652PART TENMONEY AND PRICES IN THE LONG RUNquantity theory of money, p. 632nominal variables, p. 633real variables, p. 633classical dichotomy, p. 633monetary neutrality, p. 634velocity of money, p. 635quantity equation, p. 635inflation tax, p. 638Fisher effect, p. 640shoeleather costs, p. 642menu costs, p. 644Key Concepts1.Explain how an increase in the price level affects the realvalue of money.2.According to the quantity theory of money, what is theeffect of an increase in the quantity of money?3.Explain the difference between nominal and realvariables, and give two examples of each. According tothe principle of monetary neutrality, which variables areaffected by changes in the quantity of money?4.In what sense is inflation like a tax? How does thinkingabout inflation as a tax help explain hyperinflation?5.According to the Fisher effect, how does an increase inthe inflation rate affect the real interest rate and thenominal interest rate?
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