Exam 17: Money Growth and Inflation

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.

Monetary neutrality means that a change in the money supply

You put money into an account and earn a real interest rate of 5 percent. Inflation is 2 percent, and your marginal tax rate is 35 percent. What is your after-tax real rate of interest?

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

Suppose one year ago the price index was 120 and Maria purchased $20,000 worth of bonds. One year later the price index is 126. Maria redeems her bonds for $22,700 and is in a 40 percent tax bracket. What is Maria's real after-tax rate of interest to the nearest tenth of a percent?

Which of the following is accurate?

Suppose over some period of time the money supply tripled, velocity doubled, and real GDP doubled. According to the quantity equation the price level is now

When inflation causes relative-price variability,

When inflation falls, people

When the money market is drawn with the value of money on the vertical axis, the price level increases if

When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of money

Higher inflation makes relative prices

If M = 3,000, P = 2, and Y = 6,000, what is velocity?

Figure 30-2. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. -Refer to Figure 30-2. At the end of 2009 the relevant money-demand curve was the one labeled MD2. At the end of 2010 the relevant money-demand curve was the one labeled MD1. Assuming the economy is always in equilibrium, what was the economy's approximate inflation rate for 2010?

The money demand curve is downward sloping because as the value of money falls people desire to hold a larger quantity of money.

When the money market is drawn with the value of money on the vertical axis, the money demand curve slopes

The quantity theory of money can explain hyperinflations but not moderate inflation.

If real output in an economy is 1,000 goods per year, the money supply is $300, and each dollar is spent an average of 4 times per year, then according to the quantity equation, the average price level is

Which of the following is consistent with the idea that high money supply growth leads to high inflation?

Relative­price variability is "automatic" when