When inflation rises people will

Demand less money, so the price level rises.

Suppose an economy produces only ice cream cones. If the price level rises, the value of currency

falls, because one unit of currency buys fewer ice cream cones.

If P denotes the price of goods and services measured in terms of money, then

1/P represents the value of money measured in terms of goods and services.

when the money market is drawn with the value of money on the vertical axis, as the price level decreases, the value of money

increases, so the quantity of money demanded decreases.

if the money supply is MS2, and the value of money is 2, then there is an excess

supply of money that is represented by the distance between the points A and B.

when the money supply curve shifts from MS1 to MS2,

the equilibrium value of money decreases.

if the relevant money supply curve is the one labeled MS1, then the equilibrium price level is

2, and the equilibrium value is 0.5

if the relevant money supply curve is the one labeled MS2, then

when the money market is in equilibrium, one dollar purchases about one-third of a basket of goods and services.

If the relevant money-demand curve is the one labeled MD1, then the equilibrium value of money is

0.5, and the equilibrium price level is 2

The price of a Honda Accord

Is a nominal variable and the price of a Honda Accord divided by the price of a Honda Civic is a real variable.

the payments you make on your automobile loan are given in terms of dollars. As prices rise you may notice you give up fewer goods to make your payments

The dollar amount you pay is the nominal value. The number of goods you give up is the real value.

An assistant manager at a restaurant gets a $100 a month raise. He figures with his new monthly salary he cannot buy as many goods and services as he could last year.

His real salary has fallen, and his nominal salary has risen.

Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay makes

your nominal wage will increase. if your nominal wage rose by a greater percent than the price level, then your real wage also increased.

The classical dichotomy refers to the idea that the supply of money

Determines nominal variables, but not real variables.

According to the classical dichotomy, when the money supply doubles, what also doubles?

The price level and nominal wages.

Monetary neutrality implies that an increase in the quantity of money will

increase the price level.

Most economists believe that the principle of monetary neutrality is

Mostly relevant to the long run.

The classical dichotomy separates what two things?

Real and nominal variables.

When studying long run changes in the economy, what usually offers a good description of how the world works?

The neutrality of money.

If M=2000, P=2.25, and Y=6,000, what is velocity?

6.75

If real output in an economy is 1000 goods per year, the money supply is $300, and each dollar is spent an average of 4 times per year, then according to the quantity equation what is the average price level?

1.20

According to the assumptions of the quantity theory of money, if the money supply increases by 5 percent, then

Nominal GDP would rise by 5 percent; real GDP would be unchanged.

The money supply is 4000, nominal GDP is 8000, and real GDP is 2000. Which of the following is 2?

velocity but not the price level.

Other things the same, an increase in velocity means what?

transactions per dollar increase so the price level rises.

Suppose the money supply tripled, but at the same time velocity doubled and real GDP was unchanged. According to the quantity equation the price level

is 6 times its old value.

Suppose over some period of time the money supply tripled, velocity was unchanged, and and real GDP doubled. according the quantity equation the price level

is 1.5 times its old value.

the source of hyperinflations is primarily

increases in money supply growth.

The inflation tax refers to

the revenue a government creates by printing money.

The inflation tax falls mostly heavily

On those who hold a lot of currency, but accounts for a small share of government revenue.

Printing money to finance government expenditures

Imposes a tax on everyone who holds money.

The continental congress used what to help finance the American Revolution?

Inflation tax

The claim that increases in the growth rate of money supply increase nominal interest rates but not real interest rates is known as

Fisher Effect

Walter puts money in a savings account at his bank earning 3.5 percent. One year later he takes his money out and notes that while his money was earning interest, the prices rose 1.5 percent. Walter earned a nominal interest rate of

3.5 percent, and a real interest rate of 2 percent.

If a company experienced deflation, then

the real interest rate would be greater than the nominal interest rate.

The cost of changing price tags and price listings are known as

menu costs.

When inflation falls, people

make less frequent trips to the bank and firms make less frequent price changes.

Higher inflation makes relevant prices

more variable, making it less likely that resources will be allocated to their best use.

You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the price level. Before taxes, you experienced

a nominal gain, but no real gain, and you paid taxes on the nominal gain.

The nominal interest rate is 4%, the inflation rate is 1% and the tax is 20%. Given US tax laws, how is after tax real return calculated?

.04(1-.20)-.01

You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 2%, and your marginal tax rate is 20%. What is your after tax real rate of interest?

2%

Which of the following costs of inflation can be significant even if actual inflation and expected inflation are the same?

menu costs, inflation tax, and shoeleather costs.

In the 1970s, in response to recessions caused by increase in the price of oil, the central banks in many countries increased their money supplies. The central banks may have done this by

purchasing bonds on the open market, which would have lowered the value of money

Open markets purchased by the Fed make the money supply

increase, which makes the value of money decrease.

Economic variables whose values are measured in monetary units are called

Nominal variables

When shopping you notice that a pair of jeans cost $20, and a t shirt costs $10. You compute the price of jeans relative to the t shirt.

The dollar price of jeans is a nominal variable; the relative price of jeans is a real variable.

Marta lends money at a fixed interest rate and then inflation turns out to be higher than she had expected. The real interest rate she earns is

Lower than she had expected, and the real value of the loan is lower than she expected.

In the last part of the 1800s

deflation made it harder for farmers to pay off their debts.