Chapter 17 Money Growth and Inflation

Quantity equation - M*V = P*Y

Fisher Effect - the one-for-one adjustment of the nominal interest rate to the inflation rate
What is the classical dichotomy? How does monetary neutrality tie into this concept?

Is monetary neutrality true in the short run or the long run?

Does inflation rob people of purchasing power? Why or why not?

Suppose that in 2014 a country has a MS of $500 billion, NGDP of $10 trillion, and RGDP of $5 trillion.
a) What is the price level?

b) What is the velocity of money?

c) Show the situation on a graph.

d) Suppose the MS increases by 10% in 2015, while velocity and output are constant. Show this on
the graph
a. What is the new price level?
b. Calculate the inflation rate.

e) Suppose that the MS increases by 10% AND velocity increases by 3%. Calculate the inflation
rate.

f)

Suppose that the MS increases by 10% AND velocity decrease by 3%. Calculate the inflation rate.

g) Suppose that the MS increases by 10% and that productivity increases by 4.5%. Calculate the
inflation rate.

Suppose inflation is expected to be 4% but is really 2%. Decide if it would hurt or help the following.
a) a homeowner with a fixed-rate mortgage
b) a professional athlete who signed a multi-year contract last year
c) a retiree
d) Mitt Romney
Steve purchases some land for $30,000. He maintains it, but makes no improvements to it. One year
later he sells it for $32,000. Stephanie puts $30,000 in a savings account that pays 6% interest. Steve
has to pay the 50% capital gains tax, Stephanie is in the 35% tax bracket. The inflation rate was 2%.
Who had the higher before-tax real gain and who had the higher after-tax real gain?
a. Steve had both the higher before-tax real gain and the higher after-tax real gain.
b. Steve had the higher before-tax real gain but Stephanie had the higher after-tax real gain.
c. Stephanie had the higher before-tax real gain but Steve had the higher after-tax real gain.
d. Stephanie had both the higher before-tax real gain and the higher after-tax real gain.

Which of the following are costs incurred by people trying to protect themselves from the effects of
inflation?
a. menu costs and shoeleather costs
b. menu costs but not shoeleather costs
c. shoeleather costs but not menu costs
d. menu costs but not shoeleather costs
Higher inflation makes relative prices
a. more variable, making it more likely that resources will be allocated to their best use.
b. more variable, making it less likely that resources will be allocated to their best use.
c. less variable, making it more likely that resources will be allocated to their best use.
d. less variable, making it less likely that resources will be allocated to their best use.