Inflation Flashcards
Core inflation rate:
CPI inflation rate excluding volatile elements (food, fuel), attempts to reveal underlying inflation trend
Old amount in new dollars =
Old amount x (New CPI(100) / Old CPI)
Money Measures:
Monetary base (currency & reserves), M1 (demand deposits + base), M2 (savings accounts + M1)
Classical dichotomy states:
LR - Real and nominal sides of economy are separate
Neutrality of money states:
LR - Changes in the money supply have no real effects on the economy and only affect prices, in SR prices don’t respond immediately/precisely to changes in MS
Quantity equation:
MtVt = PtYt
Quantity Theory for the Price Level:
Pt* = (M̅tV̅) / Y̅t
Quantity Theory for the Price Level implies…
An increase in the money supply or a decrease in real GDP will cause price levels to rise. In the long run, a key determinant of the price level is the level of the money supply
Quantity Theory for Inflation:
π* = g̅M - g̅Y
When RGDP is constant in the LR, the quantity theory for inflation implies…
Changes in the growth rate of money lead one-for-one to changes in the inflation rate
Who is the inflation tax payed by?
People holding money (Value of assets doubles, so not affected in real terms)
What is the coordination problem?
Hyperinflation inertia due to expectations, if everyone expects the price level to keep rising, then it ultimately will
Why is inflation undesirable?
Costs of inflation are not generated by the rate of inflation, but by the unexpectedness and uncertainty generated from surprise changes - it distorts relative prices which are the signals to the economy of how to allocate resources
If nominal returns are taxed then high inflation will cause:
Lower investment & R&D
What can affect V?
Tech/ATM/Paying online will increase the velocity of money
