Question

In 1984 and​ 1985, the small South American country of Bolivia experienced hyperinflation.

Do the money​ supply, price​ level, and exchange rate against the U.S. dollar move broadly as economic theory would​predict?

A. ​No, the three variables did not move in rigid lockstep as one would expect.

B. Yes, these three variables clearly moved in​ step, just as the theory would predict.

C. Not​ exactly, since the exchange rate went up while inflation the money supply also increased.

D. Bolivian data is too unreliable to assess in any meaningful way.

Between April 1984 and July​ 1985, the percent change in the general price level was approximately ____ %.

Between April 1984 and July​ 1985, the percent change in the price of the dollar was approximately ____ %.

How do these rates of increase compare to each​ other, and to the percent increase in the money​ supply?

A. All three rates of increase were very disparate.

B. Both increased at similar​ rates, and more slowly than the money supply.

C. Both increased at similar​ rates, and more rapidly than the money supply.

D. None of the above.

Can you explain the results regarding the percentage changes in these three​ variables? (Hint: Refer to the definition of the velocity of​ money.)

A. The results are consistent with an increase in the real demand for​ money, an effect that is correlated with exploding​ inflation, just as Bolivia experienced.

B. The results are consistent with a decline in the real demand for​ money, an effect that is correlated with exploding​ inflation, just as Bolivia experienced.

C. The results are unexplainable since the Bolivian experience was unprecedented.

D. The results are consistent with an increase in the real demand for​ money, which likely happened in Bolivia due to the surge in prices.

The Bolivian government introduced a dramatic stabilization plan near the end of August 1985. Looking at the price levels and exchange rates for the following two​ months, do you think it was​ successful?

A. Two months is an insufficient length of time to formulate an assessment.

B. ​No, the price level remained ridiculously high and the peso was still almost worthless relative to the dollar.

C. Yes, since both the price level and the exchange rate began to level off in the two months after August.

In light of your​ answer, explain why the money supply increased by a large amount between September and October 1985.

A. Seasonal factors such as fall harvesting explain the increase.

B. The increase was only large in absolute terms. In percentage​ terms, it was the second smallest​ month-over-month increase for 1985.

C. October was the start of a new Bolivian fiscal year.

D. The increase was probably a policy error by the Bolivian central bank.

Answer 1

1 B

Yes, three variables clearly moved in step just as the theory would predict.

Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy. While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per monthHyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy. While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.

2 10%

3 15%

4B

Both increased at same rate and more slowly then the money supply.

When money supply increase price level also increase but less than the money supply.

And and as a result of increase in price level, exchange rate also increases.

5 B

The results are consistent with a decline in the real demand for​ money, an effect that is correlated with exploding​ inflation, just as Bolivia experienced.

6 C

. Yes, since both the price level and the exchange rate began to level off in the two months after August.

7 A. S

Seasonal factors such as fall harvesting explain the increase