Chapter 11 - Money Growth + Inflation Flashcards
Inflation is about ___ per year
4%
Hyperinflation is
caused by…
extremely high inflation (inflation exceeding 50%/month).
…caused by excessive growth in money supply
Quantity Theory of Money explains…
Quantity of Money determines ____ in a ___ correlation.
LR determinants of Price level and inflation rates.
Q of money determines value of money in a negative correlation (more $ = less value)
Money Demand is…
if P increases, $ reduced so ppl need…
how much money people want to hold in liquid form.
-need more money to buy G+S
Q of Money Demanded is…
negatively correlated with Money Value + positively correlated with Price levels.
Monetary injection (B.o.C. incr Money Supply which…)
Money value falls, Price rises.
Result - at initial P, incr in Money Supply causes excess money, which ppl spend or loan to others, which causes incr D for Goods, but the S of Goods d/n rise so the Prices have to.
Nominal Variables are…
3 examples…
those which involve monetary units.
1. nominal GDP; 2. nominal inflation rates; 3. nominal wage
Real Variables are…
3 examples are…
physical units.
1. real GDP; 2. inflation rates (output); 3. wage (output)
Relative Price is…
…formula
Price of G1 to Price of G2.
-formula: PG1/PG2
Real Wage is…
($/hr)/output
eg. ($15/hr)/($5/unit)
- -need 3 units per hour to be efficient
Classical Dichotomy is…
theory of separating real and nominal variables.
-notion that monetary deviation affects nominal (not real) variables
Monetary Neutrality is…
proposed money changes d/n affect real variables.
Velocity of Money is…
rate of money changing hands.
- avg. dollar used in ____ transactions.
- velocity (v) = (P x Y)/M
Quantity Equation…
both sides of velocity equation xM.
-M x V = P x Y
5 steps to Quantity Equation
- V = stable; 2. M change % = nominal GDP change % (PxY);
- M change d/n affect Y (tech + res determine it); 4. P change % is equal to P x Y and M change %; 5. Rapid $ growth causes rapid inflation
Inflation tax is ….
causes…
is revenue from printing money.
-can cause hyperinflation
Fisher Effect is…
Nom inflation rate = inflation rate + real inflation rate
-incr in inflation causes equal incr in nominal inflation, so real inflation rate is unchanged (wealth)
Inflation Fallacy is…
that inflation erodes real incomes. D/N b/c those are determined by real variables, not inflation rates.
Shoe leather Costs…
time and transaction cost of frequent bank withdrawals (wasted resources)
Menu Costs…
costs of changing prices (on menus, catalogues, etc)
Misallocation of resources from relative P variability is caused by inflation b/c…
Prices don’t all change at once, so distorts how resources are allocated.
Confusion/Inconvenience result from inflation b/c…
it changes the “yardstick”; complicates the LR planning and comparing.
Tax Distortion arise from inflation b/c…
taxes are on nominal incomes (incr faster than real) so some ppl pay more despite their real income being unchanged.
Arbitrary Redistributions of Wealth Occur b/c…
ppl get to pay back debts w/ less valuable money
