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AP Macro Ch. 30 Money Growth & Inflation
1
Over the past 70 years, prices have risen an average of
about ________% per year in the United States.
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AP Macro Ch. 30 Money Growth & Inflation
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Nominal; real
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“Inflation tax”
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4
Most economists believe that monetary neutrality
approximately describes the behavior of the economy in
the ____________.
AP Macro Ch. 30 Money Growth & Inflation
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Countries that rely heavily on the government paying
for it’s spending by simply printing money suffer from
the result of _________.
AP Macro Ch. 30 Money Growth & Inflation
8
Inflation means that the ________ of prices in the
economy is rising rather that the prices of all goods.
Average level
Fisher effect
9
A rise in the price level means that the value of money
is now _________ because each dollar now buys a
smaller quantity of goods and services.
Lower
AP Macro Ch. 30 Money Growth & Inflation
Hyperinflation
According to the _________, when the inflation rate
rises, the nominal interest rate rises by the same amount,
so that the real interest rate remains the same.
AP Macro Ch. 30 Money Growth & Inflation
The overall level of prices in an economy adjusts to
bring money supply and money demand into balance.
When the central bank increases the supply of money, it
causes the price level to _________.
Long run
A government can pay for some of its spending simply
by printing money. This is know as an _________.
AP Macro Ch. 30 Money Growth & Inflation
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Rise
The principle of monetary neutrality asserts that
changes in the quantity of money influence _________
variables but not _________ variables.
AP Macro Ch. 30 Money Growth & Inflation
AP Macro Ch. 30 Money Growth & Inflation
AP Macro Ch. 30 Money Growth & Inflation
10
If P is the price level, then the quantity of good and
services that can be purchased with $1 is equal to ____.
1/P
AP Macro Ch. 30 Money Growth & Inflation
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For the most part, the supply of money is determined by
the _________.
Fed
AP Macro Ch. 30 Money Growth & Inflation
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Higher
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AP Macro Ch. 30 Money Growth & Inflation
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If the price level is above the equilibrium level, people
will want to hold more money that is available and
prices will have to _________.
Decline
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If the price level is below equilibrium, people will want
to hold less money than that available and the price
level will _________.
AP Macro Ch. 30 Money Growth & Inflation
18
When an increase in the money supply makes dollars
more plentiful, the result is a(n) ________ in the price
level that makes each dollar ______ valuable.
Increase; less
Rise
19
__________ is a theory asserting that the quantity of
money available determines the price level and that the
growth rate in the quantity of money available
determines the inflation rate.
Quantity theory of money
AP Macro Ch. 30 Money Growth & Inflation
Price level
A higher price level (and a lower value of money) leads
to a __________ quantity of money demanded.
AP Macro Ch. 30 Money Growth & Inflation
Because the Fed determines the supply of money, the
supply is fixed (until the Fed decides to change it).
Therefore, the supply of money will be ______.
One variable that is very important in determining the
demand for money is the _________.
Liquid
AP Macro Ch. 30 Money Growth & Inflation
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Vertical (Perfectly inelastic)
The demand for money reflects how much wealth
people want to hold in __________ form.
AP Macro Ch. 30 Money Growth & Inflation
AP Macro Ch. 30 Money Growth & Inflation
AP Macro Ch. 30 Money Growth & Inflation
20
The increase in the money supply leads to an increase in
the demand for goods and services. Because the supply
of goods and services has not changed, the result will be
____________.
Higher prices
AP Macro Ch. 30 Money Growth & Inflation
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_________ are variables measured in monetary units.
Nominal variables
AP Macro Ch. 30 Money Growth & Inflation
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Classical dichotomy
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AP Macro Ch. 30 Money Growth & Inflation
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Prices in the economy are __________ (because they
are quoted in units of money), but relative prices are
_______ (because they are not measured in money
terms).
AP Macro Ch. 30 Money Growth & Inflation
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_________ is the rate at which money changes hands.
Velocity of money
Nominal; real
27
To calculate velocity, we divide ________ by the
quantity of money.
AP Macro Ch. 30 Money Growth & Inflation
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If P is the price level (the GDP deflator), Y is real GDP,
and M is the quantity of money, then what would be the
quantity equation?
Nominal GDP
AP Macro Ch. 30 Money Growth & Inflation
__________ are variables measured in physical units.
Nominal; real
Changes in the money supply affect ________ variables
but not _________variables.
AP Macro Ch. 30 Money Growth & Inflation
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Real variables
________ is the theoretical separation of nominal and
real variables.
AP Macro Ch. 30 Money Growth & Inflation
AP Macro Ch. 30 Money Growth & Inflation
MxV=PxY
29
According to the quantity equations, what three
variables must be reflected if there is an increase in the
quantity of money?
The price level must rise, output must rise, or velocity
must fall.
AP Macro Ch. 30 Money Growth & Inflation
___________ is generally defined as inflation that
exceeds 50% per month.
Hyperinflation
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AP Macro Ch. 30 Money Growth & Inflation
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The ________ is like a tax on everyone who holds
money.
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What is the main cause of hyperinflation?
When the government has a high level of spending and
inadequate tax revenue to pay for its spending.
Inflation tax
AP Macro Ch. 30 Money Growth & Inflation
AP Macro Ch. 30 Money Growth & Inflation
33
Recall that the real interest rate is equal to the nominal
interest rate minus the _________.
AP Macro Ch. 30 Money Growth & Inflation
34
If the real interest rate is equal to the nominal interest
rate minus the inflation rate, then the :
Nominal interest rate = real interest rate + ______
Inflation rate
AP Macro Ch. 30 Money Growth & Inflation
Inflation rate
35
__________ are a result of the resources wasted when
inflation encourages people to reduce their money
holdings.
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Menu costs
A possible solution to the problem of discouraged
savings as a result of high inflation would be to
__________ the tax system.
Index
Shoeleather costs can be considerable in countries
experiencing ___________.
AP Macro Ch. 30 Money Growth & Inflation
38
Because lawmakers fail to take inflation into account
when they write tax laws, people living in a country
with inflation ends up with a smaller after-tax real
interest rate. Therefore, higher inflation will tend to
discourage _________.
_________ are costs of changing prices.
AP Macro Ch. 30 Money Growth & Inflation
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hyperinflation
Shoeleather costs
AP Macro Ch. 30 Money Growth & Inflation
AP Macro Ch. 30 Money Growth & Inflation
Saving
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AP Macro Ch. 30 Money Growth & Inflation
40
According to the quantity theory of money, an increase
in the quantity of money causes a proportional increase
in the _________.
Price level