1) Answer these three sub-parts a) If an economy’s price level increases from year to year, its money supply likely also increases from year to year. (True or False) b) ) If a central bank creates new money and lets the government spend it, those who already hold money experience a decrease in the purchasing power of their money. This is called an inflation ______________________. c) Which of the following costs of inflation occurs only when inflation is not correctly anticipated by borrowers and lenders? (shoe leather costs; menu costs; increased tax burdens on income from saving; arbitrary redistributions of purchasing pow

1) Answer these three sub-parts a) If an economy’s price level increases from year to year, its money supply likely also increases from year to year. (True or False) b) ) If a central bank creates new money and lets the government spend it, those who already hold money experience a decrease in the purchasing power of their money. This is called an inflation ______________________. c) Which of the following costs of inflation occurs only when inflation is not correctly anticipated by borrowers and lenders? (shoe leather costs; menu costs; increased tax burdens on income from saving; arbitrary redistributions of purchasing pow

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter22: Money Growth And Inflation

Section: Chapter Questions

Problem 8PA

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Question

1) Answer these three sub-parts

a) If an economy’s price level increases from year to year, its money supply
likely also increases from year to year. (True or False)

b) ) If a central bank creates new money and lets the government spend it, those who already hold money experience a decrease in the purchasing power of their money. This is called an inflation ______________________.

c) Which of the following costs of inflation occurs only when inflation is not correctly anticipated by borrowers and lenders? (shoe leather costs; menu costs; increased tax burdens on income from saving; arbitrary redistributions of purchasing power)

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Please just do question 4 please 3) Suppose that on January 1, 2019 a bank lends $20,000 to a person. The bank and the individual both agree that the real interest rate charged on the loan should be 10% and the loan is going to be totally paid ($20,000 plus interest), in a one-time payment, on December 31, 2020. Suppose the two parties to this transaction can perfectly foresee what the inflation rate for this period is going to be. Given this information, what is the nominal rate the Bank has to charge on this loan? Assume that the CPI is computed at the beginning of each year. According to US inflation data: The historical average CPI for 2019 is - 255.657 The historical average CPI for 2019 is - 258.811 The inflation rate during the period is: (258.811/255.657 -1) *100 = 1.233% Real Interest Rate = Nominal Interest Rate – Expected Inflation Nominal Interest Rate = Real Interest Rate+ Expected Inflation Nominal Interest Rate = 10% + 1.23% Nominal Interest Rate…
10. Which of the following statements is true? a Cost-push inflation occurs as prices rise because of a rise in per-unit cost of production (unit cost = total cost/units of output). With cost-push inflation, prices rise but output falls. b Rising costs reduce profits and the amount of output firms are willing to supply at the current price level. As a result, the economy’s production of goods and services declines and the price level rises. c Supply shocks have been the major source of cost-push inflation. Supply shocks occur when there are dramatic increases in the price of raw materials or energy. d All of the above. e Only a) and b)
#### Correct answer
20) Some inflation is actually considered good. Explain why that is.
Demand-pull inflation is an inflation that results from an initial Select one: а. decrease in aggregate demand O b. increase in natural resource prices O c. increase in wage rates O d. increase in the aggregate demand
Real GDP grew by 4.6% last year, while nominal GDP grew by 8.2%. Calculate inflation for the period. a) 1.78% b) 0.56% O c) 3.77% d) 3.60%
3. Explain any three costs associated with inflation? Also, provide a real-world example of hyperinflation that happened in the past.
3.In economics, what does the term "inflation" refer to?a) The rate at which a currency depreciatesb) A decrease in the overall price levelc) An increase in the overall price leveld) A decrease in the supply of money
2. Assume the short-run aggregate supply curve can be expressed algebraically as: Y = 4,500 + 3,000π and the dynamic aggregate demand curve can be written as: Y = 5,000 – 1,000π a. Find the numerical value for the short-run inflation rate? Show your work. b. Find the numerical value for equilibrium output in the short run? Show your work.
7. Suppose that people expect inflation to equal 3%, but in fact, prices rise by 5%. Describe how this unexpectedly high inflation rate would help or hurt the following: A.) the governmentB.) a homeowner with a fixed-rate mortgageC.) a union worker in the second year of a labor contractD.) a college that has invested some of its endowment in government bonds
(c). Consider an economy that starts out in steady state when the central bank decides to make the inflation target more ambitious. Analyse the effects of a decrease in the inflation target from ? to ??. Explain the mechanisms behind the adjustment to the new steady state.
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