Ch. 7 class notes Flashcards
where does inflation come from?
the fed and banking system increase money supply
how can all consumers spending increase on all goods and services without reducing nominal savings?
money supply must have increased
equation of exchange
MV=PQ
V stands for what and define
velocity, average number of times the dollar changed hands in a year
what is common sense interpretation of equation of exchange
year of output in econ is bought by money supply, spent and re-spent V times per year
which assumption does simple quantity theory rest on?
equation of exchange applies velocity is constant output is constant
what is production of simple quantity theory?
price and money supply are proportional
who founded monetarist school of econ
M. Freidman
what assumption does monetarism make about equation of exchange?
V is stable function of few variables. output may change in short run, but long run output is at econs potential, with labor market at equilibrium
what happens in short run and long run in Freidman’s helicopter drop?
short run - prices and output increase
long run - wages increase causing output to be restored to potential but with higher prices
under what condition would inflation have zero effect on the econ?
if inflation is anticipated and evenly spread throughout econ
if all prices in econ double, how does goods and services produced change?
amount of goods and services does not change reward to production, terms goods and services, is same before the price change
what is a way to avoid being made worse off by anticipated inflation?
before inflation, buy goods whose prices will rise faster than average price level
T/F exp: unanticipated inflation, borrowers gain and lenders lose
true
what is real interest rate?
real rate=nominal rate - expected inflation rate
