Exam 17: Money Growth and Inflation: Part A

The increase in the overall level of prices is known as _____.

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 two key assumptions does the quantity theory make concerning variables in the equation of exchange?

Suppose the Fed sells government bonds.Use a graph of the money market to show what this does to the value of money.

The inflation tax alters people's behavior and creates a deadweight loss.Explain.

The theory that most economists rely on to explain inflation is called the __________.

An economy produces two goods,x and y.A year ago the price of x was $4 and the price of y was $6.Today the price of x is $8 and the price of y is $10.What happened to the nominal and the real value of good x? What happened to the nominal and real value of good y?

Mitch makes payments on a car loan.If the price level a year ago was 120 and people expected it to rise to 125 but it actually rose to 128,what happened to the real value of Mitch's payment as opposed to what he was expecting to happen? Express your answer to the nearest 100th.

The idea that firms incur actual costs when they change prices is known as _____. Firms in countries with lower inflation rates will change price _____ frequently compared to those countries where inflation is higher.

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 __________.

When the Federal Reserve injects money into the banking system,it initially causes an excess ________ of money.Equilibrium in the money market is reestablished through a(n)_______ in the price level.

What direction of change in velocity could explain the price level increasing by a smaller percentage than the money supply? What would this change in velocity imply about the frequency with which money changes hands?

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

Jackie saves $100 and receives $106 the next year.During the same year,the price of the basket of goods that she purchases increases from $100 to $104.What is nominal interest rate on Jackie's saving? What is the real interest rate on Jackie's saving? What was the inflation rate?

What are menu costs and why does high inflation increase menu costs?

If the government were to run a budget deficit and wanted to finance it by printing money,would it have the central bank conduct open market purchases or open market sales?

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.

According to the quantity theory of money,an increase in the money supply causes the price level to ________ and the value of money to______.

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

If the inflation rate was 10%,and the tax rate was 25%,and you deposited money in a bank account that paid 14%,what is after tax real interest rate? Show you work.