Exam 11: Money Growth and Inflation

According to Hume, the classical dichotomy is useful for analyzing the economy because nominal variables are heavily influenced by developments in the monetary system, and real variables are not.

Explain the adjustment process that creates a change in the price level when the money supply increases.

What does the Fisher effect imply?

According to the classical dichotomy, what is influenced by monetary factors?

In a graph having the price level P on the vertical axis and the quantity of money M on the horizontal axis and considering V and Y independent on the price level or the quantity of money demanded, draw the Md - P curve that is implied by the quantity equation. Show how the P?2-Md curve changes when Y changes.

Nominal GDP measures output of final goods and services in physical terms.

Use a money supply and demand diagram to answer the following problem: "The introduction of automated teller machines was equivalent to an increase in money supply." Discuss this assertion.

What does nominal GDP measure?

If the Bank of Canada increases the money supply, the equilibrium value of money decreases and the equilibrium price level must increase.

Assuming that velocity is stable, if real GDP grows by 20 percent this year, and if the money supply does not change this year, how much does the price level change by?

According to the classical dichotomy theory, when the money supply doubles, what also doubles?

When the money market is drawn with the value of money on the vertical axis, in which situation does the price level increase?

Use a money supply and demand diagram to answer the following problem: In a diagram having the value of money on the vertical axis and the quantity of money on the horizontal axis, draw a money demand curve and explain its shape. Do the same for the money supply curve.

The irrelevance of monetary changes for real variables is called monetary neutrality. Most economists accept monetary neutrality as a good description of the economy in the long run, but not the short run.

Which statement best characterizes the effect of inflation?

How can inflation be measured?

Define each of the symbols and explain the meaning of M × V = P × Y.

Assuming that velocity is stable, if real GDP grows by 10 percent this year, and if the money supply does not change this year, how does the price level and nominal GDP change?

What assumptions are necessary to argue that the quantity equation implies that increases in the money supply lead to proportional changes in the price level?

What does real GDP measure?