Macroeconomics Ch. 17 Definitions Flashcards
Quantity Theory of Money
A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate.
Nominal Variables
Variables measured in monetary units.
Real Variables
Variables measured in physical units.
Classical Dichotomy
The theoretical separation of nominal and real variables.
Monetary Neutrality
The proposition that changes in the money supply do not affect real variables.
Velocity of Money
The rate at which money changes hands.
Quantity Equation
The equation M x V = P x Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy’s output of goods and services.
Inflation Tax
The revenue the government raises by creating money.
Fisher Effect
The one-for-one adjustment of the nominal interest rate to the inflation rate.
Shoeleather costs
The resources wasted when inflation encourages people to reduce their money holdings.
Menu Costs
The costs of changing prices.
Hyperinflation
Inflation that exceeds 50% per month, caused by excessive growth in the money supply.
Inflation Fallacy
Thinking inflation erodes real income.
Neutrality of Money
The proposition that changes in the money supply do not affect real variables (in the long run).
