During the Great Inflation of the 1970s, (a) the growth rates of M1 and M2 were higher than previously, and (b) the growth rate of M2 was much higher than the growth rate of M1
Explain how the high inflation of the decade relates to each of these facts.
By the quantity theory of money, rapid growth of the money supply (relative to the growth rate of aggregate output) causes the inflation rate to be high. When inflation is high, holding cash and non-interest bearing deposits is costly, so people shift as much money as possible into interest-bearing accounts, so the narrow monetary aggregate M1 does not grow as fast as the broader aggregate M2. By the Fisher effect, nominal interest rates rise with expected inflation, so interest-bearing accounts provide some compensation for inflation.
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The self-correcting tendency of the economy means that rising inflation eventually eliminates:
A. unemployment. B. exogenous spending. C. recessionary gaps. D. expansionary gaps.
The market system does not produce public goods because
A. there is no need or demand for such goods. B. public enterprises can produce such goods at lower cost than can private enterprises. C. their production seriously distorts the distribution of income. D. private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.
Computation of gross domestic product by the expenditure method would include the purchase of:
A. a school building by the U.S. Department of Education. B. fertilizer by a farmer. C. government bonds by a commercial bank. D. cement by a construction company.
Anti-competitive price discrimination, interlocking directorates, and tying contracts were banned by the:
A. Federal Trade Commission Act B. Clayton Act C. Sherman Act D. Celler-Kefauver Act