Deck 30: Essay

Question 1

If the price level were to rise from 160 to 200,in what direction and by how much would the value of a dollar change?

Answer 1

rise,excess supply (a surplus),increase

Question 2

In the long run an increase in the money supply causes the price level to ----------.The price level moves in this direction because an increase in the money supply creates ---------- in the money market that causes people to -------- spending.

Answer 2

supply,increase

Question 3

The consumer price index increases from 200 to 208.What is the inflation rate?

Answer 3

classical theory

Question 4

An increase in the price level means that a dollar buys ---------- goods and services so the value of a dollar ----------.

Question 5

It takes more money to purchase the same amount of goods when prices -----.Therefore,the value of your money has ----.

Question 6

According to the quantity theory of money,an increase in the money supply causes the price level to ----- and the value of money to -----.

Question 7

A decrease in the value of money ---------- the quantity of money demanded.On a graph with the value of money on the vertical axis this effect on the value of money on quantity demanded is shown as ------------.

Question 8

An economy produces two goods,x and y.A year ago the price of x was $4 and the price of y was $6.Today the price of x is $8 and the price of y is $10.What happened to the nominal and the real value of good x? What happened to the nominal and real value of good y?

Question 9

The classical dichotomy says that two groups of variables are affected by different forces.What are these two groups of variables?

Question 10

A decrease in the overall price level (or falling prices)is called -----.An extraordinarily high rate of inflation is called -----.

Question 11

When the Federal Reserve injects money into the banking system,it initially causes an excess ----- of money.Equilibrium in the money market is reestablished through a(n)----- in the price level.

Question 12

If the price level this year was 140 and was 135 last year,what was the inflation rate to the nearest decimal?

Question 13

The theory that most economists rely on to explain inflation is called the ----------.

Question 14

When the consumer price index increases,the value of your money has -----.According to the quantity theory of money this is caused by an increase in the -----.

Question 15

The increase in the overall level of prices is known as -----.

Question 16

If velocity is 6,real output is 10,000,and M is 20,000 what would the price level be? If M increases to 25,000 but V and Y do not change,what happens to the price level? Are the change in the money supply and the change in the price level proportional?

Question 17

The quantity equation is expressed as -----.The rate at which money changes hands is known as -----.

Question 18

Money neutrality states that a change in the money supply affects ----- variables only.Most economists believe that money neutrality is a good description of how money affects the economy in the -----.

Question 19

You hear an economist state the following: "The increase in the money supply will causes price to rise in the long run and will have no effect on output or any other real factors." This economist is expressing the principle of -----.

Question 20

An increase in the price level causes the value of money to -----.Therefore,people will want to hold ---- money,because the cost of their purchases has increased.

Question 21

Some countries have experienced an extraordinarily high rate of inflation known as -----.This is usually due to governments using money creation as a way to pay for their spending.The revenue the government raises by creating money is called the -----.

Question 22

During hyperinflations,people desire to hold less money and will go to the bank more frequently.This waste of resources due to the high rate of inflation is known as -----.

Question 23

Suppose the rate of inflation rate is two percent and the nominal interest rate is five percent.According to the Fisher Effect,an increase in the inflation rate to six percent should cause the nominal interest rate to increase from five percent to ----- in the long run.

Question 24

Your grandfather tells you that his annual income increased at an average rate of eight percent over his lifetime.He complains,however,that the average inflation rate of three percent reduced his ability to buy all the things he could have purchased if inflation had been zero.You respectfully tell your grandfather that he is committing the -----,because his annual income would have increased at an average rate of only five percent if inflation had been zero.

Question 25

If the government were to run a budget deficit and wanted to finance it by printing money,would it have the central bank conduct open market purchases or open market sales?

Question 26

Does an increase in the inflation rate increase or decrease the amount of money people choose to hold at any given price level? What would an increase in the inflation rate do to money demand? What would this change in money demand do to the price level?

Question 27

The nominal interest rate is eight percent and the consumer price index rises from 140 to 147.What is the real interest rate?

Question 28

According to the Fisher effect,if the central bank raises the rate of money supply growth,what happens to the nominal and the real interest rate?

Question 29

The inflation tax alters people's behavior and creates a deadweight loss.Explain.

Question 30

In the long run inflation is explained by ----------.For countries that had hyperinflation this source of inflation arose primarily because the government ----------.

