Money Growth and Inflation

Question 1

Inflation

Answer 1

Increase in the overall level of prices

Question 2

Hyperinflation

Answer 2

Extraordinarily high rate of inflation

Question 3

What happens when the bank of Canada increases money supplied according to the quantity theory of money?

Answer 3

Money somehow finds itself in the hands of the public.
Public uses the additional money to buy more goods and services, increasing the prices of goods and services = inflation.

Question 4

What economic principle determines the value of money?

Answer 4

Supply and Demand

Question 5

Quantity theory of money

Answer 5

The quantity of money available in an economy determines the value of money. Growth in the quantity of money is the primary cause of inflation.

Question 6

Velocity of Money (V)

Answer 6

The number of times a dollar (or any other unit of money) changes hands during a year.

Question 7

Inner arrows in circular flow diagram represent? Outer arrows?

Answer 7

Inner arrows: Real economy, Outer arrows: Nominal flow

Question 8

Quantity Equation

Answer 8

M x V = P x Q

Question 9

P

Answer 9

Average price level = Consumer price index = GDP deflator

Question 10

P x Q

Answer 10

Nominal GDP

Question 11

Q

Answer 11

Real GDP

Question 12

When money supply increases, velocity of money…

Answer 12

remains relatively constant.

Question 13

Which variable changes when money supply changes?

Answer 13

Average Price Level (P)

Question 14

Classical Economists

Answer 14

Economists in England from the 18th to early 20th century (1920s)

Question 15

Real variables

Answer 15

Variables measured in physical units

Question 16

Nominal variables

Answer 16

Variables measured in monetary units

Question 17

How do you calculate real wages?

Answer 17

real wages = W (wages) / P (GDP deflator)

Question 18

How to calculate real interest rate?

Answer 18

r (real interest rate) = R (nominal interest rate) - π (inflation rate)

Question 19

Money Neutrality

Answer 19

Classical economists said that changes in money supply do not affect real variables.

Question 20

Classical Dichotomy

Answer 20

Separation of variables into real and nominal variables.