Exam 30: Money Growth and Inflation

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?

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.

U.S. prices rose at an average annual rate of about 3.6 percent over the last 80 years.

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.

When inflation causes relative-price variability consumer decisions,

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

When the value of money is on the vertical axis, the money supply curve slopes upward because an increase in the value of money induces banks to create more money.

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 _____.

James took out a fixed-interest-rate loan when the CPI was 200. He expected the CPI to increase to 206 but it actually increased to 204. The real interest rate he paid is

When the value of money is on the vertical axis, the money supply curve is vertical and shifts right if the Federal Reserve buys bonds.

Suppose the nominal interest rate is 5 percent, the tax rate on interest income is 30 percent, and the after-tax real interest rate is 2.1percent. Then the inflation rate is 2 percent.

For a given level of money and real GDP, an increase in velocity would lead to an increase in the price level.

An excess supply of money is eliminated by a falling price level

If there is inflation, then a firm that has kept its price fixed for some time will have a

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?

The classical dichotomy is useful for analyzing the economy because in the long run nominal variables are heavily influenced by developments in the monetary system, and real variables are not.

If inflation is higher than expected, then borrowers make nominal interest payments that are less than they expected.

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 _____.

The idea that nominal variables are heavily influenced by the quantity of money and that money is largely irrelevant for understanding the determinants of real variables is explained by the

According to the classical dichotomy, which of the following increases when the money supply increases?