ECON 2035 Study Guide - Nominal Interest Rate, Real Interest Rate, Longrun

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24 Jun 2014

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14. 1 money and inflation in the long run: deflation: sustained period of negative inflation. Velocity measures the average number of times the money supply is used in transactions during the year. Inflation rate is determined by the growth rates of the money supply, velocity, and real gdp. Long run output growth rate primarily depends on the productivity of the economy. Long run growth rate of velocity primarily depends on transaction technologies (assuming constant inflation rate expectations) incease aggregate output increase inflation rate on philip"s curve. Quantity equation of money: relationship among the money supply, velocity, and nominal gdp: mv = pv. Inflation increases all prices (wages and salaries) real income remains the same. Effect on taxes with moderate inflation rate. After-tax real interest rate ( ): the interest rate adjusted for both taxes and inflation decreases as inflation rate increases.

Related Questions

Evidence shows that the quantity equation is correct over the long run, which implies that the:

A) growth rate of the velocity of money causes the level of prices to change.

B) growth rate of GDP causes most of the change in the money supply.

C) growth rate of the money supply determines the rate of inflation.

D) growth rate of inflation leads to growth in GDP.

cyanmosquito560

Question 2

For any given expected inflation rate, short-run aggregate supply curves show the relationship between

the money supply and growth rate of output.

inflation and growth rate of output.

production factors and wages.

inflation and wages.

1 points

Question 3

Why is the SRAS curve steeper above its intersection with the Solow growth curve?

		Wages are stickier in the upward direction.
		Wages are less sticky in the upward direction.
		Lower inflation will lead to faster growth.
		Employees become less motivated to work during times of unexpected inflation.

1 points

Question 4

What factors triggered the Great Depression?

		decreased consumer spending and tight monetary policy
		decreased investment and increased inflation
		decreased employment and increased money supply
		decreased inflation and increased income taxes

1 points

Question 5

How might changes in the money supply be non-neutral in the short run?

		As the amount of money circulating in the economy changes before prices respond, consumers' purchases change accordingly, which leads producers to change production levels.
		When money supply changes in the short run, it will affect nominal, but not real, variables in the short run.
		As money growth increases at a faster rate, it will cause real GDP to grow at an equally faster rate.
		If producers expect inflation to increase, they will increase supply in order to sell before the arrival of inflation.

1 points

Question 6

For a given nominal interest rate, an increase in deflation will cause the real rate of interest to

remain relatively constant.

increase.

decrease.

become unpredictable.

Question 8

Which of the three price indexes measures the average price level of the largest total number of goods?

		the consumer price index
		the GDP deflator
		the producer price index
		Each price index accomplishes the same task.

The textbook uses the

Consider the following demand equation for money.

(M/P)^d = kY

a) In words, explain what the velocity of money is.

b) Let the supply of (real) money be given by M/P. Using the money demand equation, solve for the velocity of money.

c) Suppose that real GDP is expected to grow 3% over the next year and k is constant. What is the expected rate of inflation if the Fed holds the money supply constant?

d) Suppose that the Fed (Federal Reserve) targets inflation to be 2% over the coming year. What should be the targeted growth rate of the money supply?

e) Suppose that growth in real GDP ends up being 1%. Assuming the Fed carries out its open market operations, expecting a growth rate of 3%, what will happen to the rate of inflation?

f) Is there reason to think that demand for money should be a function of the nominal interest rate? Why?

g) Modify the money demand equation that is given to include the nominal interest rate.

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ECON 2035 Study Guide - Nominal Interest Rate, Real Interest Rate, Longrun

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Related Questions

		the money supply and growth rate of output.
		inflation and growth rate of output.
		production factors and wages.
		inflation and wages.