Exam 17: Money Growth and Inflation: Part B

The story The Wizard of Oz can be interpreted as an allegory about U.S.monetary policy in the late 19th century.

The source of all four classic hyperinflations was high rates of money growth.

One study found that unemployment is the economic term mentioned most often in U.S.newspapers.

Suppose the nominal interest rate is 5 percent,the tax rate on interest income is 30 percent,and the after-tax real interest rate is 2.1percent.Then the inflation rate is 2 percent.

Inflation necessarily distorts saving when either real interest income or nominal interest income is taxed.

Inflation distorts savings when real interest income,rather than nominal interest income,is taxed.

As the price level falls,the value of money falls.

If the Fed conducts open market sales,the equilibrium value of money decreases and the equilibrium price level increases.

Dollar prices and relative prices are both nominal variables.

In the late 1800's deflation caused farmers to suffer as the fall in crop prices reduced their income and thus their ability to pay off their debts.

The money demand curve is downward sloping because as the value of money falls people desire to hold a larger quantity of money.

According to the Fisher effect,if inflation rises then the nominal interest rate rises.

Inflation is costly only if it is unanticipated.

An increase in money demand would create a surplus of money at the original value of money.

Monetary neutrality means that while real variables may change in response to changes in the money supply,nominal variables do not.

The price level is determined by the supply of,and demand for,money.

If the real interest rate is 5% and the inflation rate is 3%,then the nominal interest rate is 8%.

For a given real interest rate,an increase in the inflation rate reduces the after-tax real interest rate.

An excess supply of money is eliminated by a falling price level

If inflation is higher than expected,then lenders receive interest payments whose real values are less than they expected.