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Unformatted text preview: Economics 102, Problem Set 3, Answer Key February 15, 2007 Problem 1 1. False. If M=P = Y & V and velocity is constant, then & M M & P P = & Y Y- the di/erence between the growth rates of money and prices is equal to the growth rate of output, not zero. 2. False. The ex ante real interest rate is the di/erence between the nominal interest rate and expected in&ation. The shocks realize ex post, while both parts of the denition are dened ex ante, so they are predened and cannot change. 3. UncertainTrue. Only unexpected in&ation causes redistribution between these categories. In general the direction of redistribution depends on whether the realized in&ation is higher then expected, or lower. If it is expected high in&ation, then there is no redistribution. However, in this case one can interpret the statement as if the in&ation is high relative to what was expected. Then the statement is true. 4. False. There is a maximum seignorage revenue, dened by the maximum of the La/er (in&a- tion) tax curve. While increasing the tax rate, higher in&ation decreases the tax base. Theretion) tax curve....
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