sets the relationship between money, velocity, real output, and prices
2. helps explain the role of the money supply in determining inflation rate

Question 11

What is the quantity theory of money?

Answer 11

Mv=PYr

Question 12

What does M stand for in the quantity theory of money?

Answer 12

money supply

Question 13

What does v stand for?

Answer 13

the velocity of money

Question 14

What is the velocity of money?

Answer 14

the average number of times a dollar is spent on final goods and services in a year

Question 15

What does P stand for?

Answer 15

price level

Question 16

What does Yr stand for?

Answer 16

Real GDP

Question 17

What is inflation caused by?

Answer 17

An increase in the money supply

Question 18

According to the quantity theory of money, the growth rate of the money supply will be equal to what?

Answer 18

the inflation rate

Question 19

Increases in the velocity of money can accelerate an already existing_________.

Answer 19

inflation

Question 20

What is deflation?

Answer 20

a decrease in the average level of prices–a negative inflation rate

Question 21

What is a disinflation?

Answer 21

a reduction in the inflation rate

Question 22

In the long run, money is _____.

Answer 22

neutral

Question 23

What is the money illusion?

Answer 23

the false perception that occurs when people mistake changes in nominal prices for changes in real prices

Question 24

Inflation is a type of _____.

Answer 24

tax

Question 25

What is the real rate of return?

Answer 25

The nominal rate of return minus the inflation rate

Question 26

What is the nominal rate of return?

Answer 26

the rate of return that does not account for inflation

Question 27

What is the Fisher effect?

Answer 27

the tendency of nominal interest rates to rise one to one with expected inflation rates

Question 28

If expected inflation is greater than actual inflation, then the real rate of return will be ______ than the equilibrium rate

Answer 28

higher

Question 29

What is monetizing the debt?

Answer 29

the result of government paying off its debt by printing more money

Question 30

Inflation is always and everywhere a monetary phenomenon. True or False?

Answer 30

True