Week seven learning

Question 1

What is inflation?

Answer 1

An increase in the overall level of prices.

Question 2

What is deflation?

Answer 2

A decrease in the overall price level

Question 3

What is hyperinflation?

Answer 3

An extraordinarily high rate of inflation.

Question 4

What is the quantity theory of money?

Answer 4

It explains that the quantity of money available determines the price level and that the growth rate of the money supply determines the inflation rate.

Question 5

Why does printing too much money lead to inflation?

Answer 5

Prices rise when there is too much money in the economy, reducing the value of money.

Question 6

What is the price level?

Answer 6

The number of dollars needed to buy a basket of goods and services.

Question 7

What is the value of money?

Answer 7

It is the quantity of goods and services that can be bought with $1. It is the inverse of the price level (1/P).

Question 8

How does an increase in money supply affect prices and money demand?

Answer 8

An increase in money supply leads to higher prices (inflation) and increases the money demand because people need more money to buy goods and services.

Question 9

What is the role of the Reserve Bank in controlling the money supply?

Answer 9

The Reserve Bank influences money supply through open-market operations, buying or selling government securities to adjust the amount of funds in the market.

Question 10

What is monetary neutrality?

Answer 10

The concept that changes in the money supply affect nominal variables (like prices) but not real variables (like real GDP)

Question 11

What is the Fisher Effect?

Answer 11

The principle that an increase in the rate of money growth raises the rate of inflation but does not affect real variables. Nominal interest rate = Real interest rate + Inflation rate.

Question 12

What is the inflation tax?

Answer 12

The revenue the government raises by creating money, which effectively reduces the value of money held by individuals.

Question 13

What are shoe leather costs?

Answer 13

The resources wasted when inflation encourages people to hold less money and make more frequent trips to the bank.

Question 14

What are menu costs?

Answer 14

The costs associated with changing prices, including printing new price lists and dealing with customer reactions.

Question 15

What are some other costs of inflation?

Answer 15

Misallocation of resources, inflation-induced tax distortions, confusion, inconvenience, and arbitrary redistributions of wealth.

Question 16

In the case of $1,000 deposited with a 10% nominal interest rate and 0% inflation, what happens to the real value of the deposit after one year?

Answer 16

The real value grows by 10% because there is no inflation to erode the purchasing power.

Question 17

In the case of $1,000 deposited with a 20% nominal interest rate and 10% inflation, what happens to the real value of the deposit after one year?

Answer 17

The real value grows by 10% (20% nominal interest rate - 10% inflation).

Question 18

How does inflation impact the after-tax real interest rate?

Answer 18

Inflation raises nominal interest rates but lowers the after-tax real interest rate, increasing savers’ tax burdens