• Home
  • Textbooks
  • Principles of Macroeconomics
  • Money Growth and Inflation

Principles of Macroeconomics

N. Gregory Mankiw

Chapter 17

Money Growth and Inflation - all with Video Answers

Educators

Chapter Questions

07:55

Problem 1

Suppose that this year's money supply is 500 billion dollar, nominal GDP is 10 trillion dollar, and real GDP is 5 trillion dollar.
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?

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
03:08

Problem 2

Suppose that changes in bank regulations expand the availability of credit cards so that people can hold less cash.
a. How does this event affect the demand for money?
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?

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
02:42

Problem 3

It is sometimes suggested that the Fed should 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 money growth should equal.

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
04:20

Problem 4

Suppose that a country's inflation rate increases sharply. What happens to the inflation tax on the holders of money? Why is wealth held in savings accounts not subject to a change in the inflation tax? Can you think of any way in which holders of savings accounts are hurt by the increase in inflation?

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
07:08

Problem 5

Let's consider the effects of inflation in an economy composed of only two people: Bob, a bean farmer, and Rita, a rice farmer. Bob and Rita both always consume equal amounts of rice and beans.
In 2019 , the price of beans was 1 dollar and the price of rice was 3 dollar.
a. Suppose that in 2020 the price of beans was 2 dollar and the price of rice was 6 dollar. What was inflation? Did the price changes leave Bob better off, worse off, or unaffected? What about Rita?
b. Now suppose that in 2020 the price of beans was 2 dollar and the price of rice was 4 dollar. What was inflation? Did the price changes leave Bob better off, worse off, or unaffected? What about Rita?
c. Finally, suppose that in 2020 the price of beans was 2 dollar and the price of rice was 1.50 dollar. What was inflation? Did the price changes leave Bob better off, worse off, or unaffected? What about
Rita?
d. What matters more to Bob and Rita - the overall inflation rate or the relative price of rice and beans?

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
03:52

Problem 6

Assuming a tax rate of 40 percent, compute the before-tax real interest rate and the after-tax real
interest rate for each of the following cases.
a. The nominal interest rate is 10 percent, and the inflation rate is 5 percent.
b. The nominal interest rate is 6 percent, and the inflation rate is 2 percent.
c. The nominal interest rate is 4 percent, and the inflation rate is 1 percent.

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
02:39

Problem 7

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?

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
04:43

Problem 8

Suppose that people expect inflation to be 3 percent but that, in fact, prices rise by 5 percent. Describe how this unexpectedly high inflation would help or hurt the following:
a. the government
b. a homeowner with a fixed-rate mortgage
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

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
05:30

Problem 9

Explain whether the following statements are true, false, or uncertain.
a. "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."
c. "Inflation does not reduce the purchasing power of most workers."

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis