If the price level increased from 120-130 then what was the inflation rate?
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8.3%
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When prices are falling, economists say that there is
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deflation
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To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the
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quantity theory of money
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When the price level falls, the number of dollars needed to buy a representative basket of goods
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decreases, so the value of money rises
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When there is inflation, the number of dollars needed to buy a representative basket of goods
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increases, and so the value of money falls
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If P denotes the price of goods and services measured in terms of money, then
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1/P represents the value of money measured in terms of goods and services,
P can be regarded as the "overall price level", and
an increase in the value of money is associated with a decrease in P.
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The supply of money is determined by
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the Federal Reserve System
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With the value of money on the vertical axis, the money supply curve is
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vertical
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Money demand refers to
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how much wealth people want to hold in liquid form
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As the price level decreases, the value of money
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increases, so people hold less money to purchase goods and services
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When the money market is drawn with the value of money on the vertical axis, as the price level increases the quantity of money
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demanded increases
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When the money market is drawn with the value of money on the vertical axis, as the price level decreases, the value of money
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increases, so the quantity of money demanded decreases
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When 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 due to adjustments in
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the price level
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When the money market is drawn with the value of money on the vertical axis, if the value of money is above the equilibrium level,
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the price level will rise
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Suppose the money market, drawn with the value of money on the vertical axis, is in equilibrium. If the money supply increases, then at the old value of money there is an
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excess supply of money that will result in an increase in spending
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When the money market is drawn with the value of money on the vertical axis, an increase in the money supply
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increases the price level and decreases the value of money
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A decrease in the money supply creates an excess
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demand for money that is eliminated by falling prices
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Economic variables whose values are measured in monetary units are called
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nominal variables
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The price level is a
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nominal variable
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On a given morning, Franco sold 40 pairs of shoes for a total of $80 at his shoe store.
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The $80 is a nominal variable. The quantity of shoes is a real variable.
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Classical economic theory argues that long run changes in the money supply
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affect nominal variables, but not real variables
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According to the classical economic theory, which of the following is not influenced by long- run monetary factors?
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real GDP
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The principle of monetary neutrality implies that in the long run, an increase in the money supply will
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increase the price level, but not real GDP
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According to the principle of monetary neutrality, a decrease in the money supply in the long run will not change
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unemployment
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Most economists believe that monetary neutrality provides
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a good description of the long run, but not the short run
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The velocity of money is
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the average number of times per year a dollar is spent
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If M = 6,000, P = 3, and Y = 3,000, what is velocity?
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1.5
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If velocity = 4, the quantity of money = 20,000, and the price level = 2.5, then the real value of output is
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32,000
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If real output in an economy is 1,000 goods per year, the money supply is $300, and each dollar is spent an average of 4 times per year, then according to the quantity equation, the average price level is
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1.20
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According to the assumptions of the quantity theory of money, if the money supply increases by 5 percent, then
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nominal GDP would rise by 5 percent; real GDP would be unchanged
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According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then
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the price level would rise by 5 percent and real GDP would be unchanged
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The money supply in Muckland is $100 billion. Nominal GDP is $800 billion and real GDP is $200 billion. What are the price level and velocity in Muckland?
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The price level is 4 and velocity is 8
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The money supply is 4,000, nominal GDP is 8,000, and real GDP is 2,000. Which of the following is 2?
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velocity but not the price level
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If velocity and output were nearly constant, then
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the inflation rate would be a bout the same as the money supply growth rate
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According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then
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both the price level and nominal GDP would rise by 5 perent
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According to the assumptions of the quantity theory of money, if the money supply decreases by 7 percent, then
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nominal GDP would fall by 7 percent; real GDP would be unchanged
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Based on past experience, if a country is experiencing hyperinflation, then which of the following would be a reasonable guess?
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a) The country has high money supply growth.
b) Inflation is acting like a tax on everyone who holds money.
c) The government is printing money to finance its expenditures.
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The inflation tax
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is an alternative to income taxes and government borrowing,
taxes most those who hold the most money, and is the revenue created when the government prints money.
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If a bank posts a nominal interest rate of 4 percent, and inflation is expected to be 3 percent, then
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the expected real interest rate is 1 percent
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The Fisher effect says that
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the nominal interest rate adjusts one for one with the inflation rate
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Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases
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the inflation rate and the nominal interest rate by the same number of percentage points
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Shoe leather costs arise when higher inflation rates induce people to
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hold less money
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When inflation rises, people tend to go to the bank
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more often, giving rise to shoe leather costs
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Deciding on new prices, printing new price lists, and advertising new prices are all ______.
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menu costs
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If there is inflation, then a firm that has kept its price fixed for some time will have a
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low relative price. Relative price variability rises as the inflation rate rises.
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In the US, people are required to pay taxes on
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nominal interest earnings, irrespective of their real interest earnings.
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US taxpayers are not allowed to adjust interest income or capital gains for inflation of purpose of _____.
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income taxes
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You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the price level. Before taxes, you experienced
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a nominal gain, but no real gain, and you paid taxes on the nominal gain
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Wealth is redistributed from debtors to creditors when inflation was expected to be
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high and it turns out to be low
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If inflation is higher than what was expected,
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creditors receive a lower real interest rate than they had anticipated
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Though monetary policy is neutral in the _______, it may have effects on real variables in the ______
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long run, short run
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