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Exam 30: Money Growth and Inflation

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Question 41

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The nominal interest rate is 5 percent and the real interest rate is 3 percent. What is the inflation rate?

A) 8 percent
B) 2 percent
C) 0.2 percent
D) -3 percent

E) A) and B)
F) A) and C)

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Question 42

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Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, then

A) both the nominal and the real interest rate rise.
B) neither the nominal nor the real interest rate rise.
C) the nominal interest rate rises, but the real interest rate does not.
D) the real interest rate rises, but the nominal interest rate does not.

E) A) and D)
F) None of the above

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Question 43

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One benefit of low inflation is that it _____ the variability of relative price changes. Therefore, resources are _____ likely to be better allocated.

In recent years Venezuela and Ukraine have had much higher nominal interest rates than the United States while Japan has had lower nominal interest rates. What would you predict is true about money growth in these other countries? Why?

An increase in the price level causes the value of money to _____. Therefore, people will want to hold ____ money, because the cost of their purchases has increased.

An excess supply of money is eliminated by a decrease in the value of money.

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

Nominal GDP measures output of final goods and services in physical terms.

If the quantity of money demanded is greater than the quantity supplied, then the value of money rises.

Most economists believe the principle of monetary neutrality is

You earn a nominal return of 6% on your savings and the tax rate is 20%. If the rate of inflation is 2%, what are the before-tax real interest rate and your after-tax rate of return?

An associate professor of physics gets a $200 a month raise. With her new monthly salary she can buy more goods and services than she could buy last year.

If the price level were to rise from 160 to 200, in what direction and by how much would the value of a dollar change?

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.

If M = 3,500, P = 4.5, and Y = 6,000, what is velocity?

Based on the quantity equation, if Y = $10,000, P = 2.75, and V = 8, then M =

Inflation distorts savings when real interest income, rather than nominal interest income, is taxed.

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

If velocity = 8, the quantity of money = 2,400, and the price level = 3, then the real value of output is approximately

Inflation induces people to spend more resources maintaining lower money holdings. The costs of doing this are called shoeleather costs.