Exam 5: Inflation: Its Causes, Effects, and Social Costs

Assume that a series of inflation rates is 1 percent, 2 percent, and 4 percent, while nominal interest rates in the same three periods are 5 percent, 5 percent, and 6 percent, respectively. a. What are the ex post real interest rates in the same three periods? b. If the expected inflation rate in each period is the realized inflation rate in the previous period, what are the ex ante real interest rates in periods wo and three? c. If someone lends in period two, based on the exante inflati on expectation in part b, will he or she be pleasantly or unpleasantly surprised in period 3 when the loan is repaid?

Interest rates played a part in the 1984 U.S. presidential debates. Some politicians claimed that interest rates rose over the 1981-1983 period, while others claimed rates fell. Below is a table showing interest rates and annual inflation rates from 1981 to 1983. Interest Rate Annual Year (annual \%) Inflation Rate 1981 14.03\% 10.3\% 1982 10.69\% 6.2\% 1983 8.63\% 3.2\% Reconcile these conflicting claims.

Variables expressed in terms of physical units or quantities are called ______ variables.

In Zimbabwe in the 1990s the government resorted to printing money to pay the salaries of government employees because:

For a country A, the GDP growth rate is 8 percent and inflation is 4 percent. If the velocity of money remains constant, what is the change in real money balances?

The real interest rate is equal to the:

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

The right of seigniorage is the right to:

Equilibrium in the market for goods and services determines the ______ interest rate and the expected rate of inflation determines the ______ interest rate.

"Inflation tax" means that:

During the American Revolution, the price of gold measured in continental dollars increased to more than ______ times its previous level.

When the demand for money parameter, k, is large, the velocity of money is ______ and money is changing hands ______

The hyperinflation experienced by interwar Germany illustrates how fiscal policy can be connected to monetary policy when government expenditures are financed by:

According to the quantity theory and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase:

The costs of expected inflation cause productive resources of an economy to be directed away from their efficient allocation. Explain how each of the following costs of expected inflation distort the allocation of productive resources: a. shoeleather costs b. menu costs c. the inconvenience of a changing price level

The definition of the transactions velocity of money is:

If velocity is constant and, in addition, the factors of production and the production function determine real GDP, then:

Variable inflation hurts both debtors and creditors because:

One possible benefit of moderate inflation is:

If the demand for money depends on the nominal interest rate, then via the quantity theory and the Fisher equation, the price level depends on: