Question 1

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

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Question 2

During the late 19th century, the U.S. price level fell. This unexpected increase in the real cost of borrowing caused wealth to be redistributed from _____ to _____.

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Question 3

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 4

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

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Question 5

If the inflation rate was 10%, and the tax rate was 25%, and you deposited money in a bank account that paid 14%, what is after tax real interest rate? Show you work.

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Question 6

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

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Question 7

Mitch makes payments on a car loan. If the price level a year ago was 120 and people expected it to rise to 125 but it actually rose to 128, what happened to the real value of Mitch's payment as opposed to what he was expecting to happen? Express your answer to the nearest 100th.

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Question 8

Wages and prices are many times higher today than they were 30 years ago, yet people do not work a lot more hours or buy fewer goods. How can this be?

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Question 9

Fifteen years ago your parents purchased some land with the idea of selling it later to help pay your college expenses. They purchased the land for $100,000. They sold if for $180,000. During the time they held it the price level rose from 80 to 120. If your parents face a 25% tax rate, what was their real after-tax gain? (Hint: What's the real value of the land in current prices?)

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Question 10

In the U.S., taxes are paid on one's _____ gains/returns. Therefore, a _____ inflation rate encourages more saving.

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Question 11

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

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Question 12

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

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Question 13

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

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Question 14

If inflation is less than expected, who is wealth redistributed to?

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Question 15

One year ago Sam purchased bonds for $100,000. He just sold them for $120,000. During the year the price level rose by 5%. If the tax rate on capital gains is 20%, how much did Sam gain in real terms?

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Question 16

Why did farmers in the late 1800s dislike deflation?

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Question 17

Suppose the Fed 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 18

If the inflation rate was 8%, and the tax rate was 20%, and you deposited money in a bank account that pays 12%, what is your after tax real interest rate? Show you work.

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Question 19

You earn a nominal return of 6% on your savings and the tax rate is 20%. If the rate of inflation is 2%, what are the before-tax real interest rate and your after-tax rate of return?

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Question 20

One benefit of low inflation is that it _____ the variability of relative price changes. Therefore, resources are _____ likely to be better allocated.

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Quiz 30: Money Growth and Inflation