Exam 16: The Dynamics of Inflation and Unemployment

If the growth rate of money changes, there will be short-run effects on real interest rates.

As the result of unanticipated inflation, lenders are better off while borrowers are worse off if the actual inflation rate

Suppose that the expected inflation rate is 4 percent and the actual inflation rate is 1 percent. Then borrowers

The real rate of interest is defined as the

Recall the Application about the increase in political independence for the Bank of England and its effect on anticipated inflation to answer the following question(s). In 1997, the Bank of England became more independent from the government. Although the government still retained the authority to set overall policy goals, the Bank of England was free to pursue its policy goals without direct political control. Federal Reserve economist Mark Spiegel compared interest rates on two different types of long-term bonds, those that are automatically adjusted for inflation and those that are not, to see how the British bond market reacted to this policy change. -According to this Application, in 1997, the Chancellor of Exchecquer in Great Britain announced that the Bank of England would be more independent from the government. Typically, the more independent a nation's central bank

A nation that cannot borrow money but creates a large budget deficit is likely to experience

What must a government do to end hyperinflation in its economy?

During the early 1980s, one effect of the Federal Reserve's fight against inflation was

Suppose workers negotiate for a 5 percent nominal wage increase and expect a 8 percent inflation rate. If the actual inflation rate is 4 percent, then workers

According to the rational expectations theory

Recall the Application about the study by Thomas J. Sargent of hyperinflations after World War I in Germany, Austria, Hungary, and Poland, and how those hyperinflations ended, to answer the following question(s). -According to this Application, Sargent found that in each of the four cases studied, hyperinflation ended

-Using Figure 16.1, describe the two choices the fed has with respect to changing the money supply if unions negotiate higher industry wages for its members, and as a result, higher rates of inflation emerge. Assume before the wage increase, the economy is at point c.

Recall the Application about the increase in political independence for the Bank of England and its effect on anticipated inflation to answer the following question(s). In 1997, the Bank of England became more independent from the government. Although the government still retained the authority to set overall policy goals, the Bank of England was free to pursue its policy goals without direct political control. Federal Reserve economist Mark Spiegel compared interest rates on two different types of long-term bonds, those that are automatically adjusted for inflation and those that are not, to see how the British bond market reacted to this policy change. -Why are the heads of central banks typically very conservative and constantly warning about the dangers of inflation?

Suppose the economy has been at full employment for the past two years with a 7 percent inflation rate, and both the money supply and money demand were growing at 7 percent a year. If the Federal Reserve unexpectedly decreases the rate of money growth to 3 percent, the following sequence of events occurs

During hyperinflations, prices are

All else equal, if workers confuse real and nominal magnitudes, they are experiencing

Suppose you have $100 to invest for a year and the nominal interest rate is 7 percent. If the inflation rate during the year is 4 percent, at the end of the year your nominal gain from the investment is

In the short run, increases in the money supply growth rate will

Suppose workers receive a 5 percent increase in wages and prices are rising by 5 percent. Workers will experience

Suppose that for a given year money growth is 10 percent, real GDP growth is 8 percent, and velocity is constant. According to the growth version of the quantity equation, the inflation rate would be