Question 1

In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold, which was in use as a medium of exchange. We would predict that this increase in gold

Accepted Answer

When Emperor Kankan Musa gave away much gold in Cairo, it increased the supply of gold in the area. According to basic economic principles, an increase in the supply of a commodity, while demand remains constant, leads to a decrease in its value. In this context, the value of gold would decrease. Additionally, since gold was used as a medium of exchange, injecting more gold into the economy would increase the money supply, leading to inflation or an increase in the price level. Therefore, the correct prediction is that the action raised the price level and decreased the value of gold in Cairo.

Question 2

The economy of Umrica uses palladium as its money. If the government discovers a large reserve of palladium on their land the

Accepted Answer

Discovering a large reserve of palladium increases the supply of money. As the supply of money increases, its value decreases, leading to higher prices, or inflation.

Question 3

Economists generally argue that

Accepted Answer

High inflation is widely recognized as costly due to its unpredictability and impact on economic decisions, while the costs of moderate inflation are often considered to be lower than public perception suggests. Moderate inflation can have some benefits, such as avoiding deflation and potentially helping to lubricate the wheels of the economy.

Question 4

Money demand refers to

Accepted Answer

Money demand specifically refers to the desire to hold wealth in a liquid form, such as cash or checking accounts, for transactions, precautionary, or speculative purposes, rather than in less liquid forms of wealth like real estate or stocks.

Question 5

The supply of money increases when

Accepted Answer

The supply of money increases when the Federal Reserve (the Fed) makes open-market purchases. This involves buying securities (like government bonds) in the open market, which injects money into the banking system, increasing the overall supply of money.

Question 6

List and define any two of the costs of high inflation.

Accepted Answer

The answer of List and define any two of the...

Question 7

When the Consumer Price Index increases from 100 to 115

Accepted Answer

When the Consumer Price Index (CPI) increases, it indicates that the average level of prices for goods and services has risen, meaning consumers need more money to buy the same amount of goods. This effectively reduces the purchasing power of money, indicating that the value of money falls.

Question 8

Explain how inflation affects savings.

Accepted Answer

The answer of Explain how inflation affects savings....

Question 9

In recent years Venezuela and Ukraine have had much higher nominal interest rates than the United States 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 Venezuela and Ukraine have...

Question 10

To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the

Accepted Answer

Most economists today rely on the quantity theory of money to explain the long-run determinants of the price level and the inflation rate. This theory posits that the amount of money in an economy determines the value of money, with increases in the money supply leading to inflation.

Question 11

When the market for money is drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal due to adjustments in

Accepted Answer

In the context of the money market, long-run equilibrium is achieved when the quantity of money demanded equals the quantity supplied, and this balance is primarily adjusted through changes in the value of money. The value of money reflects its purchasing power, which adjusts to equilibrate the demand and supply for money over the long run.

Question 12

When the price level rises, the number of dollars needed to buy a representative basket of goods

Accepted Answer

When the price level rises, it means that more dollars are needed to purchase the same basket of goods, indicating that each dollar has less purchasing power. Therefore, the value of money falls.

Question 13

Inflation can be measured by the

Accepted Answer

Inflation is typically measured by the percentage change in the consumer price index (CPI), which reflects the average change over time in the prices paid by consumers for a basket of goods and services.

Question 14

Inflation distorts relative prices. What does this mean and why does it impose a cost on society?

Accepted Answer

The answer of Inflation distorts relative prices. What does this...

Question 15

In the long run, money demand and money supply determine

Accepted Answer

In the long run, money demand and money supply primarily determine the value of money (i.e., the purchasing power of money or the price level) but not the real interest rate. The real interest rate is influenced by factors such as productivity and preferences for saving and investment, rather than by money supply and demand directly.

Question 16

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 17

Suppose the market for money, drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis, is in equilibrium. If the money supply increases, then at the old value of money there is an

Accepted Answer

When the money supply increases, at the old value of money, there is more money available than people want to hold, leading to an excess supply of money. This excess supply typically results in an increase in spending as people try to exchange their excess money for goods and services.

Question 18

When prices are falling, economists say that there is

Accepted Answer

Deflation is the term used to describe a decrease in the general price level of goods and services, which is the opposite of inflation.

Question 19

When the market for money is drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis, the money demand curve slopes

Accepted Answer

The money demand curve slopes downward because at higher prices (or lower value of money), people need or want to hold more money to purchase goods and services, reflecting an inverse relationship between the value of money and the quantity demanded.

Question 20

If the price level increased from 115 to 133, then what was the inflation rate?

Accepted Answer

The inflation rate is calculated as the percentage increase in the price level. The formula to calculate the inflation rate is: [(New Price Level - Old Price Level) / Old Price Level] * 100. Using the given numbers: [(133 - 115) / 115] * 100 = 15.65, which rounds to 15.7 percent.

Quiz 30: Money Growth and Inflation