EBK ESSENTIALS OF ECONOMICS
7th Edition
ISBN: 8220102452107
Author: Mankiw
Publisher: CENGAGE L
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Chapter 22, Problem 1QCMC
To determine
Nominal and real variables and money neutrality.
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The classical principle of monetary neutrality statesthat changes in the money supply do not influence_________ variables, and it is thought mostapplicable in the _________ run.a. nominal; shortb. nominal; longc. real; shortd. real; long
Money neutrality is the idea that
a. any policy can have intended and unintended consequences
b. in the long-run, markets will clear and return the economy to equilibrium regardless of what happens to the money supply.
c. there are two types of variables, nominal and real, and only nominal variables are affected by the money supply.
d. nominal and real interest rates are unrelated.
During the middle of the 20th century, income inequality in developed economies generally fell. The reason for this was
a. average incomes didn't rise but welfare systems redistributed income.
b. that returns to assets held by high income earners fell steadily.
c. incomes overall rose but taxation systems were slowly made more and more progressive.
d. a rise in average income with incomes of the bottom deciles rising faster than the top.
The short-run impact on the nominal interest rate of monetary expansion is different from its long-run impact. Which of the following explanations is not correct?a. In the short run, nominal interest rate falls due to Fisher effect.b. Over time, rising income pushes up nominal interest rate via increased demand for money.c. Over time, expected inflation rate rises, which in turn pushes up nominal interest rate.d. Over time, rising prices also push up nominal interest rate.e. All of the above are correct
Chapter 22 Solutions
EBK ESSENTIALS OF ECONOMICS
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- Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, then A. the nominal interest rate rises, but the real interest rate does not. B. the real interest rate rises, but the nominal interest rate does not. C. neither the nominal nor the real interest rate rise. D. both the nominal and the real interest rate rise.arrow_forwardSuppose a country has a money demand function (M/P)ª = kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. a. What is the average inflation rate? b. How would inflation be different if real income growth were higher? Explain. c. How do you interpret the parameter k? What is its relationship to the velocity of money? d. Suppose, instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain.arrow_forwardA. Discuss, with the help of diagrams, Friedman’s argument concerning the short and long-run effects of an increase in the money supply. B. Now discuss how his argument can be extended to study short and long-run effects of changes in the growth rate of a growing money supply. Both parts please.arrow_forward
- According to the classical theory of money, inflation does not make workers poorer because wages increase: Select one: a. faster than the overall price level. b. more slowly than the overall price level. c. in proportion to the increase in the overall price level. d. in real terms during periods of inflation.arrow_forwarda) In the long run, the real interest rate is determined by and, in the short run, the Reserve Bank can control the real interest rate by setting the nominal interest rate if inflation adjusts A. saving and investment; slowly B. saving and investment; quickly C. the Reserve Bank; to equal the increase in the money supply D. the Reserve Bank; slowly b) Small differences in growth rates of real GDP per person over the long run make differences in the average standard of living. A. almost no B. unpredictable C. very large D. very minorarrow_forwardBased on the money market model, when real GDP increases, the equilibrium interest rate should Select one: a. increase the same percentage as the money supply increase. b. increase. c. stay the same. d. decrease.arrow_forward
- Milton Friedman argued that the Fed's control over the money supply could be used to peg a. the level of a nominal or real variable, but not the growth rate of a real or nominal variable. b. the level or growth rate of a real variable, but not the level or growth rate of a nominal variable. c. the level or growth rate of a nominal variable, but not the level or growth rate of a real variable. d. both levels and growth rates of both real and nominal variables.arrow_forwardpolicy is when a central bank acts to increase the money supply in an effort to stimulate the economy. Select one: a.Deflationary monetary b.Expansionary monetary c.Contractionary fiscal d.Cyclical monetary e.Countercyclical fiscalarrow_forwardThe classical dichotomy and the neutrality of money The classical dichotomy is the separation of real and nominal variables. The following questions test your understanding of this distinction. Janet spends all of her money on paperback novels and beignets. In 2014, she earned $14.00 per hour, the price of a paperback novel was $7.00, and the price of a beignet was $2.00. Which of the following give the nominal value of a variable? Check all that apply. 1-Janet's wage is $14.00 per hour in 2014. 2-The price of a beignet is 0.29 paperback novels in 2014. 3-The price of a beignet is $2.00 in 2014. Which of the following give the real value of a variable? Check all that apply. 1-Janet's wage is 7 beignets per hour in 2014. 2-The price of a paperback novel is $7.00 in 2014. 3-The price of a paperback novel is 3.5 beignets in 2014. Suppose that the Fed sharply increases the money supply between 2014 and 2019. In 2019, Janet's wage has risen to…arrow_forward
- Q.2 The growth in the velocity (V) has been steady at about 1%. We would like inflation to be 2%. If the economy grows at 2.5%, how fast should we let the money supply (M) grow? A.4.5% B.2.5% C.3.5% D.2.0%.arrow_forwardThe interest-rate effect a. depends on the idea that increases in interest rates decrease the quantity of goods and services demanded.b. depends on the idea that increases in interest rates decrease the quantity of goods and services supplied.c. is responsible for the downward slope of the money-demand curve.d. is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.arrow_forwarde. Show the impact of the fiscal policy action on a correctly labeled money market graph (remember that the government will need to use money to make more transactions). i. ii. Label the original nominal interest rate i₁ and the new nominal interest rate i2.4 DESCRIBE the change. f. Suppose (in a limited reserves framework) the Federal Reserve decides to implement monetary policy to counteract inflation that occurred following the spending increase. i. What open market operation would they need to implement? ii. iii. How would the policy action impact the money supply?. What change in the discount rate would they use if they wanted it to be consistent with the open market operation? g. Assuming a limited reserves framework, graph the impact of the monetary policy action on the money market graph in part e. i. ii. Label the new interest rate i3. E DESCRIBE the combined impact of parts e and g (the fiscal and monetary policy) on nominal interest rates.arrow_forward
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