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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....
' “ “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.
- Spring '07