Ch17 tuQ - 31—DCT-2BBB 12 e3 PART 6 382 FROM HKCC(Po lgUJ MONEY AND PRICES IN THE LONG RUN TD 23543145'P.e1 4 In what sense is inflation like a

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Unformatted text preview: 31—DCT-2BBB' 12 e3 PART 6 382 FROM HKCC (Po lgUJ MONEY AND PRICES IN THE LONG RUN TD 23543145 'P.e1 4. In what sense is inflation like a tax? How does 6. What are the costs of inflation? Which of these 5. thinking about inflation as a tax help explain hyperinflation? According to, the fisher effect, how does an increase in the inflation rate affect the real interest rate and the nominal interest rate? PROBLEMS AND APPLICATIONS costs doyou think are most important for the US. economy? 7. If inflation is less than expected, who debtors or creditors? Explain. ' 1. Suppose that this year’s money supply is $500 31—0cr—2ees billion, nominal GDP is $10 trillion, and real GDP is $5 trillion. . a. What is the price level? What is the velocity of money? b.» Suppose that velocity is constant and the economy’s output of goods and services rises by 5 percent each year. What will happen to nominal GDP and the price level next year if the Fed keeps the money supply constant? c. What money supply should the Fed set next year if it wants to keep the price level stable? d. What money supply should the Fed set next year if it wants inflation of 10 percent? Suppose that changes in bank regulations expand the availability of credit cards so that people need to hold less cash. a. How does this event affect the demand for money? i b. If the Fed does not respond to this event, what will happen to the price level? c. If the Fed wants to keep the price level stable, what should it do? . It is often suggested that the Federal Reserve try to achieve zero inflation. If we assume that velocity is constant, does this zero-inflation goal require that the rate of money growth equal zero? If yes, explain why. If no, explain what the rate of maney growth should equal. Suppose that a caunuys inflation rate inCreases ‘ sharply. What happens to the inflation tax on_ the holders of money? Why is wealth that is held in savings accounts not subject to a change . “,3 I"--l.... . . . .i.‘ .,~'.....\,. ., I“, .. ,1.... - "‘.l‘A\.I-"t"'£v, ' “ “lfifiéflfl£§””t"“- :nu : wash». 7* km - ~.- - .L. ¢r 11 : 45 "H in the inflation tax? Can you think of anyway holders of savings accounts are hurt by the increaSe in the inflation rate? . Hyperinflations are extremely rare in countries whose central banks are independent of the rest of the government. Why might this be so? . Let’s consider the effects of inflation in an econ- omy composed only of two people: Bob, a bean farmer, and Rita, a rice farmer. Bob and Rita both always consume equal'amounts of rice and beans. ln 2005, the price'of beans was $1, and the price of rice was $3. a. Suppose that in 2006 the price of beans was $2 and the price of rice was $6. What was inflation? Was Bob‘better off, worse off, or unaffected by the changes in prices? What about Rita? ‘ b. Now suppose that in 2006 the price .of beans ‘ was $2 and the price of rice-was $4. What was inflation? Was Bob better off, worse off, or unaffected-by the changes in prices? What about Rita? . I 'c. Finally? suppose that in 2006 the price of beans was $2 and the price of rice was $1.50. What was inflation? Was Bob better off, worse off, or unaffected by the changes in - prices? What about Rita? 'd. What matters more to Bob and Rita~the overall inflation rate or the relative price of rice and beans? 7. If the tax rate is 35 percent, compute the before- tax real interest rate and the after—tax real inter- est rate in each of the following cases. P.81 ' 10. “,1, 31-DCT-2BBE FROM. Hit CC (PolgU) Wt”? «up " " " ' ‘ i 1";fll'l a. The nominal interest rate is 8 percent and the v inflation rate is 4 percent. b. The nominal interest rate is 5 percent and the inflation rate is 1 percent. . c. The nominal interest rate is 4 percent and the inflation rate is 3 percent. ' » What are your shoeleather costs of going to the bank? How might you measure thesa costs in dollars? How do you-think the shoelea‘ther costs . of your college president differ from your own? Recall that money serves three functions in the economy. What are those functions? How does inflation affect the ability of money to serve each of these functions? Suppose that people expect inflation to equal 3 percent, but in fact, prices rise by 5 percent. Describe how this unexpectedly high inflation rate would help or hurt the folloiving: a. the government b. a homeowner with a fixed-rate mortgage 11:45 HKCC (PolgU) 11. 12. P.82 T0 23643145 ' -—- CHAPTER-17 c. a union worker in the second year of ,a labor contract .' ' . . d. a college that has invested some of its endowment in government bonds ‘ Explain one harm associated with unexpected inflation that is not associated with expected inflation. Then explain one harm associated with v both expected and unexpected inflation. Explain whether the following statements are true. false, or uncertain. V :1. "Inflation hurts borrowers and helps lenders, because borrowers must pay a higher rate of interest." b. "If prices change in a way that leaves the overall price level unchanged, then no one is made better or worse off.” 4; "Inflation does not reduce the purchasing power of most workers”. P.a2' 'MQNEY‘GROWI’H AND well/anon sea ...
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This note was uploaded on 11/02/2009 for the course FB cc2105 taught by Professor Alan during the Spring '07 term at École Normale Supérieure.

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Ch17 tuQ - 31—DCT-2BBB 12 e3 PART 6 382 FROM HKCC(Po lgUJ MONEY AND PRICES IN THE LONG RUN TD 23543145'P.e1 4 In what sense is inflation like a

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