#147 True and False Q&A for Business Statistics Solutions Manuals

True and False Q&A for Business Statistics Solutions Manuals  - Business Statistics

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True & False Q&A for Business Statistics Solutions Manuals
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(a) True. In the short run a government can finance a deficit of nearly any size through money growth. If they only do this in the short run the growth in nominal money growth will be small. However, if the government doesn’t immediately cease this practice, prices will adjust and cause inflation to increase one-for-one with the nominal money growth, leading to very high inflation. If a government attempted to do this longer than the short run it would have to continually increase the rate of money growth above the adjusted inflation, leading to hyperinflation.

(b) False. The inflation tax is equal to seignorage only when the nominal money growth is constant. If nominal money growth accelerates or decelerates, the inflation tax and seignorage will not be exactly equal. This is because inflation relies on expectations and these expectations are slower than reality. So if people expect a 3% rate of inflation but the government increase money growth by 5%, the inflation tax and seignorage will not be equal.

(c) False. Hyperinflations actually lead to a decrease in output. This occurs for three main reasons. First, the system of transactions breaks down. People might need to carry hundreds of thousands of units of currency just to purchase groceries. People will consequently only purchase necessities. Second, prices cease to be useful. Because a matter of hours can mean a huge increase in prices, consumers cannot make informed decisions. Again, this leads to decrease in output as consumers will only purchase what they absolutely need. Finally, the large swings in interest rates caused by inflation discourage investing. Investing and savings stop because the money invested or saved could be rendered useless shortly after.

(d) Uncertain. Using wage and price freezes could perhaps help fix the problem but typically will only work in addition to other measures. Specifically, many economists argue that wage and price freezes should be used in conjunction with fiscal reform and a credible reduction of the government budget deficit. Using wage and price freezes are certainly one way to handle the problem but by themselves, they are unlikely to solve the problem.

(e) False. During hyperinflations the inflation swings drastically. This means that borrowers who lock in an interest rate on their loan could end up paying 0% interest or paying 500%. The latter number is hardly a deal. Since it is impossible to predict the inflation rate, borrowing and lending typically come to a complete halt, making it impossible to get a loan anyway.

(f) False. Typically hyperinflations make budget deficits larger. This occurs because taxes are collected on the previous years’ wages. Thus, by the time taxes are due, hyperinflation has caused these taxes to decrease in value. In effect, the government now has less tax revenue to decrease the budget deficit with. This leads to the budget deficit problem getting much worse.