Exam 11: Money Growth and Inflation

Given a nominal interest rate of 6 percent, in which of the following cases would you earn the lowest after-tax real interest rate?

Figure 11-1 -Refer to Figure 11-1. What happens when the money supply curve shifts from MS1 to MS2?

Inflation induces people to spend more resources maintaining lower money holdings. This is called shoe leather costs.

In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks in many countries increased the money supply. How might the central banks have done this?

When the money market is depicted in a graph with the value of money on the vertical axis, what does an increase in the price level cause?

According to the principle of monetary neutrality, what will a decrease in the money supply NOT change?

When deciding how much to save, what interest rates do people usually care most about?

The money supply curve shifts to the left when the Bank of Canada sells government bonds.

When the money market is depicted in a graph with the value of money on the vertical axis, as the price level increases, how does the quantity of money demanded or supplied change?

When a graph of 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. This is due to adjustments in which of the following?

According to the quantity theory of money, when the money supply doubles, which variable doubles?

Suppose Geoff considers borrowing $100 from Tracey. They both think that a 4 percent real interest rate would be fair, but they are aware of a 30 percent interest income tax. Therefore, they think of the fair 4 percent real interest rate as an after-tax rate. How much should Geoff pay to Tracey in interest, such that the after-tax real interest rate would be 4 percent, if they expect inflation to be 6 percent? What if the expected inflation was 8 percent? How does this affect Geoff's incentive to borrow?

Given a nominal interest rate of 12 percent, when would you earn the highest after-tax real interest rate?

Which statement best defines the velocity of money?

In recent years, Bolivia, Russia, and Turkey have had much higher nominal interest rates than Canada, while Japan has had lower nominal interest rates. What would you predict is true about money growth in these other countries? Why?

If inflation is more than expected, how are creditors or debtors affected?

According to the classical dichotomy theory, when the money supply doubles, what also doubles?

What is the immediate and longer-term effect of a decrease in the money supply?

When does the supply of money increase?

Which statement best characterizes the inflation tax?