Ch14: Money Growth and Inflation

Question 1

Define inflation, deflation, disinflation.

Answer 1

Inflation: Increase in the general level of prices.
Deflation: Decreasing average prices.
Disinflation: Declining inflation.

Question 2

Headline inflation, Core inflation?

Answer 2

Headline inflation: Takes food, oil prices + other goods to get inflation number.
Core inflation: All G’s except food + oil. More useful for economists as affects growth.

Question 3

What is the Fisher Effect?

Answer 3

• One-to-one adjustment of the nominal interest rate to the inflation rate.

Question 4

What is the QTOM?

Answer 4

Quantity Theory of Money:
M x V = P x Q

M = Money Supply
V = Velocity of  Money
P = Price Level
Y = Quantity of Output

Question 5

Define classical dichotomy and monetary neutrality?

Answer 5

Classical Dichotomy: seperation of real and nominal variables.
Monetary neutrality: irrelevance of monetary changes for real variables.

Question 6

Formula for inflation rate?

Answer 6

Growth of Money Supply - Growth of Real GDP.

Question 7

What are the costs of inflation?

Answer 7

• Loss of Purchasing Power
• Shoe leather costs (resources wasted going to the bank).
• Menu costs: cost of updating menus from changing prices.
• Relative price variability.
• Tax distortions: capital gains taxed more heavily.
• Confusion and inconvenience: Difficult to compare real revenues, costs and profits over time.
• Arbitrary redistribution of wealth: