Chapter 11 Flashcards
What is the quantity theory of money?
a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
the injection of money in the economy increases the demand for goods and services
the price of goods and services increases so there is an increase in the quantity of money demanded
What is the velocity of money?
the rate at which money changes hands
What is the quantity equation?
M x V = P x Y
M: quantity of money
V: velocity
P: price level (GDP deflator)
Y: quantity of output (real GDP)
(an increase in M must be reflected as either increase in P, increase in Y, or decrease in V
what is inflation tax?
the revenue the govt raises by creating money; like a tax on anyone who holds money because money becomes less valuable when price levels rise
What is the Fisher Effect?
a one-for-one adjustment of the nominal interest rate to the inflation rate
Nominal interest rate = real interest rate + inflation rate
