Money Growth And Inflation Flashcards
Countries that struggled with inflation
Venezuela, Russia, Zimbabwe
In the long run, the overall level of prices adjusts to level at which——-
Demand for money equals the supply
In model for supply and demand, the supply curve is —– because —–
The s c is vertical because the fed has fixed the quantity of money available
Quantity theory of money
Ha theory asserting that the quantity of money available determines the price level and the growth rate in the quantity of money available determines the inflation rate
Milton Friedman said inflation is always and everywhere—-
A monetary phenomenon
Injection of money increases
Demand for goods and services
Velocity of money
The rate at which money changes hands
Quantity equation
MV=PY
Explain the equilibrium price level and inflation rate. The five steps of quantity theory of money
The velocity of money is relatively stable over time. Because the velocity a stable when the central bank changes the quantity of money because it proportionate changes in the nominal value of output. The economy’s output of goods and services is primarily determined by factors supplies e.g. labor physical capital human capital and natural resources, and the available production technology. In particular because moneyis neutral, money does not affect output. With output determined by factors supplies and technology, when the central bank alters the money supply and includes proportional changes in the nominal value of output, these changes are related in changes in the price level. Therefore when central-bank increases the money supply rapidly, the result is a high rate of inflation
Hyperinflation
Inflation that exceed 50% per month, this makes the price level increase more than hundred fold over the course of a year
Inflation tax
The revenue the government raises by creating money. Essentially, the inflation taxes like a tax on every one who holds money
Fisher effect
The one for one adjustment of the nominal interest rate to the inflation rate. When the Fed increases the rate of money growth, the long and result is both a higher inflation rate and higher nominal interest rate. The fishery fact states that the nominal interest rate just to expected inflation, and expected inflation moves with actual inflation in the long run, but that is not necessarily true in the short run
Inflation fallacy
Inflation itself doesn’t reduce people’s real purchasing power
Shoe leather costs
The resources wasted when inflation encouraged people to reduce their money holdings.
Menu costs
Cost of changing prices
Inflation induced tax distortions
The IRS doesn’t take into account time value of money with respect to capital gains or interest income
The income taxed treats the nominal interest rate earned on savings as income, even though part of the nominal interest rate really compensates for inflation
Friedman rule
Hey small and predictable amount of deflation me be desirable. Deflation would lower than normal interest rate as seen in the fishery fact, in that lower nominal interest rate we reduce the cost of holding money. The shoe leather Casa pulling money would be minimized by a nominal interest rate close to zero, which in turn would require deflation equal to the real interest rate
Long periods in the 19th century during which most prices fell, called
Deflation
Value
The y axis on the model for supply and demand. =1/P
Model for money supply and demand… Variables
Y axis is value of money
X axis is quantity of money
Supply is money and its vertical because fed fixes the money supply
As price increases, the Value of money decreases
