Econ Ch 4

Question 1

Real variables

Answer 1

Real GDP & real GDP per hour worked

Question 2

Nominal variables

Answer 2

Price levels, inflation rates , nominal interest rates

Question 3

Classical dichotomy

Answer 3

The assertion that in the long run, nominal variables such as money supply or price don’t affect real variables

Question 4

Money neutrality

Answer 4

In the long run changes in money supply have no effect on the real variable

Question 5

In Lr, the inflation rate is determined by

Answer 5

The growth rate of the money supply

Question 6

Barter economies exist in the

Early stages of economic development

Answer 6

→ trading goods directly → double coincidence of wants is lacking → high transaction costs exist

Question 7

Transaction costs

Answer 7

Cost of time or resources in making a transaction

Question 8

Commodity money

Answer 8

A good used as money that has value independent of its use of money

Question 9

Fiat money

Answer 9

Money like paper currency

Question 10

Hyperinflation

Answer 10

Extremely high rates of inflation more than 50% or more per month

Question 11

Seigniorage

Answer 11

GOV profit from issuing fiat money

Question 12

Functions of money

Answer 12

① medium of exchange ② store of value ③ unit of account

Question 13

Monetary base or high powered money

Answer 13

Sum of currency in circulation & bank reserves monetary base = currency in circulation + reserves

Question 14

Relationship between monetary base & aggregates considers 3 actors ① bank of Canada ② banking system ③ non bank public

Answer 14

① controls money supply & regulates system ② creates checking accounts that are an important part of m1 + measure ③ all households & firms decide which form they will hold money

Question 15

Money multiplier

Answer 15

The number indicating how much the money supply increases with the monetary base increases by one dollar

Question 16

Money supply =

Answer 16

Money multiplier * monetary base

Question 17

If actual inflationary rate,> expected inflation rate

Answer 17

The actual real interest rate wil be less than expected real interest rate

Question 18

If actual inflation rate differs from the expected inflation rate

Answer 18

Lenders lose / borrowers gain → actual inflation exceeds expected inflation

Question 19

According to the Fisher effect the nominal interest rate will increase by 5% if the

Answer 19

Expected inflation rate increases by 5%

Question 20

Lr growth rate of real GDP is 3.7%
Expected real interest rate on 10 yr gov bond = 2.2%
Growth velocity =0%
Rate of growth money supply = 5.5%
Nominal interest?

Answer 20

① 5.5- 3.7 =1.8

② 1.8 +2.2 = 4%

Question 21

Suppose inflation is higher than expected.

For investors who bought bonds issued when inflation rate was expected to be lower. This news is

Answer 21

Bad since the real return on their investment will be lower than they anticipated

Question 22

Suppose that information has been equal to 3.2% per year for several years and the real interest rate that banks require on typical mortgages is 6.3%

The normal interest rate that include currently charging on a 30 year homework it is _ percent

Answer 22

= 6.3 + 3.2 = 9.5%

Question 23

Who is the bank of Canada unexpectedly decreases the rate of growth of money supply by 0.9% do you nominal interest rate that banks will charge a new mortgages is

Answer 23

= 6.3 + [ 3.2 + 0.9 ] = 10.4%

Question 24

The actual real interest rate on your mortgage is made prior to the increase in the growth of my supply is now

Answer 24

= 9.5% - [ 3.2% +0.9% ]= 5.4%

Question 25

Even when it is expected inflation can be costly bl

Answer 25

Select all but → redistributes

Question 26

” Greases the wheels of the labour market”

Answer 26

Low inflation allows for real wage adjustments when nominal wages are sticky thereby permitting labour market adjustments that improve markets efficiency

Question 27

Setting an explicit inflation target is likely to make inflationary expectations:

Answer 27

More stable

Question 28

Menu costs → significantly decreased

Answer 28

B)Some items such as magazines have prices that are labelled on the product and change slowly bus there is no menu cost for the store other items such as produce half price if I can change daily so my new cost so much higher

Question 29

I may risk experiencing hyper inflation by printing more money rather than issuing bonds to a finance a large budget deficit because

Answer 29

Investors if used by the government bonds on the police said they will never be paid

Question 30

During the hyperinflation the velocity of money is likely to → increase

Answer 30

What is the growth rates of a real GDP constant is change in velocity must → increase inflation