Exam 17: Money Growth and Inflation: Part B

The money demand curve shifts to the left when the Fed buys government bonds.

Suppose the nominal interest rate is 10 percent,the tax rate on interest income is 28 percent,and the inflation rate is 6 percent.Then the after-tax real interest rate is -3.2 percent.

A person received 4% nominal interest.The inflation rate was -2% and the tax rate was 25%.This person received an after-tax real interest rate of 5%.

If P represents the price of goods and services measured in money,then 1/P is the value of money measured in terms of goods and services.

In the presence of inflation in the U.S. ,accountants incorrectly measure firms' earnings but the tax code correctly measures real incomes.

When the Fed increases the money supply and creates inflation,it erodes the real value of the unit of account and makes it more difficult for investors to sort successful from unsuccessful firms.

The United States has never had deflation.

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.

Real GDP measures output of final goods and services in physical units.

In the long run,an increase in the growth rate of the money supply leads to an increase in the real interest rate,but no change in the nominal interest rate.

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

The quantity theory of money implies that if output and velocity are constant,then a 50 percent increase in the money supply would lead to less than a 50 percent increase in the price level.

The inflation rate is measured as the percentage change in a price index.

The quantity equation is M x V = P x Y.

Unexpected and large deflation is desirable,according to the Friedman rule.

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

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

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

In United States history there were long periods when most prices fell.

The hyperinflation in Zimbabwe ended in April 2009 when the central bank purchased government bonds in open-market operations.