F: Chapter 30

Question 1

Inflation

Answer 1

an increase in the overall level of prices

Question 2

Hyperinflation

Answer 2

extraordinarily high rate of inflation

- occurs in some countries because the government prints too much money to pay for its spending

Question 3

Quantity theory of money

Answer 3

When overall price level rises, the value of money falls. The quantity of money available in the economy determines the value of money.

Question 4

Nominal variables

Answer 4

variables measured in monetary units

Question 5

real variables

Answer 5

variables measured in physical units

Question 6

Monetary neutrality

Answer 6

the irrelevance of monetary changes for real variables

Question 7

Velocity of money

Answer 7

the speed at which money changes hand

Question 8

velocity and quantity equation

Answer 8

V = (P x Y)/M 
p= price level
y= quantity of output
m= quantity of money

Question 9

Quantity equation shows:

Answer 9

that an increase in the quantity money in an economy must be reflected in:

1. price level must rise
2. quantity of output must rise or;
3. velocity of money must fall

Question 10

Inflation tax

Answer 10

government raises revenue by printing money

Question 11

Fisher effect

Answer 11

refers to a one-to-one adjustment of the nominal interest rate of the inflation rate
- when the rate of inflation rises, the nominal interest rate rise by the same amount and real interest rate stays the same

Question 12

Costs of Inflation (6)

Answer 12

1. Shoeleather costs
2. Menu Costs
3. Relative-Price Variability
4. Inflation-Induced Tax Distortion
5. Confusion and Inconvenience
6. Arbitrary Redistribution of Wealth

Question 13

Shoeleather costs

Answer 13

The cost, in time and energy, of efforts intended to counteract the effects of inflation, people will cope with inflation by keeping less cash on hand and making more trips to the bank

Question 14

Menu Costs

Answer 14

costs of adjusting prices

Question 15

Relative-Price Variability

Answer 15

When inflation distorts relative prices, consumer decisions are distorted and markets are less able to allocate resources to their best use

Question 16

Inflation-Induced Tax Distortion

Answer 16

inflation exaggerates the size of capital gains and increases the tax burden on this type of income

Question 17

Confusion and Inconvenience

Answer 17

When the central bank increases the money supply and creates inflation, it erodes the real value of the unit of account

Question 18

Arbitrary Redistribution of Wealth

Answer 18

unexpected inflation redistributes wealth among the population in a way that has nothing to do with either merit or need