Chapter 30: Money Growth and Inflation

Question 1

Inflation

Answer 1

An increase in the overall level of prices

Question 2

Deflation

Answer 2

A decrease in the overall level of prices

Question 3

Hyperinflation

Answer 3

Extraordinarily high inflation

Question 4

Quantity theory of money

Answer 4

The theory that the quantity of money determines prices and the growth rate of money determines
inflation

Question 5

Nominal variables

Answer 5

Variables measured in monetary units

EX: prices of goods, wages and GDPn

Question 6

Real variables

Answer 6

Variables measured in physical units

EX: relative prices (price of one good in terms of another), real wages and GDPr

Question 7

Classical dichotomy

Answer 7

The theoretical separation of nominal and real variables

Question 8

Monetary neutrality

Answer 8

The property that changes in the money supply affect nominal variables but not real variables

Question 9

Velocity of money

Answer 9

Rate at which money circulates

Question 10

Quantity equation

Answer 10

M × V = P × Y

Question 11

Inflation tax

Answer 11

The practice of a government raising revenue by printing money

Question 12

Nominal interest rate

Answer 12

Interest rate uncorrected for inflation

Question 13

Real interest rate

Answer 13

Interest rate corrected for inflation

Question 14

Fisher effect

Answer 14

The one-to-one adjustment of the nominal interest rate to inflation

Question 15

Shoeleather costs

Answer 15

Resources wasted when inflation causes people to economize on money holdings

Question 16

Menu costs

Answer 16

The costs associated with changing prices

Question 17

Capital gains

Answer 17

Profits made from selling an asset for greater than the purchase price