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Money Growth and Inflation 7529
60.
According to the classical dichotomy, what changes nominal variables? What changes real
variables?
61.
Suppose that monetary neutrality holds. Of the following variables, which ones do not change
when the money
supply increases?
a.
real interest rates
b.
inflation
c.
the price level
d.
real output
e.
real wages
f.
nominal wages
62.
Wages and prices are many times higher today than they were 30 years ago, yet people do not
work a lot more
hours or buy fewer goods. How can this be?
63.
Identify each of the following as nominal or real variables.
a.
the physical output of goods and services
b.
the overall price level
c.
the dollar price of apples
d.
the price of apples relative to the price of oranges
e.
the unemployment rate
f.
the amount that shows up on your paycheck after taxes
g.
the amount of goods you can purchase with the wage you get each hour
h.
the taxes that you pay the government
64.
Define each of the symbols and explain the meaning of M V = P Y.
65.
What assumptions are necessary to argue that the quantity equation implies that increases in the
money supply lead
to proportional changes in the price level?
66.
What is the inflation tax, and how might it explain the creation of inflation by a central bank?
67.
Economists agree that increases in the money-supply growth rate increase inflation and that
inflation is undesirable. So why have there been hyperinflations and how have they been ended?
68.
Suppose that velocity and output are constant and that the quantity theory and the Fisher effect
both hold. What
happens to inflation, real interest rates, and nominal interest rates when the
money supply growth rate increases from
5 percent to 10 percent?
69.
In recent years Venezuela and Ukraine have had much higher nominal interest rates than the
United States while
Japan has had lower nominal interest rates. What would you predict is true
about money growth in these other
countries? Why?
70.
List and define any two of the costs of high inflation.
71.
Inflation distorts relative prices. What does this mean and why does it impose a cost on society?
72.
Explain how inflation affects savings.
Problems
1.
The increase in the overall level of prices is known as .
2.
If the price level this year was 140 and was 135 last year, what was the inflation rate to the nearest
decimal?
3.
The consumer price index increases from 200 to 208. What is the inflation rate?
4.
A decrease in the overall price level (or falling prices) is called _____. An extraordinarily high
rate of inflation is called _____.
5.
The theory that most economists rely on to explain inflation is called the .
6.
An increase in the price level means that a dollar buys __________ goods and services so the
value of a dollar __________.
7.
It takes more money to purchase the same amount of goods when prices _____. Therefore, the
value of your money has ____.
8.
An increase in the price level causes the value of money to _____. Therefore, people will want to
hold ____ money, because the cost of their purchases has increased.
9.
When the consumer price index increases, the value of your money has _____. According to the
quantity theory of money this is caused by an increase in the _____.
10.
If the price level were to rise from 160 to 200, in what direction and by how much would the
value of a dollar
change?
11.
A decrease in the value of money __________ the quantity of money demanded. On a graph
with the value of money on the vertical axis this effect on the value of money on quantity
demanded is shown as ____________.
12.
In the long run an increase in the money supply causes the price level to __________. The price
level moves in this direction because an increase in the money supply creates __________ in the
money market that causes people to ________ spending.
13.
According to the quantity theory of money, an increase in the money supply causes the price
level to _____ and the value of money to _____.
14.
When the Federal Reserve injects money into the banking system, it initially causes an excess
_____ of money. Equilibrium in the money market is reestablished through a(n) _____ in the
price level.
15.
The classical dichotomy says that two groups of variables are affected by different forces. What
are these two
groups of variables?
16.
You hear an economist state the following: “The increase in the money supply will causes price
to rise in the long run and will have no effect on output or any other real factors.” This
economist is expressing the principle of _____.
17.
Money neutrality states that a change in the money supply affects _____ variables only. Most
economists believe that money neutrality is a good description of how money affects the
economy in the _____.
18.
An economy produces two goods, x and y. A year ago the price of x was $4 and the price of y
was $6. Today the
price of x is $8 and the price of y is $10. What happened to the nominal and
the real value of good x? What
happened to the nominal and real value of good y?
