Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Chapter 15, Problem 6QQ
To determine
Taylor principle.
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Explain the two costs of inflation from the perspective of economists.
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In each of the following scenarios, explain and categorize the cost of inflation. A) Because of inflation has risen, the L.L Bean Company decides to issue a new catalog quarterly rather than annually. B)Grandma buys annuity for $100,000 from an insurance company, which promises to pay her $10,000 a year for the rest of her life. After buying it, she is surprised that high inflation triples the price level over the next few years. C)Maria lives in an economy with hyperinflation. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses its value. D) Warren lives in an economy with an inflation rate of 10%. Over the past few years, he earned a return of $50,000 oh his million dollar portfolio of stocks and bonds. Because his tax rate is 20%, he paid $10,000 to the government. E) Your father tells you that when he was your age, he worked for only $3 an hour. He suggest that you are lucky to have a job that pays $7 an hour. Is it…
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- Give two specific reasons why inflation in Canada is higher than normal.arrow_forwardAssuming prices and output are somewhat flexible, an increase in consumer spending will cause inflation to __________ in the short run and growth to ___________ in the short run. increase/decrease increase/increase decrease/increase decrease/decrease uncertain/decreasearrow_forwardWhich of the following groups would most likely be harmed by inflation? Group of answer choices spenders workers retirees none of the above Older people often reminisce about the “good old days” when prices were much lower. This is misplaced nostalgia primarily because in the “good old days” Group of answer choices prices were not really that low wages were much lower also When interest rates fall, investment expenditures by businesses Group of answer choices decrease increasearrow_forward
- Which of the following are CORRECT statements regarding inflation and real variables? Select ONLY THOSE THAT APPLY. Select 2 correct answer(s) If nominal interest rate is 10 percent, the inflation rate is 5 percent, and the tax rate is 30 percent, the real after-tax interest rate is 2 percent. Lower than anticipated inflation raises the real wage rate (adjusted for inflation) and workers gain at the expense of employers who lose. If the money wage rate is $30.00 an hour and the price level is 120, the real wage rate is $24.00.arrow_forwardConsidering the impacts of expected inflation, how might the purchasing power of consumers be affected in the short term?arrow_forwardWith respect to the concept of inflation, it is correct to say that ________. options: A) inflation increases the purchasing power of consumer dollars. B) inflation and deflation are really almost synonymous in practice. C) the consumer price index is one way to measure inflation. D) inflation occurs when the amount of money taken out of the economy exceeds the amount of money put into the economy. E) inflation occurs when people have more money to spend as the quantity of goods available increases.arrow_forward
- Describe in detail the costs of inflation. Be sure to differentiate between expected and inflation.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_forwardDistinguish between the general inflation rate and the average inflation rate for specific goods?arrow_forward
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