Chapter 11 - MONEY GROWTH AND INFLATION

Question 1

The inflation rate is the percentage change in either the?…

Answer 1

• CPI
• GDP deflator
• Other Index of the overall price level
  More money causes the inflation.

Question 2

What does a rise in the price level mean?

Answer 2

A rise in the price level means a lower value of money because each dollar in the wallet now buys a smaller quantity of goods and services.

Question 3

How to calculate the value of money measured in terms of goods and services?

Answer 3

= 1/P

When the overall price level rises, the value of money falls.

Question 4

What is Quantity theory of money ?

Answer 4

A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate.

Question 5

What is Nominal variables?

Answer 5

Variables measured in monetary units.

Question 6

What is Real variables?

Answer 6

Variables measured in physical units.

Question 7

What is Classical dichotomy?

Answer 7

The theoretical separation of nominal and real variables.

Question 8

What is Monetary neutrality?

Answer 8

The proposition that changes in the money supply do not affect real variables.

Question 9

How to calculate the velocity of money? And what does the velocity of money mean?

Answer 9

Velocity of money is the rate at which money changes hands.

V = P*Y/M

V = velocity
P = price level
Y = Real GDP
M = Quantity of money

Question 10

What is the Fisher effect?

Answer 10

Real interest rate = Nominal interest rate − Inflation rate

The one-for-one adjustment of the nominal interest rate to the inflation rate

Question 11

What are shoe leather costs?

Answer 11

Resources wasted when inflation encourages people to reduce their money holdings.

Question 12

What are menu costs?

Answer 12

Costs of changing prices

Question 13

According to the quantity theory of money and the Fisher effect, what happens if the central bank increases the rate of money growth?

inflation and the nominal interest rate both increase

inflation and the real interest rate both increase

the nominal interest rate and the real interest rate both increase

inflation, the real interest rate, and the nominal interest rate all increase

Answer 13

inflation and the nominal interest rate both increase

Question 14

Suppose that, because of inflation, a business in Pakistan must calculate, print, and mail a new price list to customers each month. Which of the following is this an example of?

menu costs

shoe-leather costs

arbitrary redistributions of wealth

costs due to inflation-induced tax distortions

Answer 14

menu costs

Question 15

Which of the following is characteristic of an inflation tax?

a tax on people who hold money

usually employed by governments with balanced budgets

a tax on people who hold interest-bearing savings accounts

an explicit tax paid quarterly by businesses based on the amount of increase in the prices of their products

Answer 15

a tax on people who hold money

Question 16

If the money supply grows by 7 percent and real output grows by 4 percent and velocity is constant, which one of the following is the amount that prices should rise by?

0 percent

3 percent

7 percent

11 percent

Answer 16

3 percent

Question 17

Suppose the nominal interest rate is 7 percent while the money supply is growing at a rate of 5 percent per year. If the government increases the growth rate of the money supply from 5 percent to 9 percent, which of the following should the nominal interest rate become, in the long run, according to the Fisher effect?

4 percent

9 percent

11 percent

12 percent

Answer 17

11 percent

Question 18

According to the quantity theory of money, if nominal GDP is $400, real GDP is $200, and the money supply is $100, then which of the following is correct?

the price level is 1/2, and velocity is 2

the price level is 1/2, and velocity is 4

the price level is 2, and velocity is 2

the price level is 2, and velocity is 4

Answer 18

the price level is 2, and velocity is 4

Question 19

According to the quantity theory of money, which variable in the quantity equation is most stable over long periods of time?

money

velocity

price level

output

Answer 19

velocity

Question 20

The classical principle of monetary neutrality states that changes in the money supply do not influence _____ variables and is thought most applicable in the _____ run.

nominal, short

nominal, long

real, short

real, long

Answer 20

real, long

Question 21

Which one of the following is a reason that a country would employ an inflation tax?

The government has a balanced budget.

An inflation tax is the most equitable of all taxes.

The government does not understand the causes and consequences of inflation.

Government expenditures are high and the government has inadequate tax collections and difficulty borrowing.

Answer 21

Government expenditures are high and the government has inadequate tax collections and difficulty borrowing.

Question 22

Suppose that, because of inflation, people in Venezuela economize on currency and go to the bank each day to withdraw their daily currency needs. Which one of the following is this an example of?

menu costs

shoe-leather costs

costs due to inflation-induced tax distortions

costs due to inflation-induced relative price variability that misallocates resources

Answer 22

shoe-leather costs

Question 23

If the real interest rate is 4 percent, the inflation rate is 6 percent, and the tax rate is 30 percent, which one of the following is the after-tax real interest rate?

1 percent

2 percent

3 percent

4 percent

Answer 23

1 percent

Question 24

If an economy always has inflation of 10 percent per year, which of the following costs of inflation will it NOT suffer?

shoeleather costs from reduced holdings of money

menu costs from more frequent price adjustment

distortions from the taxation of nominal capital gains

arbitrary redistributions between debtors and creditors

Answer 24

arbitrary redistributions between debtors and creditors

Question 25

Which one of the following statements is true about a situation where real incomes are rising at 2 percent per year?

If inflation were 0 percent, people should receive raises of about 0 percent.

If inflation were 5 percent, people should receive raises of about 2 percent per year.

If inflation were 5 percent, people should receive raises of about 5 percent per year.

If inflation were 5 percent, people should receive raises of about 7 percent per year.

Answer 25

If inflation were 5 percent, people should receive raises of about 7 percent per year.