chapter 7 Flashcards

1
Q

What does the equation of exchange do?

A

shows the relationship between prices and the money supply

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2
Q

What is the equation of exchange?

A

MV=PQ (M=money supply. P=price level. Q=amount of output produced by the economy-fixed.)

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3
Q

What does the V stand for in the equation of exchange?

A

V=velocity. The average number of times a dollar changes hands in a year. Fixed over a short period of time.

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4
Q

Common sense interpretation of the equation of exchange?

A

a year’s worth of output in the economy is bought by the money supple which is spent and respent V times per year.

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5
Q

Where does inflation come from?

A

When the Fed and banks increase the money supply

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6
Q

How can all consumers spend more on all goods and services without their nominal savings?

A

money supply must have increased

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7
Q

Which assumptions does the simple quantity theory rest on?

A

The equation of exchange applies. Velocity is constant. Output is constant.

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8
Q

What is the prediction of the simple quantity theory?

A

money supply and price level are proportionally related

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9
Q

What assumptions does monetarism make about the equation of exchange?

A

Velocity is a stable function of a few variables. Output may change in the short run, but in the long run, output is at the economy’s potential, with labor markets at equilibrium. Equation of exchange holds.

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10
Q

What happens in the short run and the long run with Friedman’s helicopter drop?

A

short run: prices/output increase.

longrun: wages increase, output at economy’s potential, but with increasing prices.

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11
Q

Under what conditions would inflation have zero effect on the economy?

A

If it is wholly anticipated and evenly spread throughout the economy.

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12
Q

If all prices in the economy double, how does the qatnity of goods/services produced change?

A

it doesn’t change.

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13
Q

What is a way to avoid being made worse off by anticipated inflation?

A

Buy goods/services whose prices inflate before inflation starts.

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14
Q

Who gains and loses with anticipated inflation?

A

borrowers gain and lenders lose

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15
Q

real interest rate

A

nominal rate - expected inflation rate

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16
Q

secured loan

A

loan where lender can seize the borrower’s property if not paid. backed by a real, collateral asset

17
Q

What are 2 problems with uneven inflation?

A

Prices no longer reflect value, so mistakes are made. Bubbles expand as systematic mistakes are made due to the inflation.

18
Q

When someone pays an interest rate to someone, what are they paying that person to do?

A

to delay the consumption

19
Q

The economic school that emphasized inflationary bubbles?

A

Austrian school of economics with Hayes and Mises

20
Q

What is the difference between dollars saved and dollars created by the Fed?-

A

Dollars saved have the potential to fuel later consumption, since they represent delayed consumption. Dollars made by the Fed do not have this potential.

21
Q

What happens when a Fed-created inflationary bubble bursts?-

A

Unwanted capital goods and and constructions are abandoned and the workers that produced them must all find new jobs.

22
Q

Why do the Austirans say that government and the central bank create bubbles, though private markets do not?

A

Because there must be coordinated failures by many individuals and firms. Government, especially through a government money supplier is the best coordinator

23
Q

What is “monetizing the debt?”

A

The central bank attempts to assist the state in its borrowing by purchasing debt in return for dollars

24
Q

What is the inflationary tax?

A

When money growth causes inflation, borrowers gain and lenders lose, so governments, who borrow a lot, can sap their lenders by creating inflation and paying with lower valued dollars.

25
Q

What was the difference between inflation using gold as money and inflation using dollars not backed by gold?

A

Inflation using gold was very low. Inflation using unbacked dollars was high

26
Q

What was the cause of inflation in the late 1960s?

A

The Fed’s monetizing of the debt to support the Vietnam War

27
Q

How much inflation is viewed as normal?

A

3%

28
Q

With 3% inflation, how long does it take the value of one’s savings to be cut in half?-

A

24 years

29
Q

What is an example of an unsecured loan?

A

Credit Cards- high risk because there is no actual asset backing the loan; they are more expensive because it costs the company more to administer the credit card. The payments vary and the charges continue to pile up and be paid off.