L5 Flashcards
Define inflation(deflation)?
The increase (decrease) in the overall price level in the economy
Define inflation rate (π)?
Measure of the average change in prices across the economy over a specified period
What is hyperinflation?
> =50%inflation/month
4 measures of inflation?
Producer price indices (PPI)
Services PPI (SPPIS)
Retail price index (RPI)
Consumer price index (CPI)
How does the PPI measure inflation?
Measures prices of goods bought and sold by UK manufacturers
How does the SPPIS measure inflation?
Measures prices of services bought and sold by UK manufacturers
How does the RPI measure inflation?
Measures change in prices of a representative sample of goods and services (includes cost of housing unlike CPI)
How does the CPI measure inflation?
Measures 700 representative items average change in price
What is CPIH?
CPI including housing costs, discontinued in 2013 due to difficulties but will be reinstated in March 2017 as preferred inflation measure
Define purchasing power?
The amount of G+S that can be purchased with a unit of currency
Define money supply?
Total amount of money available in an economy at a given time
What do we assume about money supply?
Assume it is fixed at the level the CB chooses
What is broad money?
M2, M3, M4
What is M0?
Notes+coins in circulation plus total reserves
What is M1?
Currency in circulation + demand deposits
What is M2?
M1 + short term time deposits (2yr maturity)
What is M3?
M2 + long term time deposits (repos + shares + debt securities)
What is M4?
M3 + other deposits
Learn 3 axis diagram I the effects of changing money supply on the price level and value of money (1/p)
Now
Define money demand?
Total amount of money people want to hold in liquid form
Define monetary policy?
The CB’s decisions regarding the supply of money in the economy
Define quantity theory of money?
The theory asserting that the Q of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
Explain the QToM?
MV = PY
tf V = PY/M
Velocity is stable tf fixed, output is determined by FofP tf
Change M -> change P
(Positive correlation)
What is velocity of money?
The number of times money is used per year
What is monetary neutrality?
The proposition that changes in the money supply do not affect real variables (DO affect nominal variables)
Explain why AD slopes downward?
If money supply is held constant, velocity is fixed:
MV = PY
MV is fixed tf increase in P means decrease in Y and vice versa
In the very long run output(Y) increases at a steady rate; what does this mean for the price level?
It means P is also determined by a change in output
Define inflation targeting?
When the CB has to keep an explicit target for inflation rate and tf sets monetary policy to hit this target
Why does the CB set a positive target rate?
If provides a policy tool to influence AD
Define fisher effect?
The adjustment of the nominal interest rate to the inflation
What happens to the inflation rate if the CB increases the money supply?
Increase M -> increase π -> increase nominal interest rate
See explanation
