Exam 5: The Open Economy

Consider two countries, Hitech and Lotech. In Hitech new arrangements for making payments, such as credit cards and ATMs, have been enthusiastically adopted by the population, thereby reducing the proportion of income that is held as real money balances. Over this period no such changes occurred in Lotech. If the rate of money growth and the growth rate of real GDP were the same in Hitech and Lotech over this period, then how would the rate of inflation differ between the two countries? Carefully explain your answer.

The inconvenience associated with reducing money holdings to avoid the inflation tax is called:

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must:

Using decade-long data across countries from 2000-2010, countries with high money growth tend to have inflation.

According to the quantity theory a 5 percent increase in money growth increases inflation by percent. According to the Fisher equation a 5 percent increase in the rate of inflation increases the nominal interest rate by .

If the quantity of real money balances is kY, where k is a constant, then velocity is:

A classical economist wears a T-shirt printed with the slogan "Fast Money Raises My Interest!" Use the quantity theory of money and the Fisher equation to explain the slogan.

Econoland finances government expenditures with an inflation tax. a. Explain who pays the tax and how it is paid. b. What are costs of the tax, assuming the tax rate is expected?

Devoting resources to avoiding the costs of expected inflation leads to: