chapter 12

Question 1

in the long run, inflation occurs if…

Answer 1

the quantity of money grows faster than potential GDP

Question 2

demand-pull inflation

Answer 2

an inflation that starts because AD increases

Question 3

factors that increase AD, leading to demand-pull inflation

Answer 3

• a cut in the interest rate
• an increase in the q of money
• an increase in government expenditure
• a tax cut
• an increase in exports/investment stimulated by an increase in expected future profits

Question 4

cost-push inflation

Answer 4

an inflation that starts with an increase in costs

Question 5

two main sources of increased costs leading to cost-push inflation:

Answer 5

1. an increase in the money wage rate
2. an increase in the money price of raw materials, such as oil

Question 6

stagflation

Answer 6

the combination of a rising price level and a decreasing real GDP

Question 7

inflation rate formula

Answer 7

money growth rate + rate of velocity change - real GDP growth rate

Question 8

deflation occurs if (related to inflation equation):

Answer 8

money growth rate < real GDP growth rate - rate of velocity change

Question 9

what are the consequences of deflation?

Answer 9

redistributes income & wealth, lowers real GDP & employment, & diverts resources from production

Question 10

how can deflation be ended?

Answer 10

by increasing the growth rate of money. make the money growth rate exceed the growth rate of real GDP minus the rate of velocity change