Money and Inflation
Problem Set #3
Economics 100b; Spring 1996; Brad DeLong
1. Up until this week, we have focused on quantities and relative
prices. This week we focus on prices expressed in terms of units of
money. What terms do economists use to distinguish between these two
groups of concepts and magnitudes?
2. What is wrong with stable, predictable, constant inflation?
3. What is the real interest rate? What is the nominal interest rate?
How are they different?
4. How would you measure the real interest rate?
5. Suppose that the income velocity of money is increasing at a
steady 5% per year, the level of real GDP is increasing at 3% per
year, and the money stock is increasing at 2% per year. What is the
rate of inflation?
6. Suppose the rate of growth of the money stock jumps to ten percent
per year and other variables in the quantity equation remain
unchanged. What is the rate of inflation?
7. Explain why a borrower should be more concerned about the
real interest rate he or she pays than the nominal interest
8. Suppose that the government taxes nominal interest payments
at 33%. Suppose the expected (and actual) inflation rate rises from
zero to ten percent per year. Would you expect the real interest rate
to rise or fall as a result of this change in inflation. Why?