Question 31

Jackie saves $100 and receives $106 the next year.During the same year,the price of the basket of goods that she purchases increases from $100 to $104.What is nominal interest rate on Jackie's saving? What is the real interest rate on Jackie's saving? What was the inflation rate?

Question 32

What two key assumptions does the quantity theory make concerning variables in the equation of exchange?

Question 33

What direction of change in velocity could explain the price level increasing by a smaller percentage than the money supply? What would this change in velocity imply about the frequency with which money changes hands?

Question 34

What are menu costs and why does high inflation increase menu costs?

Question 35

Given that firms change their prices infrequently,a business that has just raised its price will have a ---------- relative price;over time as its price remains fixed its relative price ----------.

Question 36

The costs a business incurs to change its prices are called -----------.

Question 37

The idea that firms incur actual costs when they change prices is known as -----.Firms in countries with lower inflation rates will change price ----- frequently compared to those countries where inflation is higher.

Question 38

In the early 1920s U.S.consumer prices fell,while Germany experienced hyperinflation.According to the ideas of shoeleather costs and menu costs,U.S.households (relative to German households)made ----- frequent trips to the bank and U.S.firms changed prices ----- frequently.

Question 39

The ----- interest rate tells you how fast the number of dollars in your bank account will rise over time,and it is the sum of the ----- interest rate and the -----.

Question 40

According to the classical dichotomy and money neutrality,a doubling of the money supply,holding all else constant,causes prices to ----- and real GDP to -----.

Question 41

If inflation is less than expected,who is wealth redistributed to?

Question 42

During the late 19th century,the U.S.price level fell.This unexpected increase in the real cost of borrowing caused wealth to be redistributed from ----- to -----.

Question 43

Economists agree that increases in the money-supply growth rate increase inflation and that inflation is undesirable.So why have there been hyperinflations and how have they been ended?

Question 44

Wages and prices are many times higher today than they were 30 years ago,yet people do not work a lot more hours or buy fewer goods.How can this be?

Question 45

If the inflation rate was 10%,and the tax rate was 25%,and you deposited money in a bank account that paid 14%,what is after tax real interest rate? Show you work.

Question 46

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

Question 47

Why did farmers in the late 1800s dislike deflation?

Question 48

One benefit of low inflation is that it ----- the variability of relative price changes.Therefore,resources are ----- likely to be better allocated.

Question 49

Mitch makes payments on a car loan.If the price level a year ago was 120 and people expected it to rise to 125 but it actually rose to 128,what happened to the real value of Mitch's payment as opposed to what he was expecting to happen? Express your answer to the nearest 100th.

Question 50

What is the inflation tax,and how might it explain the creation of inflation by a central bank?

Question 51

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?

Question 52

Define each of the symbols and explain the meaning of M
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Question 53

You earn a nominal return of 6% on your savings and the tax rate is 20%.If the rate of inflation is 2%,what are the before-tax real interest rate and your after-tax rate of return?

Question 54

One year ago Sam purchased bonds for $100,000.He just sold them for $120,000.During the year the price level rose by 5%.If the tax rate on capital gains is 20%,how much did Sam gain in real terms?

Question 55

Fifteen years ago your parents purchased some land with the idea of selling it later to help pay your college expenses.They purchased the land for $100,000.They sold if for $180,000.During the time they held it the price level rose from 80 to 120.If your parents face a 25% tax rate,what was their real after-tax gain? (Hint: What's the real value of the land in current prices?)

Question 56

According to the classical dichotomy,what changes nominal variables? What changes real variables?

Question 57

If the inflation rate was 8%,and the tax rate was 20%,and you deposited money in a bank account that pays 12%,what is your after tax real interest rate? Show you work.

Question 58

Suppose the Fed sells government bonds.Use a graph of the money market to show what this does to the value of money.

Question 59

Using separate graphs,demonstrate what happens to the money supply,money demand,the value of money,and the price level if:
a.the Fed increases the money supply.
b.people decide to demand less money at each value of money.

Question 60

In the U.S. ,taxes are paid on one's ----- gains/returns.Therefore,a ----- inflation rate encourages more saving.

Question 61

List and define any two of the costs of high inflation.

Question 62

In recent years Venezuela and Ukraine have had much higher nominal interest rates than the United States while Japan has had lower nominal interest rates.What would you predict is true about money growth in these other countries? Why?

Question 63

Suppose that velocity and output are constant and that the quantity theory and the Fisher effect both hold.What happens to inflation,real interest rates,and nominal interest rates when the money supply growth rate increases from 5 percent to 10 percent?