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Econ 100b

Created 4/30/1996
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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 rate.

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?


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Econ 100b

Created 4/30/1996
Go to
Brad De Long's Home Page


Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/