Understand the relationship of money with other economics variables 1. How does the money supply affect inflation? 2. How does the money supply affect nominal interest rates? 3. Does the money supply affect real variables like real GDP or the real interest rate? 4. How is inflation like a tax? 5. What are the costs of inflation? How serious are they? 6. One good: cheese. The economy has enough labor, capital, and land to produce Y = 800 cheese. V is constant. In 2019, MS = $2000, P = $5. For 2020, the Fed increases MS by 5%, to $2100. a. Compute the 2020 values of nominal GDP and P. Compute the inflation rate for 2019-2020. b. Suppose technological progress causes Y to increase to 824 in 2020. Compute 2019-2020 inflation rate. 7. You deposit $1000 in the bank for one year. CASE 1: inflation = 0%, nom. interest rate = 10% CASE 2: inflation = 10%, nom. interest rate = 20% a. In which case does the real value of your deposit grow the most? Assume the tax rate is 25%. b. In which case do you pay the most taxes? c. Compute the after-tax nominal interest rate, then subtract inflation to get the after-tax real interest rate for both cases