Page 406 - Krugmans Economics for AP Text Book_Neat

b.Maria continues to keep the $1,000 in her drawer for a sec- 13. Monetarists believed for a period of time that the velocity of
ond year. What is the real value of this $1,000 at the begin- money was stable within a country. However, with financial in-
ning of the second year? Over the year, the inflation rate is novation, the velocity began shifting around erratically after
again 10%. What is the real inflation tax paid by Maria for 1980. As would be expected, the velocity of money is different
the second year? across countries depending upon the sophistication of their fi-
c. For a third year, Maria keeps the $1,000 in the drawer. nancial systems—velocity of money tends to be higher in coun-
What is the real value of this $1,000 at the beginning of tries with developed financial systems. The accompanying
the third year? Over the year, the inflation rate is again table provides money supply and GDP information in 2005 for
10%. What is the real inflation tax paid by Maria for the six countries.
third year?
d.After three years, what is the cumulative real inflation M1 Nominal GDP
tax paid? (billions in (billions in
National national national
e. Redo parts a through d with an inflation rate of 25%. Why
Country currency currency) currency)
is hyperinflation such a problem?
Egypt Egyptian pounds 101 539
10. Concerned about the crowding - out effects of government bor-
rowing on private investment spending, a candidate for presi- South Korea Korean won 77,274 806,622
dent argues that the United States should just print money to Thailand Thai baht 863 7,103
cover the government’s budget deficit. What are the advan- United States U.S. dollars 1,369 12,456
tages and disadvantages of such a plan?
Kenya Kenyan pounds 231 1,415
11. The accompanying table provides data from the United
India Indian rupees 7,213 35,314
States on the average annual rates of unemployment and in-
Source: Datastream.
flation. Use the numbers to construct a scatter plot similar to
Figure 34.1. Discuss why, in the short run, the unemploy-
ment rate rises when inflation falls. a. Calculate the velocity of money for each of the countries.
The accompanying table shows GDP per capita for each of
these countries in 2005 in U.S. dollars.
Year Unemployment rate Inflation rate
2000 4.0% 3.4%
Nominal GDP per capita
2001 4.7 2.8 Country (U.S. dollars)
2002 5.8 1.6
Egypt $1,270
2003 6.0 2.3
South Korea 16,444
2004 5.5 2.7
Thailand 2,707
2005 5.1 3.4
United States 41,886
2006 4.6 3.2
Kenya 572
2007 4.6 2.9
India 710
Source: IMF.
Source: IMF.
12. In the modern world, central banks are free to increase or re- b.Rank the countries in descending order of per capita in-
duce the money supply as they see fit. However, some people come and velocity of money. Do wealthy countries or poor
harken back to the “good old days” of the gold standard. countries tend to “turn over” their money more times per
Under the gold standard, the money supply could expand only year? Would you expect that wealthy countries have more
when the amount of available gold increased.
sophisticated financial systems?
a. Under the gold standard, if the velocity of money was stable
when the economy was expanding, what would have had to 14. Module 35 explains that Kenneth Rogoff proclaimed Richard
happen to keep prices stable? Nixon “the all -time hero of political business cycles.” Using the
table of data below from the Economic Report of the Presi-
b.Why would modern macroeconomists consider the gold dent, explain why Nixon may have earned that title. (Note:
standard a bad idea?

364 section 6 Inflation, Unemployment, and Stabilization Policies