Chapter 05

Question 1

Inflation

Answer 1

An increase in the overall level of prices

Question 2

Hyperinflation

Answer 2

Extremely high inflation.

Question 3

Quantity equation

Answer 3

the identity stating that the product of the money supply and the velocity of money equals nomianl expenditure (MV = PY); coupled with the assumption of stable velocity, an explanation of nominal expenditure called the quantity theory of money.

Question 4

Transactions velocity of money

Answer 4

the ratio of the dollar value of all transactions to the money supply.

Question 5

Real money balances

Answer 5

the quantity of money expressed in terms of the quantity of goods and services it can buy; the quantity of money divided by the price level (M/P).

Question 6

Money demand function

Answer 6

A function showing the determinants of the demand for real money balances; for example (M/P)^d = L(i, Y)

Question 7

Quantity theory of money

Answer 7

the doctrine emphasizing that changes in the quantity of money lead to changes in nominal expenditure.

Question 8

Seigniorage

Answer 8

the revenue raised by the government through the creation of money; also called the inflation tax.

Question 9

Nominal interest rates

Answer 9

the return to saving and the cost of borrowing without the adjustment for inflation.

Question 10

Real interest rates

Answer 10

the return to saving and the cost of borrowing after the adjustment for inflation.

Question 11

Fisher equation and Fisher Effect

Answer 11

the equation stating that the nominal interest rate is the sum of the real interest rate and expected inflation (i = r + Epi).

Question 12

Ex ante real interest rate

Answer 12

the real interest rate that is anticipated when a loan is made; the nominal interest rate minus the expected inflation.

Question 13

Ex post real interest rate

Answer 13

the real interest rate actually realized; the nominal interest rate minus actual inflation.

Question 14

Shoeleather costs

Answer 14

the cost of inflation from reducing real money balances, such as the inconvenience of needing to make more frequent trips to the bank.

Question 15

Menu costs

Answer 15

the cost of changing a price.

Question 16

Real variables

Answer 16

All variables measured in physical units, such as quantities and relative prices.

Question 17

Classical dichotomy

Answer 17

the theoretical separation of real and nominal variables in the classical model, which implies that nominal variables do not influence real variables.

Question 18

Monetary neutrality

Answer 18

the property that a change in the money supply does not influence real variables.

Question 19

Nominal variables

Answer 19

Variables expressed in terms of money.