Economics Chapter 12: Inflation and Money Market
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Questions and Answers

What is indicated by the horizontal axis in Figure 17-2?

  • The value of money
  • The real interest rate
  • The quantity of money (correct)
  • The price level

If the money-demand curve shifts from MD1 to MD2, which event could potentially explain this shift?

  • An increase in the value of money
  • A decrease in the price level
  • An increase in interest rates
  • None of the above is correct (correct)

What can be inferred if the relevant money-demand curve shows an equilibrium value of money of 0.5?

  • One dollar purchases two baskets of goods
  • One dollar purchases one-half of a basket of goods (correct)
  • The price level cannot be determined
  • One unit of goods sells for 0.5 dollars

If GDP is $30,000 and the velocity of money is 6, what is the quantity of money in the economy?

<p>5,000 (A)</p> Signup and view all the answers

According to the classical dichotomy, which factor is influenced by monetary supply?

<p>Nominal interest rates (C)</p> Signup and view all the answers

How often does the typical dollar bill get used for transactions if the economy's real GDP is 30,000 and the money market is in equilibrium?

<p>12 times (A)</p> Signup and view all the answers

Which of the following scenarios would indicate a situation of excess demand for money?

<p>Value of money is 0.375 (C)</p> Signup and view all the answers

If the equilibrium value of money is 2, what does that imply about the price level?

<p>The price level is 0.5 (A)</p> Signup and view all the answers

According to the classical dichotomy, if the money supply doubles, which variables also double?

<p>The price level and nominal GDP (C)</p> Signup and view all the answers

What does monetary neutrality imply regarding an increase in the quantity of money?

<p>It will increase the price level (B)</p> Signup and view all the answers

The velocity of money is defined as?

<p>The average number of times per year a dollar is spent (A)</p> Signup and view all the answers

In the quantity equation, if M = 100, V = 3, and Y = 200, what is the value of P?

<p>2 (B)</p> Signup and view all the answers

If the money supply increases by 5 percent, what will happen to nominal and real GDP according to the quantity theory of money?

<p>Nominal GDP would rise by 5 percent; real GDP would be unchanged (A)</p> Signup and view all the answers

If M = 5,000, P = 3, and Y = 10,000, what is the calculated velocity?

<p>6 (D)</p> Signup and view all the answers

If P = 4 and Y = 450, which of the following pairs of values is consistent?

<p>M=600, V=3 (D)</p> Signup and view all the answers

The primary source of hyperinflations is attributed to?

<p>Excessive money supply growth (D)</p> Signup and view all the answers

What does money demand refer to?

<p>How much wealth people want to hold in liquid form. (B)</p> Signup and view all the answers

How does money demand depend on economic variables?

<p>It depends on both the price level and the interest rate. (D)</p> Signup and view all the answers

In the context of the quantity theory of money, what happens to the value of money when the price level rises?

<p>The value of money decreases as it can buy fewer goods. (A)</p> Signup and view all the answers

Which theory describes the relationship between money supply and price level in the long run?

<p>Classical dichotomy. (A)</p> Signup and view all the answers

What is a characteristic of the money supply curve when plotted with the value of money on the vertical axis?

<p>It is vertical. (A)</p> Signup and view all the answers

What causes an increase in the supply of money?

<p>The Fed makes open-market purchases. (B)</p> Signup and view all the answers

When observing the money market, how does the money demand curve behave?

<p>Money demand slopes downward and the supply is vertical. (C)</p> Signup and view all the answers

What effect does a falling price level have on the value of money?

<p>The value of money rises as fewer dollars are needed to buy goods. (B)</p> Signup and view all the answers

Flashcards

Excess Supply of Money

Situation where the quantity of money offered in the market exceeds the quantity demanded at a given price level, usually associated with deflationary pressure.

Equilibrium Value of Money

The value of money at which the quantity of money demanded equals the quantity of money supplied, in equilibrium.

Money-Demand Curve

Graph that displays the relationship between the value of money and the quantity of money demanded by individuals.

Inflation Rate (2010)

Percentage change in the general price level of goods and services in the economy between 2009 and 2010, when the money demand shifted.

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Velocity of Money

Speed at which money circulates through the economy during a given period and is usually calculated as a ratio of nominal GDP to the money supply.

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Quantity of Money

Total amount of money in circulation in a country's economy at a given time.

