Chapter 17 Flashcards
the quantity theory of money
According to the quantity theory, the quantity of money available in an economy determines the value of money, and growth in the quantity of money is the primary cause of inflation. As economist Milton Friedman once put it, “Inflation is always and everywhere a monetary phenomenon.”
when feds do not inject more money supply but reduce it (perhaps selling bonds) this happens….
At the initial equilibrium value of money and price level, the quantity of money supplied is nowless than the quantity of money demanded. This contraction in the money supply willreduce people’s demand for goods and services. In the long run, since the economy’s ability to produce goods and services has not changed, the prices of goods and services willfall and the value of money willrise .
what kind of measurement does nominal and real use?
The first group consists of nominal variables—variables measured in monetary units. The second group consists of real variables—variables measured in physical units.
monetary nuetrality
Monetary neutrality is the proposition that a change in the money supplyaffects nominal variables anddoes not affect real variables.
how to calculate nominal interest rate
real interest rate + inflation rate = nominal interest rate
price levels falls…
The table also shows the positive relationship between the price level and the quantity of money demanded. As the price level rises (and the value of money falls), the typical transaction requires more money, and people will need to hold a larger quantity of money in the form of currency and demand deposits in order to conduct day-to-day transactions. Conversely, as the price level falls (and the value of money rises), the typical transaction requires less money, and people will need to hold a smaller quantity of money to conduct day-to-day transactions.
If the Fed were to buy government bonds to help the government finance its expenditures, then… (what would happen if there were more money supply in the market? )
the price level would rise, so the value of money would fall.
Market economies rely on which of the following to allocate scarce resources?
relative prices
Jennifer took out a fixed-interest-rate loan when the CPI was 100. She expected the CPI to increase to 103 but it actually increased to 105. The real interest rate she paid is
lower than she had expected and the real value of hte loan is lower than she had expected
Shoeleather costs arise when higher inflation rates induce people to
hold less money. they go to the bank more frequently to reduce currency holdings when inflation is high.
inflation tax
When the government pays its debts by printing money, the value of money will decline, By printing money in order to pay its debts, the government effectively taxes anyone who holds money. Revenue raised through an inflation tax is known as seigniorage.
If P denotes the price of goods and services measured in terms of money, then
the value of money measured in terms of goods and services.
