Discuss the effects of ongoing inflation based on the PPP theory
What will be an ideal response?
Other things equal, money supply growth at a constant rate eventually results in ongoing price level inflation at the same rate as the money supply growth, but changes in this long-run inflation rate do not affect the full-employment output level or the long-run relative prices of goods and services.
The interest rate, however, is affected by continuing growth in the money supply (inflation). This can be shown by combining PPP with the interest parity condition. To show it analytically, recall that the condition of parity between dollar and euro assets is:
R$ = + ( - )/
And according to relative PPP:
( - )/ = ΠUS,t - ΠE,t
If people expect relative PPP to hold, the difference between interest rates offered by dollar and euro deposits will equal the difference between the expected inflation rates, over the relative horizon, in the U.S. and Europe.
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A) Aggregate demand is growing too fast to keep the economy at full employment. B) Potential GDP is forecasted to be lower than equilibrium GDP. C) Potential GDP is forecasted to be higher than equilibrium GDP. D) Aggregate demand is growing too slowly and the economy is in danger of producing GDP above full employment.
Which of the following are examples of cooperative games?
A) The bargaining between a buyer and seller over the price of a car B) Independent action by two firms in a market regarding advertising strategies C) Independent pricing strategies by two firms in a market D) Independent pricing strategies by many firms in a market E) Team games (such as baseball or basketball)
A rightward shift of long-run aggregate supply due to technology advances without any change in aggregate demand
A. increases the price level without any change in real GDP. B. results in a lower price level. C. will leave real GDP unchanged. D. increases the price level along with an increase in real GDP.
Which of the following statements about economic models is correct?
a. Economic models are built to mirror reality exactly. b. Economic models are useful, but they should not be used for the purpose of improving public policies. c. Because economic models omit many details, they allow us to see what is truly important. d. Economic models seldom incorporate equations or diagrams.