Money and Inflation: Conceptual Questions and Solutions

Intermediate Macroeconomics Problems and Solutions - Section 4

See Mr. Stolyarov's complete index of Intermediate Macroeconomics Problems and Solutions here.

Problem 16. Which of these concepts are mutually exclusive?

(a) Fiscal policy and monetary policy
(b) Monetarism and Classical economics
(c) Real prices and nominal prices
(d) Money illusion and money neutrality
(e) Paper money and gold money
(f) Reason and emotion  

Solution 16. Money illusion means that people respond to nominal prices rather than real prices. Money neutrality occurs when people have no money illusion and respond solely to real economic factors. When money is neutral, nominal prices do not influence decision-making. Thus, money illusion and money neutrality are mutually exclusive, and (d) is the correct answer.

Problem 17. Which of these views would a Monetarist support? More than one answer is possible.

(a) The government should never increase the money supply.
(b) The government should increase the money supply to stimulate output and employment.
(c) The central bank should have as much discretion over monetary policy as possible so as to enable optimal responses to each unique economic challenge.
(d) The government should increase the money supply at a constant, predictable rate.
(e) Inflation is always and everywhere a monetary phenomenon.
(f) Animal spirits and irrational investment decisions by private businesses led to the Great Depression.
(g) The Great Depression was caused by sharp drops in the money supply, influenced by a tightening of monetary policy by the Federal Reserve.

Solution 17. A Monetarist would agree with the following:

(d) The government should increase the money supply at a constant, predictable rate.

(e) "Inflation is always and everywhere a monetary phenomenon." ~ Milton Friedman

(g) The Great Depression was caused by sharp drops in the money supply, influenced by a tightening of monetary policy by the Federal Reserve.

Problem 18. What is seignorage?