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Economic Theory

this view. Apparently, inflation worries the public much more than it does
the economics profession.
The public’s distaste for inflation may be psychological. Shiller asked
those surveyed if they agreed with the following statement: “I think that if

my pay went up I would feel more satisfaction in my job, more sense of
fulfillment, even if prices went up just as much.” Of the public, 49 percent

fully or partly agreed with this statement, compared to 8 percent of
economists.
Do these survey results mean that laymen are wrong and economists
are right about the costs of inflation? Not necessarily. But economists do

have the advantage of having given the issue more thought. So let’s
consider what some of the costs of inflation might be.

ASSIGNMENTS

Review Questions

1. What is fiat money? What is commodity money?

2. What are the functions of money?
3. Explain the equation of exchange.
4. According to the quantity theory of money, what is the effect of an
increase in the quantity of money?

5. Explain how an increase in the price level affects the real value of
money.
6. What is inflation? What is deflation?

7. What types of inflation do you know?
8. Give the example of a country that experienced hyperinflation.
9. What are the costs of inflation?

10. What is Consumer Price Index?

Multiple-Choice Questions

1. When the general level of prices is rising, we call that:
a) inflation;

b) deflation;
c) elevation;
d) none of the above.

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