12.7 Essay: Money, the Price Level, and Inlation
1) A government policymaker suggests “Double the money supply and U.S. citizens’ real
incomes will double.” In the long run, is this policy advice correct?
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
2) In the money market, how is the adjustment to equilibrium brought about in the short
run and in the long run?
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
3) What is the short-run and long-run efect on the nominal interest rate from an increase
in the growth rate of the quantity of money?
Skill: Level 4: Applying models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
4) If the Fed makes the quantity of money grow at the same rate as the growth rate of real
GDP and velocity does not change, in the long run what happens to the price level and the
inlation rate?
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
88
5) Suppose velocity does not change. Then, in the long run, a growth rate of the quantity of
money that exceeds growth in real GDP has what efect?
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
6) “If the inlation rate is positive, then the real interest rate is greater than the nominal
interest rate.” Is the previous statement correct or incorrect? Explain your answer.
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
7) According to the quantity theory of money, what is the efect of an increase in the
quantity of money?
Skill: Level 1: Deinition
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
8) Deine the quantity theory of money and show how it is related to the equation of
exchange.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Written and oral communication
89
9) What is the equation of exchange? Suppose that real GDP and velocity are constant. In
this case, what efect will an increase in the quantity of money have?
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
10) “The velocity of circulation is the average speed with which money is loaned to
businesses and households.” Is the previous statement correct or incorrect?
Skill: Level 2: Using deinitions
Section: Checkpoint 12.2
Status: Old
AACSB: Relective thinking
11) If the growth rate of the quantity of money is 4 percent per year, potential GDP and real
GDP grow at 3 percent per year, and velocity does not change, in the long run what is the
inlation rate?
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
12) If the growth of the quantity of money is 5 percent per year, potential and real GDP
grow at 3 percent per year, and velocity does not change, in the long run what is the
inlation rate?
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
90
13) The quantity of money is $1 billion, the price level is 1.10, and real GDP is $10 billion.
What is the velocity of money?
Skill: Level 3: Using models
Section: Checkpoint 12.2
Status: Old
AACSB: Analytical thinking
12.8 Essay: The Cost of Inlation
1) “Inlation acts as a tax because the government gains purchasing power.” Is the previous
statement correct or incorrect?
Skill: Level 1: Deinition
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
2) Explain how the government gains revenue during inlation.
Skill: Level 3: Using models
Section: Checkpoint 12.3
Status: Old
AACSB: Written and oral communication
91
3) What are the costs of inlation? Briely explain each.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.3
Status: Old
AACSB: Written and oral communication
4) Explain the “shoe-leather” costs of inlation.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.3
Status: Old
AACSB: Written and oral communication
5) “Inlation reduces the velocity of money because people reduce their money holdings.” Is
the previous statement correct or incorrect? Explain your answer.
Skill: Level 2: Using deinitions
Section: Checkpoint 12.3
Status: Old
AACSB: Relective thinking
92
6) George purchased a $10,000 bond that pays a nominal interest rate of 8 percent per
year. George’s marginal income tax rate is 28 percent. Over the last year, inlation was 3
percent. Find George’s before-tax real interest rate and his after-tax real interest rate.
Skill: Level 4: Applying models
Section: Checkpoint 12.3
Status: Old
AACSB: Analytical thinking
93