Exam 11: Money Growth and Inflation

Velocity in the country of Aquilonia is always stable.In 2014,the money supply was $100 billion,nominal GDP was $500 billion,and the real interest rate was 3 percent.In 2015,the money supply was $105 billion,and real GDP did not change from its level in 2014.What was the approximate nominal interest rate in 2015?

When the money market is depicted in a graph with the value of money on the vertical axis,as the price level increases,what happens to the value of money?

Which inflation cost matters even if actual inflation and expected inflation are the same?

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

The irrelevance of monetary changes for real variables is called monetary neutrality.Most economists accept monetary neutrality as a good description of the economy in the long run,but not the short run.

What does nominal GDP measure?

What can a country increase in the long run by increasing its money growth rate?

What does the Fisher effect imply?

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.

(Challenging)Let ÄX denote a small change in the variable X.Starting from the quantity equation MV = PY,show that the following relation between percentage changes holds: ÄM / M + ÄV / V = ÄP / P + ÄY / Y.(Note: It should be emphasized that this relationship holds for small changes,say less than 5 percent.The larger the changes,the less precise are the results derived from this relationship.)

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

What does the quantity theory of money try to explain?

Which statement best describes the effects of an open-market operation undertaken by the Bank of Canada?

Canada has never experienced deflation.

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

Assuming that velocity is stable,if real GDP grows by 10 percent this year,and if the money supply does not change this year,how does the price level and nominal GDP change?

In a graph having the price level P on the vertical axis and the quantity of money M on the horizontal axis and considering V and Y independent on the price level or the quantity of money demanded,draw the Md - P curve that is implied by the quantity equation.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?

If the nominal interest rate is 9 percent and the real interest rate is 4 percent,what is the inflation rate?

Use a money supply and demand diagram to answer the following problem: "The introduction of automated teller machines was equivalent to an increase in money supply." Discuss this assertion.

Which statement best describes how the cost of unexpected inflation is distributed?