Econ Ch 4 Flashcards
Real variables
Real GDP & real GDP per hour worked
Nominal variables
Price levels, inflation rates , nominal interest rates
Classical dichotomy
The assertion that in the long run, nominal variables such as money supply or price don’t affect real variables
Money neutrality
In the long run changes in money supply have no effect on the real variable
In Lr, the inflation rate is determined by
The growth rate of the money supply
Barter economies exist in the
Early stages of economic development
→ trading goods directly → double coincidence of wants is lacking → high transaction costs exist
Transaction costs
Cost of time or resources in making a transaction
Commodity money
A good used as money that has value independent of its use of money
Fiat money
Money like paper currency
Hyperinflation
Extremely high rates of inflation more than 50% or more per month
Seigniorage
GOV profit from issuing fiat money
Functions of money
① medium of exchange ② store of value ③ unit of account
Monetary base or high powered money
Sum of currency in circulation & bank reserves monetary base = currency in circulation + reserves
Relationship between monetary base & aggregates considers 3 actors ① bank of Canada ② banking system ③ non bank public
① controls money supply & regulates system ② creates checking accounts that are an important part of m1 + measure ③ all households & firms decide which form they will hold money
Money multiplier
The number indicating how much the money supply increases with the monetary base increases by one dollar
Money supply =
Money multiplier * monetary base
If actual inflationary rate,> expected inflation rate
The actual real interest rate wil be less than expected real interest rate
If actual inflation rate differs from the expected inflation rate
Lenders lose / borrowers gain → actual inflation exceeds expected inflation
According to the Fisher effect the nominal interest rate will increase by 5% if the
Expected inflation rate increases by 5%
Lr growth rate of real GDP is 3.7% Expected real interest rate on 10 yr gov bond = 2.2% Growth velocity =0% Rate of growth money supply = 5.5% Nominal interest?
① 5.5- 3.7 =1.8
② 1.8 +2.2 = 4%
Suppose inflation is higher than expected.
For investors who bought bonds issued when inflation rate was expected to be lower. This news is
Bad since the real return on their investment will be lower than they anticipated
Suppose that information has been equal to 3.2% per year for several years and the real interest rate that banks require on typical mortgages is 6.3%
The normal interest rate that include currently charging on a 30 year homework it is _ percent
= 6.3 + 3.2 = 9.5%
Who is the bank of Canada unexpectedly decreases the rate of growth of money supply by 0.9% do you nominal interest rate that banks will charge a new mortgages is
= 6.3 + [ 3.2 + 0.9 ] = 10.4%
The actual real interest rate on your mortgage is made prior to the increase in the growth of my supply is now
= 9.5% - [ 3.2% +0.9% ]= 5.4%
Even when it is expected inflation can be costly bl
Select all but → redistributes
” Greases the wheels of the labour market”
Low inflation allows for real wage adjustments when nominal wages are sticky thereby permitting labour market adjustments that improve markets efficiency
Setting an explicit inflation target is likely to make inflationary expectations:
More stable
Menu costs → significantly decreased
B)Some items such as magazines have prices that are labelled on the product and change slowly bus there is no menu cost for the store other items such as produce half price if I can change daily so my new cost so much higher
I may risk experiencing hyper inflation by printing more money rather than issuing bonds to a finance a large budget deficit because
Investors if used by the government bonds on the police said they will never be paid
During the hyperinflation the velocity of money is likely to → increase
What is the growth rates of a real GDP constant is change in velocity must → increase inflation
