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24 Cards in this Set
- Front
- Back
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Past 60 year average of inflation?
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5% annually
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In the 1970s, how much did inflation rise?
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7% annually
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In the 1990s, how much did inflation rise?
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2% annually
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What is the quantity theory of money?
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theory that says the quantity of money determines price level
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What are the determinants of money demand?
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interest rates
price levels |
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Value of money and Price Level are ____
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inversely proportional
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Equation for money velocity?
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M x V = P x Y
or (Quantity of Money)(Velocity of Money) = (Price Level)(Quantity of Output) |
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According to the quantity equation, increases in quantity of money must be reflected in one of what three variables?
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Price Level (rising)
(Quantity of Output) rising Velocity of Money falling |
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Is velocity of money dynamic or relatively stable?
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Stable
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What is Hyperinflation?
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inflation exceeding 50% a month
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What is an inflation tax?
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government raising revenue by printing money
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What is the Fisher Effect?
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The 1 to 1 adjustment of nominal interest rate and inflation
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How is the real interest rate effected by inflation?
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It isn't.
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According to the Fisher Effect, when the inflation rate rises, so does __
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nominal interest rate
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What are the "costs" of inflation?
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-Shoe leather costs
-Menu Costs -Relative price variability -Tax distortions -Confusion and Inconvenience -Arbitrary redistribution of wealth |
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What is classical dichotomy?
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separation of nominal and real variables
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What are nominal variables?
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variables measured in monetary units
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What are real variables?
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variables measured in physical units
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Equation for Real Interest Rate?
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Nominal Interest Rate minus Inflation
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(Explaining "Costs" of Inflation)
Shoe Leather Costs |
resources wasted when inflation encourages a reduction in money holdings
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(Explaining "Costs" of Inflation)
Menu Costs |
Costs of changing prices on a menu
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(Explaining "Costs" of Inflation)
Relative price Variability |
inflation distorting prices by menus not changing prices
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(Explaining "Costs" of Inflation)
Tax Distortions |
Tax law designed does not account for inflation and uses nominal numbers
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(Explaining "Costs" of Inflation)
Arbitrary Redistribution of Wealth |
Loans and stuff are subject to inflation: YOu might be paying more or less depending on how the economy went
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