PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 10, Problem 6RQ
To determine
Explain why money growth and inflation tend to be closely linked in terms of quantity equation.
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Antonio receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for
the inflation rate.
The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario.
Given the real interest rate of 4.5% per year, find the nominal interest rate on Antonio's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario.
Inflation Rate
(Percent)
After-Tax Nominal Interest Rate
(Percent)
Real Interest Rate
Nominal Interest Rate
After-Tax Real Interest Rate
(Percent)
(Percent)
(Percent)
2.0
4.5
4.5
9.5
Compared with lower inflation rates, a higher inflation rate will
quantity of investment in the economy and
the after-tax real interest rate when the government taxes nominal interest income. This…
In the FT article “Japan’s core inflation hits 41-year high with central bank under policy pressure” (20 January 2023), we can read:
“Japan's core inflation rate rose to a new 41-year high of 4 per cent in December [...]. Official statistics released on Friday showed core inflation, which excludes volatile food prices but includes oil, reached its fastest pace since December 1981, exceeding the Bank of Japan’s 2 per cent inflation target for the ninth consecutive month. The release came two days after Japan’s central bank defied market pressure and maintained its ultra-loose monetary policy, arguing that wage growth was not strong enough to sustainably achieve its inflation target. Uniqlo owner Fast Retailing and other large companies have in recent weeks announced plans to dramatically raise wages, fuelling hopes that rising prices could finally drive salaries higher in a country that has wrestled with three decades of price stagnation.”
(a) Using a 3-equation model, represent…
Homework Question 22: Hyperdeflation Can Be a Bit Cryptic to Understand
Bitcoin is an electronic currency, which means that instead of having physical notes and
coins, the currency only exists online. Bitcoins are unique in that there is no entity or individual
that can increase the supply of Bitcoins. Instead Bitcoins are created by a computer algorithm that
currently adds a fixed number of Bitcoins into circulation every hour, the algorithm is designed to
gradually reduce the number of Bitcoins being produced, eventually reaching a growth rate of zero
in 2040. You have been given the task of thinking about the potential for Bitcoin to become widely
Only a small group of online vendors initially accepted Bitcoin but more and more are accepting
it over time in other words the volume of goods and services that can be purchased with Bitcoin
has been rising rapidly.
a) Reformulate the Quantity Theory of Money to apply to Bitcoin, i.e define what M, P, V and
Y are in the context of…
Chapter 10 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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