Exam 30: Money Growth and Inflation

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 __________.

Figure 30-2 In the graph, MS represents the money supply and MD represents money demand. The vertical axis is the value of money measured as 1/P and the horizontal axis is the quantity of money. -Refer to Figure 30-2. If the relevant money-demand curve is the one labeled MD₂, then the equilibrium value of money is

If the Fed conducts open market sales, the equilibrium value of money decreases and the equilibrium price level increases.

Define each of the symbols and explain the meaning of M x V = P x Y.

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?

In the 1990s, U.S. prices rose at about the same rate as in the 1970s.

If inflation is higher than expected, then lenders receive interest payments whose real values are less than they expected.

If the real interest rate is 5% and the inflation rate is 3%, then the nominal interest rate is 8%.

Jimmy Carter, Ronald Reagan, and Gerald Ford are all U.S. presidents whose political careers were helped by inflation.

In the long run, money demand and money supply determine

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

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

As the price level falls, the value of money falls.

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.

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?)

Last year, you earned a nominal wage of $10 per hour and the price level was 120. This year your nominal wage is $11 per hour, but you are unable to purchase the same amount of goods as last year. The price level this year must be

If the Fed increases the money supply, the equilibrium value of money decreases and the equilibrium price level increases.

You put money into an account and earn a real interest rate of 4 percent. Inflation is 2 percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of interest?

In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold, which was in use as a medium of exchange. We would predict that this increase in gold

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?