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Real GDP

Total value of all final goods and services produced within a country's borders during a specific period, adjusted for inflation.

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Classical Dichotomy

The theoretical separation of real and nominal variables in the economy, where real variables are unaffected by monetary policy and monetary factors affect only nominal variables.

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Nominal Wages

The amount of money received by workers for their labor, not adjusted for inflation.

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Monetary Neutrality

The idea that changes in the money supply do not affect real variables in the long run.

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Quantity Equation

The equation that describes the relationship between money supply (M), velocity (V), price level (P), and real output (Y): MV = PY.

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Velocity Calculation

The calculation of velocity using the quantity equation; Velocity= (Nominal GDP)/(Money Supply)

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Quantity Theory of Money

A theory that suggests that changes in the money supply directly correlate to changes in the overall price level within an economy.

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Hyperinflation Causes

Hyperinflation is primarily caused by a rapid increase in the money supply which outpaces economic growth or production.

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Value of Money

The amount of goods and services that a unit of currency can purchase. A higher value of money means you can buy more with a dollar.

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Money Supply Curve

Vertical line representing the fixed amount of money in circulation, independent of the value of money.

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Money Demand

The amount of wealth that individuals want to hold in the form of money for transactions, precautionary, and speculative reasons.

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Factors Affecting Money Demand

The price level (higher prices lead to higher money demand) and the interest rate (higher interest rates make holding money less attractive, decreasing demand).

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Money Market Equilibrium

The point where the quantity of money demanded equals the quantity of money supplied. This determines the value of money.

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Inflation

A sustained increase in the general price level of goods and services in an economy, leading to a decrease in the purchasing power of money.

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Study Notes

Practice Questions for the Final Exam

  • Chapter 12: Inflation

    • Classical theory of inflation is also known as the quantity theory of money
    • Used by many modern economists to explain long-run inflation determinants
    • The quantity theory of money is relied on today by most economists to explain the long run determinants of the price level and the inflation rate
    • When the price level falls, the number of dollars needed to buy a representative basket of goods decreases, and the value of money rises
    • When the price level rises, the value of currency falls
    • Money supply curve is vertical
    • Money demand depends on the price level and interest rate

  • Chapter 12: Money Market

    • An increase in the money supply causes the equilibrium value of money to decrease and the equilibrium quantity of money to increase
    • If money demand shifts leftward, there is initially an excess supply of money causing the price level to fall
    • Money supply is vertical.
    • Money market is drawn with the value of money on the vertical axis
    • Money demand slopes downward

  • Chapter 17: Money Market and the Value of Money

    • The quantity of money is measured along the horizontal axis of Figure 17-2
    • If the money supply is MS2 and the value of money is 2, the quantity of money supplied is greater than the quantity demanded, and the price level will fall
    • When the money supply shifts from MS1 to MS2, the equilibrium value of money decreases
    • If the current money supply is MS1, there is an excess supply of money if the value of money is 1

  • Chapter 17: Money Supply and Money Demand

    • Money supply causes the equilibrium value of money to change (increases as the money supply increases)
      • In equilibrium, the quantity of money demanded equals the quantity supplied
    • Shifts in the money demand curve can be caused by events like an increase in the value of money, or a decrease in the price level

  • Chapter 18: International Trade

    • Net exports: The value of exports minus the value of imports
    • Country with a trade surplus: Exports exceed Imports
    • Country with a trade deficit: Imports exceed exports
    • Imports and exports represent the flow of goods and services

  • Chapter 18: Net Capital Outflow

    • Net capital outflow: The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreign residents
    • If a country has a trade deficit: Imports greater than exports
    • If a country has a trade surplus: Exports greater than imports

  • Chapter 18: Exchange Rate

    • nominal exchange rate: The rate at which a person can trade the currency of one country for another
    • real exchange rate: The ratio of a country's price level to the price level in another country, adjusted for exchange rates

  • Chapter 12, 17, 18, Monetary Policies

    • The velocity of money is the average number of times per year a dollar is spent.
    • The quantity equation MV = PY

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Final Exam Practice Questions 12/10/2021 PDF

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Test your understanding of key concepts from Chapter 12, covering Inflation and the Money Market. Explore the classical theory of inflation, its long-run determinants, and how changes in the money supply affect economic equilibrium. Prepare for your final exam with targeted practice questions.

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