Difference between nominal and real variables
1. Explain the difference between nominal and real variables, and give two examples of each. According to the principle of monetary neutrality, which variables are affected by changes in the quantity of money?
2. According to the quantity theory of money, what is the effect of an increase in the quantity of money?
3. It is often suggested that the Bank of Canada try to reduce the inflation rate to zero. If we assume that velocity is constant, does this zero-inflation goal require that the rate of money growth equal zero? If yes, explain why. If no, explain what the rate of money growth should equal.
4. Explain the six costs associated with inflation, and evaluate which if any of the costs are important for the average consumer.
5. If there was a decline in price over time (deflation), why would this be a concern to workers, consumers, and retailers?
6. Explain whether the following statements are true, false, or uncertain.
a. "Inflation hurts borrowers and helps lenders, because borrowers must pay a higher rate of interest.
b. "If prices change in a way that leaves the overall price level unchanged, then no one is made better or worse off."
c. "Inflation does not reduce the purchasing power of most workers."