Money growth and inflation

Question 1

What is inflation?

Answer 1

An increase in the overall level of prices

Question 2

What is hyperinflation?

Answer 2

This is an extraordinarily high rate of inflation

Question 3

What has happened to inflation in the UK?

Answer 3

It has decreased

Question 4

What did some countries experience for long periods in the 19th century?

Answer 4

Deflation

Question 5

What is deflation?

Answer 5

This is decreasing average prices

Question 6

Which country experienced hyperinflation in the 1920s?

Answer 6

Germany

Question 7

Which country experienced hyperinflation in 2007-8?

Answer 7

Zimbabwe

Question 8

What is the quantity theory of money used to explain?

Answer 8

It is used to explain the long-run determinants of the price level and the inflation rate

Question 9

What does inflation concern?

Answer 9

The value of the economy’s medium of exchange

Question 10

What happens to the value of money when the overall price level rises?

Answer 10

The value of money falls

Question 11

What are 2 determinants of money demand?

Answer 11

Interest rates

Average level of prices in the economy

Question 12

What does the amount of money people hold depend upon?

Answer 12

The prices of goods and services

Question 13

What happens to the demand for money as the interest rate increases?

Answer 13

As money pays no interest, people demand less money the higher the interest rate

Question 14

What does an increase in the money supply do to the value of money?

Answer 14

It causes a decrease in the value of money

Question 15

What is the quantity of money theory?

Answer 15

The quantity of money available in the economy determines the value of money

Question 16

What is a primary cause of inflation?

Answer 16

Growth in the quantity of money when people spend money in excess of the amount they wish to hold

Question 17

What are nominal variables?

Answer 17

These are variables measured in monetary units

Question 18

What are real variables?

Answer 18

These are variables measured in physical units

Question 19

Do real economic variables change with changes in the money supply?

Answer 19

No - real economic variables do not change with changes in the money supply

Question 20

What is classical dichotomy?

Answer 20

The idea that different forces influence real and nominal variables

Question 21

What type of variables are affected by changes in the money supply?

Answer 21

Nominal variables are affected by changes in the money supply

Question 22

What is monetary neutrality?

Answer 22

This is the irrelevance of monetary changes for real variables

Question 23

What does the velocity of money refer to?

Answer 23

The speed at which money changes hands (travels around the economy)

Question 24

What is the velocity of money equation?

Answer 24

V = (P x Y) / M
P = price level
Y = quantity of output
M = quantity of money

Question 25

What is the quantity equation?

Answer 25

M x V = P x Y

Question 26

What does the quantity equation relate?

Answer 26

The quantity value of money to the nominal value of output (P x Y)

Question 27

What does the quantity equation show?

Answer 27

It shows that an increase in the quantity of money in an economy must be reflected in one of three other variables

Question 28

What are the 3 variables that reflect an increase in money?

Answer 28

The price level must rive
The quantity of output must rise
The velocity of money must fall

Question 29

Why does money not affect output?

Answer 29

Because money is neutral

Question 30

What happens to P and Y when the central bank changes the quantity of money?

Answer 30

It causes proportionate changes in the nominal value of output but only P changes because money is neutral