Exam 11: Money Growth and Inflation

List and define any two of the costs of high inflation.

According to the classical dichotomy, which of the following is influenced by monetary factors?

If your salary increased by 7 percent and prices increased by 4 percent, by how much did your real wage rise?

The country of Aquilonia has a tax system identical to that of Canada. Suppose someone in Aquilonia bought a parcel of land for $10 000 in 1960 when the price index equalled 100. In 2002, the person sold the land for $100 000, and the price index equalled 500. If the person must pay 20 percent of any capital gain in taxes, which of the following is the after-tax real capital gain (in 2002 dollars) on the land?

Given a nominal interest rate of 12 percent, in which of the following cases would you earn the highest after-tax real rate of interest?

If the Bank of Canada were to unexpectedly increase the money supply, creditors would gain at the expense of debtors.

Suppose that velocity and output are constant and that the quantity theory and Fisher effect are both correct. If the nominal interest rate is 8 percent and inflation is 3 percent, what is the money supply growth rate or the real interest rate?

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

Over the past 70 years, what was the approximate average annual inflation rate?

Suppose that velocity and output are constant, the quantity theory and Fisher effect are correct, the nominal interest rate is 7 percent, and money growth is 2 percent. Which of the following is consistent with these facts?

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

Casimir purchased one share of Norcet stock for $200 in year 1 and sold that share in year 2 for $400. 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?

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?

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?

Greta puts money in a savings account at her bank earning 6.5 percent. One year later she takes her money out and notes that while her money was earning interest, prices rose 3.5 percent. Which of the following does Greta now have?

According to the classical dichotomy, when the money supply doubles, which of the following also double(s)?

Nominal GDP measures output of final goods and services in physical terms.

Which of the following best characterizes the effect of inflation?

When the money market is represented in a diagram with the value of money on the vertical axis, which of the following best describes the effects of an increase in money supply?

Which of the following ideas does the classical dichotomy refers to?