CHAPTER 25 & 28

Question 1

What’s the difference between present and future value?

Answer 1

Present value is the amount of money needed today, to produce a future sum. Whereas, future value is how much it’s worth at a certain point in the future

Question 2

What does being risk adverse entail?

Answer 2

Exhibiting a dislike of uncertainty

Question 3

What’s the benefit of diversification?

Answer 3

By not putting all of ‘your eggs in one basket’, risk is spread out between many investments, so if one were to fail, all is not lost.

Question 4

What’s the difference between idiosyncratic and aggregate risk?

Answer 4

Idiosyncratic affects a single economic actor whereas aggregate is risk that affects all economics actors at once.

Question 5

What’s inflation, deflation and disinflation?

Answer 5

Inflation - increase in the price level
Deflation - decrease in the price level
Disinflation - an increase in the price level at a slower rate than before

Question 6

As price level indicates the value of money, inflation does what to its value?

Answer 6

Increase in prices = lowers the value of money

This is because the same money now buys less goods and services

Question 7

What 2 statements does the quantity theory of money state?

Answer 7

The quantity of available money determines price level

The growth rate of the quantity of money determines the inflation rate.

Question 8

What are real wages and how are they calculated?

Answer 8

Money wage adjusted for inflation

Wage/price

Question 9

What is the theory of monetary neutrality?

Answer 9

Changes in the money supply don’t affect real variables because if everything changes nominally, relatively everything is still the same, therefore nothing changes.

Question 10

What is meant by the velocity of money?

Answer 10

The rate at which money changes hands

Question 11

What is the formula for the velocity of money?

Answer 11

Price x output / money quantity

Question 12

What happens if the government print more money?

Answer 12

An inflation tax

Price level increases, so the value of money falls.

Question 13

What is the fisher effect?

Answer 13

That nominal interest rates are equal to the real interest rate + inflation rate

Question 14

What are shoe leather costs?

Answer 14

The resources wasted going to the bank more frequently to avoid inflation effects to the money in your pocket.

Question 15

How can inflation cause arbitrary redistributions of wealth?

Answer 15

Inflation alters the real value of loan repayments so some people may not pay back the full value of their loan

Question 16

Why might deflation be damaging?

Answer 16

Little incentive to spend today, if prices are likely to fall tomorrow. Therefore, there’s low growth and macroeconomic objectives aren’t met and u/e is more likely.

Question 17

What are the 6 main costs of inflation?

Answer 17

• Menu costs
• Shoe leather costs
• Arbitrary redistributions of wealth
• Fall in purchasing power
• Tax distortions
• Misallocation of resources