chap 17 (final)

Question 1

quantity theory of money

Answer 1

money supply has a direct, proportional relationship with the price level
the quantity of money determines the value of money

Question 2

how to economists feel about the quantity theory of money

Answer 2

its a good explanation of the long run behavior of inflation

Question 3

what is 1/P

Answer 3

the value of $1, measured in goods. 1/P, where P is the prive level (CPI or GDP deflator)

Question 4

how does inflation rising affect prices and value of money

Answer 4

when inflation goes up, prices go up, value of money goes down

Question 5

money supply (MS) in real world is determined by

Answer 5

fed, banking system and consumers

Question 6

money supply (MS) in the model

Answer 6

assume it is a fixed amount controlled by the fed

Question 7

money demand (MD)

Answer 7

how much wealth people want to hold in liquid form

Question 8

the quantity of money demanded is ____ related to the value of money and ____ related to P

Answer 8

negatively … positively

Question 9

value of money rises, the price level

Answer 9

falls

Question 10

fall in value of money (or increase in P) means the quantity of money demanded will

Answer 10

increase

Question 11

MS on the money supply-demand diagram is a

Answer 11

set amount or vertical line

Question 12

when money supply increases, what happens to the value of money, P and MD

Answer 12

value of money decreases
P increases
MD increases

Question 13

when P increases, there is excess money. what happens to it?

Answer 13

people get rid of excess money by spending it on g&s or loaning it. this increases demand for goods supply does not increase, so price goes up

Question 14

nominal variables

Answer 14

are measured in monetary units

ex. nominal GDP, nom. interest rate (return measured in $), etc

Question 15

real variables

Answer 15

are measured in physical units

ex. real GDP, real interest rate (measured in output), etc

Question 16

relative price

Answer 16

the price of one good relative to another
one good divided by another
how many pizzas can you get with the price of 1 hamburger

Question 17

are relative prices real or nominal variables? why?

Answer 17

real, because they are measured in physical units, not money

Question 18

real wage = (equation)

Answer 18

W/P

w = nominal wage, P = price level

Question 19

classical dichotomy

Answer 19

the theoretical separation of nominal and real variables, when MS increases, nominal will increase, but real will be unchanged

Question 20

monetary neutrality

Answer 20

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

Question 21

how do economists view classical dichotomy?

Answer 21

describes the economy in the long run

Question 22

how do economists feel about neutrality of money

Answer 22

describes the economy in the long run

Question 23

velocity of money

Answer 23

the rate at which money changes hands

number of transactions per avg dollar

Question 24

velocity (V) = (equation)

Answer 24

(P x Y) / M
pxy - nominal GDP (price level x real GDP)
M - money supply

Question 25

quantity equation

Answer 25

M x V = P x Y

Question 26

hyperinflation

Answer 26

inflation exceeding 50% per month caused by excessive growth in MS

Question 27

how do almost all hyperinflations start?

Answer 27

tax revenue is inadequate, govt prints money to afford spending

Question 28

inflation tax

Answer 28

printing money causes inflation, which acts like a tax on everyone who holds money, the revenue from printing money

Question 29

nominal interest rate = (equation)

Answer 29

inflation rate + real interest rate

Question 30

fisher effect

Answer 30

real interest rate (on wealth) doesn't change with money growth, so nominal interest rate adjusts one-for-one with changes in the inflation rate

Question 31

the inflation fallacy

Answer 31

most people think inflation erodes real incomes

Question 32

when CPI increases, what happens to wages

Answer 32

wages increase

Question 33

shoeleather costs

Answer 33

the resources wasted when inflation encourages people to reduce their money holdings ex. transactions costs of more frequent bank withdrawals

Question 34

menu costs

Answer 34

the costs of changing prices | ex. print new menus, mailing new catalogs

Question 35

misallocation of resources from relative-price variability

Answer 35

firms don't all raise prices at the same time, so relative prices can vary... which distorts the allocation of resources

Question 36

confusion and inconvenience

Answer 36

inflation changes the yardstick we use to measure transactions complicates long-range planning and the comparison of dollar amounts over time

Question 37

tax distortions

Answer 37

inflation makes nominal income grow faster than real income, taxes are based on nominal income and some are not adjusted for inflation

Question 38

how does inflation affect taxes?

Answer 38

inflation makes people may more taxes when their real incomes don't increase

Question 39

arbitrary redistributions of wealth

Answer 39

when unexpected inflation transfer purchasing power from one to the other

Question 40

higher than expected inflation transfers..

Answer 40

purchasing power from creditors to debtors | debtors get to pay debt with dollars that aren't worth that much

Question 41

lower than expected inflation transfers

Answer 41

purchasing power from debtors to creditors, they are paid back with money that is worth more

Question 42

high inflation is ___ variable and ___ predictable than low inflation

Answer 42

more ... less

Question 43

arbitrary redistributions are more frequent when inflation is

Answer 43

high