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
