Inflation and Money

Question 1

what is the nominal interest rate?

Answer 1

the stated interest rate without a correction for
the effects of inflation

Question 2

what is the real interest rate?

Answer 2

the interest rate in terms of changes in your purchasing power

Question 3

what is a nominal variable?

Answer 3

a variable measured in dollars (whose
value may fluctuate over time).

Question 4

what is a real variable?

Answer 4

a variable that has been adjusted to account
for inflation.

Question 5

what are the three key functions money services?

Answer 5

1. Medium of exchange
2. Unit of account
3. Store of value

Question 6

what is the costs of inflation?

Answer 6

Inflation undermines the productive benefit of money

Question 7

what is hyperinflation?

Answer 7

extremely high rates of inflation

Question 8

what is meant by menu costs?

Answer 8

the marginal cost of adjusting prices

Question 9

what is meant by shoe-leather costs?

Answer 9

the costs incurred trying to avoid holding cash

Question 10

what are the costs of unexpected inflation?

Answer 10

1. inflation creates menu costs for sellers
2. inflation creates shoe-leather costs for buyers
3. inflation confuses the signals that prices send
4. inflation redistributes

Question 11

what is inflation fallacy?

Answer 11

the mistaken belief that inflation
destroys purchasing power