ECO 320L Final: Definitions UPDATED
ACTUAL Exam Questions and CORRECT
Answers
Fisher Equation - CORRECT ANSWER nominal IR = real IR + expected inflation
Quantity Equation - CORRECT ANSWER Mv = PY
Money supply times the velocity of money equals the nominal GDP. In the long run, g(m) = pi,
which says that the growth rate of money equals inflation
Stagflation - CORRECT ANSWER Stagflation is the term to describe that the economic
situation in which the inflation is high while the economic growth is low (or total output is
produced under the natural level).
monetarism - CORRECT ANSWER Information and impact lags are too severe for monetary
policy to be a useful stabilization method. The optimal form of monetary policy is to have a
constant growth rate of the money supply
inverted yield curve - CORRECT ANSWER Demonstrates market expectations of future
short-term interest rates going down. Indicator of an economic downturn
INTEREST RATE ON BONDS
liquidity trap - CORRECT ANSWER Situation where interest rate is zero and chance in
money supply has no real effect
Time Inconsistency - CORRECT ANSWER Central banks have an incentive to make
promises about future inflation which are no longer optimal when "the future" arrives, giving
them strong incentives to deviate from past promises.
ACTUAL Exam Questions and CORRECT
Answers
Fisher Equation - CORRECT ANSWER nominal IR = real IR + expected inflation
Quantity Equation - CORRECT ANSWER Mv = PY
Money supply times the velocity of money equals the nominal GDP. In the long run, g(m) = pi,
which says that the growth rate of money equals inflation
Stagflation - CORRECT ANSWER Stagflation is the term to describe that the economic
situation in which the inflation is high while the economic growth is low (or total output is
produced under the natural level).
monetarism - CORRECT ANSWER Information and impact lags are too severe for monetary
policy to be a useful stabilization method. The optimal form of monetary policy is to have a
constant growth rate of the money supply
inverted yield curve - CORRECT ANSWER Demonstrates market expectations of future
short-term interest rates going down. Indicator of an economic downturn
INTEREST RATE ON BONDS
liquidity trap - CORRECT ANSWER Situation where interest rate is zero and chance in
money supply has no real effect
Time Inconsistency - CORRECT ANSWER Central banks have an incentive to make
promises about future inflation which are no longer optimal when "the future" arrives, giving
them strong incentives to deviate from past promises.
