Exam 11: Money Growth and Inflation

Last year, Tealandia produced 60 000 bags of green tea, which sold at 5 units each of Tealandia's currency-the Leaf. Tealandia's money supply was 10 000. What was the velocity of money in Tealandia?

Suppose that velocity and output are constant and that the quantity theory and the Fisher effect both hold. What happens to inflation, real interest rates, and nominal interest rates when the money supply growth rate increases from 5 percent to 10 percent?

What do economists think about high and moderate inflation?

According to the classical dichotomy, what changes nominal variables? What changes real variables?

According to the quantity equation, if P = 4 and Y = 800, which of the following pairs could M and V be?

Which of the following kinds of variables are interest rates adjusted for the effects of inflation?

What are the costs of inflation?

When the money market is depicted in a diagram with the value of money on the vertical axis, in which of the following situations does the value of money increase?

Canada has never experienced deflation.

Which of the following does the classical theory of inflation try to explain?

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

Given a nominal interest rate of 7 percent, in which of the following cases would you earn the lowest after-tax real rate of interest?

Even though monetary policy is neutral in the short run, it may have profound real effects in the long run.

In this problem we try to establish a link between the quantity equation, M^dV = PY, and the money demand-money supply diagram (M^d is the quantity of money demanded). -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?

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.

Which of the following does the evidence gained from studying hyperinflation indicate?

When the money market is depicted in a diagram with the value of money on the vertical axis, which of the following happens if the price level is above the equilibrium level?

Why is the money supply curve vertical?

Suppose Bob considers borrowing $100 from Sheila. They both think that a 4 percent real interest rate would be fair, but they are aware of a 30 percent capital gain tax. Therefore, they think of the fair 4 percent real interest rate as an after-tax rate. How much should Bob pay to Sheila 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 Bob's incentive to borrow?

When and where did hyperinflation occur?