L5

Question 1

Define inflation(deflation)?

Answer 1

The increase (decrease) in the overall price level in the economy

Question 2

Define inflation rate (π)?

Answer 2

Measure of the average change in prices across the economy over a specified period

Question 3

What is hyperinflation?

Answer 3

> =50%inflation/month

Question 4

4 measures of inflation?

Answer 4

Producer price indices (PPI)
Services PPI (SPPIS)
Retail price index (RPI)
Consumer price index (CPI)

Question 5

How does the PPI measure inflation?

Answer 5

Measures prices of goods bought and sold by UK manufacturers

Question 6

How does the SPPIS measure inflation?

Answer 6

Measures prices of services bought and sold by UK manufacturers

Question 7

How does the RPI measure inflation?

Answer 7

Measures change in prices of a representative sample of goods and services (includes cost of housing unlike CPI)

Question 8

How does the CPI measure inflation?

Answer 8

Measures 700 representative items average change in price

Question 9

What is CPIH?

Answer 9

CPI including housing costs, discontinued in 2013 due to difficulties but will be reinstated in March 2017 as preferred inflation measure

Question 10

Define purchasing power?

Answer 10

The amount of G+S that can be purchased with a unit of currency

Question 11

Define money supply?

Answer 11

Total amount of money available in an economy at a given time

Question 12

What do we assume about money supply?

Answer 12

Assume it is fixed at the level the CB chooses

Question 13

What is broad money?

Answer 13

M2, M3, M4

Question 14

What is M0?

Answer 14

Notes+coins in circulation plus total reserves

Question 15

What is M1?

Answer 15

Currency in circulation + demand deposits

Question 16

What is M2?

Answer 16

M1 + short term time deposits (2yr maturity)

Question 17

What is M3?

Answer 17

M2 + long term time deposits (repos + shares + debt securities)

Question 18

What is M4?

Answer 18

M3 + other deposits

Question 19

Learn 3 axis diagram I the effects of changing money supply on the price level and value of money (1/p)

Answer 19

Now

Question 20

Define money demand?

Answer 20

Total amount of money people want to hold in liquid form

Question 21

Define monetary policy?

Answer 21

The CB’s decisions regarding the supply of money in the economy

Question 22

Define quantity theory of money?

Answer 22

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

Question 23

Explain the QToM?

Answer 23

MV = PY
tf V = PY/M

Velocity is stable tf fixed, output is determined by FofP tf

Change M -> change P
(Positive correlation)

Question 24

What is velocity of money?

Answer 24

The number of times money is used per year

Question 25

What is monetary neutrality?

Answer 25

The proposition that changes in the money supply do not affect real variables (DO affect nominal variables)

Question 26

Explain why AD slopes downward?

Answer 26

If money supply is held constant, velocity is fixed: MV = PY MV is fixed tf increase in P means decrease in Y and vice versa

Question 27

In the very long run output(Y) increases at a steady rate; what does this mean for the price level?

Answer 27

It means P is also determined by a change in output

Question 28

Define inflation targeting?

Answer 28

When the CB has to keep an explicit target for inflation rate and tf sets monetary policy to hit this target

Question 29

Why does the CB set a positive target rate?

Answer 29

If provides a policy tool to influence AD

Question 30

Define fisher effect?

Answer 30

The adjustment of the nominal interest rate to the inflation

Question 31

What happens to the inflation rate if the CB increases the money supply?

Answer 31

Increase M -> increase π -> increase nominal interest rate See explanation