Exam 11: Money Growth and Inflation

What kind of economic variables are the interest rates when adjusted for the effects of inflation?

Casimir purchased one share of Norcet stock for $100 in year 1 and sold that share in year 2 for $200. The inflation rate between year 1 and year 2 was 50 percent. If the capital gains tax is imposed at a rate of 50 percent, what is Casimir's after-tax real capital gain?

People use more resources to reduce their money holdings because of high inflation. What is this an example of?

The velocity of money in the small Republic of Sloagia is always the same. Last year, the money supply was $2 billion and real GDP was $5 billion. This year, the money supply increased by 6 percent, real GDP by 4 percent, and nominal GDP is $6.5 billion. a) Calculate the velocity of money and the price levels in the two years, and then calculate the inflation rate. b) Calculate the inflation rate using the formula ÄM/M + ÄV/V = ÄP/P + ÄY/Y, where the Greek letter Ä represents a change and the ratio ÄM/M × 100 is the percentage change (or the rate of change) in M. Compare this result with the result you obtained in part a. Why could there be some difference?

If P represents the price of goods and services measured in money, then 1/P is the value of money measured in terms of goods and services.

Figure 11-1 -Refer to Figure 11-1. If the current money supply is located at MS1 and the value of money is 2, what is the excess demand or supply?

Which statement best explains why governments may prefer an inflation tax to some other kind of tax?

Which event took place in the early 1920s in Germany?

What would be the effect of indexing the tax system to take into account the effects of inflation on taxing capital gains?

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. Now, replace the price level in your graph with the value of money on the vertical axis and redraw the money demand curve. What do you observe?

How are debtors and creditors affected when the economy unexpectedly goes from inflation to deflation?

When the money market is represented in a diagram with the value of money on the vertical axis, how does the money supply curve shift from a decrease in the money supply?

Since 1992, at what level has the Bank of Canada successfully maintained the inflation rate?

Canadian prices rose at an average annual rate of about 4 percent over the past 70 years.

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

When the money market is depicted in a diagram with the value of money on the vertical axis, in which situation does the price level decrease?

According to the quantity equation, if Y and M are constant and V doubles, what factor does the price level multiply by?

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

This problem compares the effect of a tax on interest earnings over a number of years, when interest is compounded annually. Suppose you purchase $1000 worth of mutual funds paying an average of 5 percent per year. a) How much is your interest after 30 years if there was no tax on interest? b) How much is your interest after 30 years if there is a 20 percent tax on interest earnings?