Question 1

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 2

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

Accepted Answer

The answer of Explain the adjustment process that creates a...

Question 3

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

Accepted Answer

The answer of According to the classical dichotomy, what changes...

Question 4

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

Accepted Answer

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

Question 5

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 apples
d.the price of apples relative to the price of oranges
e.the unemployment rate
f. the amount that shows up on your paycheque after taxes
g. the amount of goods you can purchase with the wage you get each hour
h. the taxes that you pay the government

Accepted Answer

The answer of Identify each of the following as nominal...

Question 6

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, so the real interest income is lower than the nominal interest income. However, when people pay taxes on their interest income, they are taxed on the nominal amount, which distorts the true value of their savings.

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

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

Question 8

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

Accepted Answer

The classic hyperinflations in Germany, Hungary, Zimbabwe, and Yugoslavia were all caused by high rates of money growth. In each case, governments or central banks printed money rapidly to finance expenditures, resulting in a sharp increase in prices and a decrease in the value of the currency.

Question 9

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 10

Suppose that monetary neutrality holds. Of the following variables, which ones do not change when the money supply increases?
a.real interest rates
b.inflation
c.the price level
d.real output
e.real wages
f. nominal wages

Accepted Answer

The answer of Suppose that monetary neutrality holds. Of the...

Question 11

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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The answer of Economists agree that increases in the money...

Question 12

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?

Accepted Answer

The answer of Suppose that velocity and output are constant...

Question 13

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

Accepted Answer

When inflation increases, the value of money decreases, and people tend to spend more resources maintaining lower money holdings to avoid losing money's value. These additional costs incurred in managing cash holdings are called shoeleather costs.

Question 14

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

Accepted Answer

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

Question 15

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 16

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 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?

Accepted Answer

The answer of Prices are many times higher today than...

Question 18

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.

Accepted Answer

The answer of Suppose the Bank of Canada sells government...

Question 19

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 leads to an increase in both the nominal and real interest rates.

Question 20

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?

Accepted Answer

The answer of What assumptions are necessary to argue that...

Quiz 11: Money Growth and Inflation