Lesson 2 Money Growth And Inflation Name: Course & Year: Lesson Activity 1 225 Directions: Answer the following questions about money growth and inflation. Use separate sheet of paper for your solution. (15 points each item) 1. Using the equation for the quantity theory of money, what is the price level if V = 10, M-100, and Y = 50? 2. Using the equation for the quantity theory of money, what is the price level if V = 5, M = 50, and Y = 125? 3. Using the equation for the quantity theory of money, what is the percent change in the price level if V changes by 3%, M changes by 2%, and Y changes by 4%? 4. Using the equation for the quantity theory of money, what is the percent change in the price level if V changes by 1%, M changes by 3%, and Y changes by 4%? 5. A farmer produces the same output in 2012 as in 2011. His input prices increase by 3 percent and so does his product price. Which inflation rate makes the farmer as well off in 2012 as in 2016? 6. If the average price level rises from 120 in year 1 to 130 in year 2, the inflation rate between years 1 and 2. 7. To stay "even" (same purchasing power) with an inflation forecast at 3.4% per year, what would your salary need to be in 8 years if you currently earn P58,256 per year? 8. A family spends $40,000 per year on living expenses. With an annual inflation rate of 4 percent, how much can they expect to spend in 3 years? 9. In 40 years, you would like to retire on #150,000 a year in today's dollars. If the inflation rate = 4% a year for the next 40 years, how much must you have to equal today's 150,000? 10. The yield to maturity on a bond is currently 9.84 percent. The real rate of return is 3.29 percent. What is the rate of inflation? 11. An investment offers a total return of 12.4 percent over the coming year. You believe the total real return will be only 9.7 percent. What do you believe the exact inflation rate will be for the next year? 12. An economist has predicted that for the next 5 years, the U. S. will have an 8% annual inflation rate, followed by 5 years at a 6% inflation rate. This is equivalent to what average price change per year for the entire 10-year period? 13. The inflation rate in the U.S. is projected at 10% per year for the next several years. The Australian inflation rate is projected to be 2% during that time. The exchange rate is currently $2.2. 14. Hector is a homeowner and has a mortgage with a fixed nominal 6% interest rate that he took out 5 years ago. Over the years, the inflation rate has crept up unexpectedly to its present level of 7%. In this situation, is inflation creating winners and losers at no net cost to the economy, or is inflation imposing a net cost on the economy? If a net cost is being imposed, which type of cost is involved? 15. If the price of a gallon of regular gasoline is P2.49 and the anticipated rate of inflation in energy prices is such that the cost of gasoline is expected to rise by 5 percent per year, what is the expected price per gallon in 10 years?