Question 1

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

The answer of In recent years, Bolivia, Russia, and Turkey...

Question 2

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

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The answer of What is the inflation tax, and how...

Question 3

What are the costs of inflation?

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The answer of What are the costs of inflation?...

Question 4

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

Accepted Answer

Inflation reduces the purchasing power of money over time, therefore nominal interest rates do not accurately reflect the true return on investment. As a result, people pay taxes on their nominal interest income, which is higher than their real interest income, and this distorts savings.

Question 5

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 6

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

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The answer of Define each of the symbols and explain...

Question 7

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

According to the quantity theory of money, if output (real GDP) and velocity of money are constant, then a 50 percent increase in the money supply would lead directly to a 50 percent increase in the price level.

Question 8

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

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Question 9

Identify each of the following as nominal or real variables.
a. the physical output of goods and services
b. the overall price level
c. the dollar price of coffee
d. the price of coffee relative to the price of tea
e. the unemployment rate
f. the tips that you earn from your part-time serving job
g. the amount of goods you can purchase with the wage you get each hour
h. the income taxes that you pay the government

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Question 10

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 11

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 12

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 13

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

Accepted Answer

Shoe leather costs refer to the costs incurred by individuals and firms in response to inflation. As inflation increases, the value of money decreases, and individuals and firms spend more resources maintaining lower money holdings to keep pace with inflation. This increased effort to limit the amount of cash they hold creates additional transaction and search costs, known as shoe leather costs.

Question 14

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 result in an increase in both the nominal and real interest rates. However, this relationship is complex and can be influenced by various factors such as changes in economic growth, productivity, and central bank policy.

Question 15

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 16

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

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Question 17

Prices are many times higher today than they were 30 years ago, yet people do not work a lot harder nor spend a lot less. How can this be?

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Question 18

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

Accepted Answer

High rates of money growth, often caused by government printing too much money, are the root cause of hyperinflation. This was evident in all four classic hyperinflations: Germany in 1923, Hungary in 1946, Yugoslavia in 1993, and Zimbabwe in the late 2000s.

Question 19

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.

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The answer of Using separate graphs, demonstrate what happens to...

Question 20

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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Quiz 11: Money Growth and Inflation