Q1. Answer following arguments regarding inflation by T (true) or F (false).

Inflation creates shoeleather costs in order to reduce cash holdings.

When inflation is unpredictable, the wealth of creditors and debtors is redistributed.

When inflation is stable and predictable, there are no menu costs.

Inflation distorts resource allocation but does not change relative prices.

Q2. Rational economic participants (agents) expected the inflation rate to be 6% and performed the following economic transactions (actions). Select all economic entities that lose money when the real inflation rate is 3%.

Households subscribed to time deposits with fixed interest rates

Workers who have entered into a wage contract with a fixed salary

Government that issued government bonds with fixed interest rates

Borrowers who take out a home equity loan at a fixed rate

Q3. Suppose the real interest rate is 4% and the expected inflation rate is 8%. Find (1) the nominal interest rate after tax, and (2) the expected real interest rate after tax.

Assume 25% tax is imposed on nominal interest income and Fisher effect holds.

Q4. If the neutrality of money based on the traditional quantity theory of money holds, answer following explanations by T (true) or F (false).

An increase in the rate of money supply increases the nominal interest rate.

Increasing the rate of money supply increases the rate of inflation.

Even if the money supply increases, the real national income level does not change.

When the money supply increases, the unemployment rate decreases.

An increase in the money supply does not change the real interest rate.

Q5. Answer following arguments regarding deflation by T (true) or F (false)

The real income of office workers receiving fixed wages will decrease.

As the purchasing power of money decreases, hoarding will flourish.

Those who invest in real estate will have an advantage over those who subscribe to time deposits of the same amount.

A person who takes out a fixed rate loan from a bank will be at a disadvantage compared to a person who takes out a variable rate loan.

Government tax revenue will increase.

Q6. Answer following arguments regarding deflation by T (true) or F (false)

Deflation refers to a slowdown in the rate of inflation.

When deflation occurs, the nominal interest rate falls below 0%.

Deflation has a less serious impact on the national economy than inflation.

If deflation is expected, private consumption will contract.

When an unexpected deflation occurs, the debtor benefits.

Q7. Assume quantity theory of money and Fisher equation hold. When real economic growth rate (change of Y) is 3%, the money growth rate (change of M) is 6%, and the nominal interest rate is 10% in an economy with a constant velocity of money (V), what is the real interest rate?

Q8. Assume that the velocity of money in Korea is faster than that of Japan, and the central banks of both countries increase the money supply by 5% each. Based on these facts answer following arguments by T (true) or F (false).

Korea's inflation rate is higher than that of Japan.

Korea's GDP growth rate is higher than that of Japan.

Korea and Japan's nominal GDP will each increase by 5%.