chap 11 Flashcards
inflation
inc in price lvl, measured by CPI or GDP deflator
determined by growth of money supply
quantity theory of money
the quantity of money available determines price lvl
growth rate determines inflation
transactions and demand for money
ppl demand money to make transactions
quantity of money needed depends on avg price lvl
if price lvl up, more money is needed for a transaction, ppl hold onto their money
money supply curve
fixed by boc, vertical line
hyperinflation
inflation exceed 50%/month
effects of monetary injection
when boc inc money supply, shift right
ppl have too much money
- inc demand for g/s
- dec demand for money
causes g/s price to inc, bcs productivity doesn’t change
dec value of money
2 properties of quantity theory of money
- variables are nominal or real
- inflation is a monetary phenomenon
real variables
measured in physical units
i.e. coconuts produced
nominal variables
measured in monetary units
i.e. profit from coconuts
monetary neutrality
proposes that real variables are not affected by changes in money supply
classical dichotomy
separating variables into real or nominal
velocity of money
rate at which money changes hands/number of times it’s used to buy g/s
P
price lvl
M
quantity of money
V
velocity
PY
nominal GDP
Y
real GDP
quantity equation
relates quantity of money, velocity, and dollar value of economy’s output of g/s
inflation tax
revenue gov raises by creating money
gov uses it to pay for their spendings
fisher effect
adjustment of nominal interest rate direction to inflation rate
nominal IR adjusts so real IR is not affected (bcs of money neutrality)
inflation fallacy
when price inc, purchasing power dec
sellers gain more
inflation reduces purchasing power
shoeleather costs
resources wasted when inflation makes ppl dec money holdings
greater cost of holding money bcs of inc infaltion rate and IRs
menu costs
costs of changing prices i.e. reprinting menus
relative price variability and misallocation of resources
inflation causes relative prices to vary more, harder to make economic decisions
need relative prices to allocate scarce resources
inflation-induced tax distortion
inflation produces inc income tax rate
confusion and inconvenience
inflation erodes real value of money
arbitrary redistribution of wealth
unexpected inflation redistributes wealth when unneeded
cannot predict inflation rate
- purchasing power to borrowers if rate is higher
- pp to savers if lower than expected
deflation may be worse
deflation usually comes as a surprise
redistributes wealth from borrowers to savers
