Exam 11: Money Growth and Inflation

Suppose Bob considers borrowing $100 from Sheila at a 10 percent interest rate. They both think that a 4 percent real interest rate would be fair.?a) What was the inflation rate they both expected??b) If the inflation rate turned out to be 8 percent, how much was the real interest rate? Who gained and who lost from this transaction, and how much because of unexpected inflation??c) If there was an interest tax of 30 percent, what is the after-tax real interest rate, with the inflation rate of 8 percent?

When do most economists believe the principle of monetary neutrality can be relevant?

What kind of variables are the interest rates usually published in newspapers such as the Financial Post?

Which of the following does an increase in the money supply growth rate increase?

Given a nominal interest rate of 12 percent, when would you earn the highest after-tax real interest rate?

When a graph of the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal. This is due to adjustments in which of the following?

Which event took place in the early 1920s in Germany?

Which statement best describes the inflation tax?

If money is neutral and velocity is stable, what does an increase in the money supply create a proportional increase in?

Canada has never experienced deflation.

When the money market is depicted in a graph with the value of money on the vertical axis, as the price level increases, what happens to the value of money?

If P represents the price of goods and services measured in money, then 1/P is the value of money measured in terms of goods and services.

Suppose Bob considers borrowing $100 from Sheila. They both think that a 4 percent real interest rate would be fair, but they are aware of a 30 percent interest income tax. Therefore, they think of the fair 4 percent real interest rate as an after-tax rate. How much should Bob pay to Sheila in interest, such that the after-tax real interest rate would be 4 percent, if they expect inflation to be 6 percent? What if the expected inflation was 8 percent? How does this affect Bob's incentive to borrow?

When the money market is represented in a diagram with the value of money on the vertical axis, which statement best describes the effects of an increase in money supply?

How is velocity computed?

Consider the quantity equation MV = PY. Assume that the money market is in equilibrium, where the money supply equals the demand for money, MS = MD = M. Assume also that the velocity of money is constant. In a graph with P on the vertical axis and Y on the horizontal axis, draw the relationship Y(P) implied by the quantity theory. How could this curve be interpreted? How does it change when MS increases?