Chapter 12:Inflation and the Quantity Theory of Money Flashcards
What is inflation?
an increase in the general or average level of prices
What is the inflation rate?
percentage increase in the average level of prices over a period of time
How do you calculate the inflation rate?
Take the difference between year 1 and 2 and divide by year 1
(P2-P1)/P1 *100
What is the consumer price index?
measure the average price for a basket of goods and service bought by a typical American consumer
In waht way is the consumer price index weighted?
So that an increase in the price of a major item counts for more than an increase in the price of a minor item
What is the GDP deflator?
The ratio of nominal to real GDP multiplied by 100. This covers all final goods
What are the producer price indexes?
They measure the average price received by producers
What are producer price indexes often used for?
To calculate changes in the cost of inputs
What is a real price?
a price that has been corrected for inflation. This is used to compare the prices of goods over time
What two things does the quantity theory of money do?
- sets the relationship between money, velocity, real output, and prices
- helps explain the role of the money supply in determining inflation rate
What is the quantity theory of money?
Mv=PYr
What does M stand for in the quantity theory of money?
money supply
What does v stand for?
the velocity of money
What is the velocity of money?
the average number of times a dollar is spent on final goods and services in a year
What does P stand for?
price level
What does Yr stand for?
Real GDP
What is inflation caused by?
An increase in the money supply
According to the quantity theory of money, the growth rate of the money supply will be equal to what?
the inflation rate
Increases in the velocity of money can accelerate an already existing_________.
inflation
What is deflation?
a decrease in the average level of prices–a negative inflation rate
What is a disinflation?
a reduction in the inflation rate
In the long run, money is _____.
neutral
What is the money illusion?
the false perception that occurs when people mistake changes in nominal prices for changes in real prices
Inflation is a type of _____.
tax
What is the real rate of return?
The nominal rate of return minus the inflation rate
What is the nominal rate of return?
the rate of return that does not account for inflation
What is the Fisher effect?
the tendency of nominal interest rates to rise one to one with expected inflation rates
If expected inflation is greater than actual inflation, then the real rate of return will be ______ than the equilibrium rate
higher
What is monetizing the debt?
the result of government paying off its debt by printing more money
Inflation is always and everywhere a monetary phenomenon.
True or False?
True
