Question 1

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

Accepted Answer

Monetary policy is typically considered neutral in the long run, meaning it does not have a permanent effect on real variables such as output or employment, but it can have significant real effects in the short run due to price and wage rigidities.

Question 2

What is the inflation tax,and how might it explain the creation of inflation by a central bank?

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Question 3

List and define any two of the costs of high inflation.

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Question 4

Inflation distorts savings because people pay taxes on their nominal rather than their real interest income.

Accepted Answer

Inflation decreases the purchasing power of money over time, which means that the real value of interest income decreases as well. However, taxes are paid on the nominal interest income, which does not account for the effects of inflation. This means that people may end up paying taxes on income that has less purchasing power than what is reflected in the nominal value. This can distort the true value of savings and potentially discourage individuals from saving.

Question 5

In recent years,Bolivia,Russia,and Turkey have had much higher nominal interest rates than Canada,while Japan has had lower nominal interest rates.What would you predict is true about money growth in these other countries? Why?

Accepted Answer

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Question 6

Economists agree that increases in the money supply growth rate increases inflation and that inflation is undesirable.So why have there been hyperinflations and how have they been ended?

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Question 7

Using separate graphs,demonstrate what happens to the money supply,money demand,the value of money,and the price level if:
a.the Bank of Canada increases the money supply.
b.people decide to demand less money at each value of money.

Accepted Answer

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Question 8

What are the costs of inflation?

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Question 9

What assumptions are necessary to argue that the quantity equation implies that increases in the money supply lead to proportional changes in the price level?

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Question 10

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

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Question 11

Explain the adjustment process that creates a change in the price level when the money supply increases.

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Question 12

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

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Question 13

If the Bank of Canada were to unexpectedly increase the money supply,creditors would gain at the expense of debtors.

Accepted Answer

If the Bank of Canada were to unexpectedly increase the money supply, it would lead to inflation and a decrease in the purchasing power of money. This would mean that creditors (lenders) would be at a disadvantage, as they would be repaid with money that has less value. Debtors (borrowers), on the other hand, would benefit from the unexpected increase in the money supply, as they would be repaying their loans with money that has less purchasing power. Therefore, debtors would gain at the expense of creditors, not the other way around.

Question 14

The source of all four classic hyperinflations was high rates of money growth.

Accepted Answer

All four classic hyperinflations (Germany in 1920s, Hungary in 1940s, Yugoslavia in 1990s, and Zimbabwe in 2000s) were caused by high rates of money growth, specifically through excessive printing of paper money without proper backing or controls.

Question 15

The quantity theory 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.

Accepted Answer

The quantity theory of money states that the money supply and velocity of money have a direct relationship with the price level. Therefore, if the money supply increases by 50%, and output and velocity remain constant, the price level would also increase by 50%.

Question 16

According to the classical dichotomy,what changes nominal variables? What changes real variables?

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Question 17

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?

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Question 18

Inflation distorts relative prices.What does this mean,and why does it impose a cost on society?

Accepted Answer

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Question 19

Inflation induces people to spend more resources maintaining lower money holdings.This is called shoe leather costs.

Accepted Answer

Inflation reduces the purchasing power of money, leading people to hold lower money balances to avoid the loss of value. As a result, people need to spend more resources on frequent trips to banks or ATMs to withdraw cash to make transactions, which is known as shoe leather costs.

Question 20

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.

Accepted Answer

In the long run, an increase in the growth rate of the money supply may lead to higher inflation expectations, which can cause an increase in nominal interest rates to compensate for the expected loss of purchasing power. This, in turn, may lead to a higher real interest rate if the inflation-adjusted return on lending stays the same or increases. Therefore, the statement is false.

Quiz 11: Money Growth and Inflation