Equation Exercise

1. What is the difference between the quantity equation and the quantity theory of money?

2. According to the classical dichotomy, what happens to the real money supply if the nominal money supply grows at 10 percent?

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3. If you were to draw a line through the points in Figure 11.6 “Inflation and Money Growth in Different Countries”, it would not pass through the origin. Can you explain why? (Hint: examine the equation for the quantity equation, expressed in growth rates.)

4. Looking at Figure 11.10 “The Price Level in Argentina”, you might be fooled into thinking that the inflation between 2002 and 2003 was almost as bad as that between 1990 and 1991. Why would this reasoning be a mistake?

5. The chapter contains two perspectives on Germany. The first is the hyperinflation in Germany during the 1920s, and the second is current Germany with low inflation and an independent central bank. How would you describe the differences in economic achievement (inflation, output growth, and unemployment) between these two versions of Germany? What were the institutional differences between these two versions of Germany?

6. Looking at Table 11.2 “The Start of the Hyperinflation in Zimbabwe”, what happened to the velocity of money in Zimbabwe during the hyperinflation?

7. If the central bank takes the view that producing at potential GDP is efficient, then does it face a commitment problem?

8. In 2010, the state of California faced severe budgetary problems. If the state could print dollars, how would that relieve its budget problems? Who would pay the inflation tax?

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