Money growth and inflation Flashcards
What is inflation?
An increase in the overall level of prices
What is hyperinflation?
This is an extraordinarily high rate of inflation
What has happened to inflation in the UK?
It has decreased
What did some countries experience for long periods in the 19th century?
Deflation
What is deflation?
This is decreasing average prices
Which country experienced hyperinflation in the 1920s?
Germany
Which country experienced hyperinflation in 2007-8?
Zimbabwe
What is the quantity theory of money used to explain?
It is used to explain the long-run determinants of the price level and the inflation rate
What does inflation concern?
The value of the economy’s medium of exchange
What happens to the value of money when the overall price level rises?
The value of money falls
What are 2 determinants of money demand?
Interest rates
Average level of prices in the economy
What does the amount of money people hold depend upon?
The prices of goods and services
What happens to the demand for money as the interest rate increases?
As money pays no interest, people demand less money the higher the interest rate
What does an increase in the money supply do to the value of money?
It causes a decrease in the value of money
What is the quantity of money theory?
The quantity of money available in the economy determines the value of money
What is a primary cause of inflation?
Growth in the quantity of money when people spend money in excess of the amount they wish to hold
What are nominal variables?
These are variables measured in monetary units
What are real variables?
These are variables measured in physical units
Do real economic variables change with changes in the money supply?
No - real economic variables do not change with changes in the money supply
What is classical dichotomy?
The idea that different forces influence real and nominal variables
What type of variables are affected by changes in the money supply?
Nominal variables are affected by changes in the money supply
What is monetary neutrality?
This is the irrelevance of monetary changes for real variables
What does the velocity of money refer to?
The speed at which money changes hands (travels around the economy)
What is the velocity of money equation?
V = (P x Y) / M P = price level Y = quantity of output M = quantity of money
What is the quantity equation?
M x V = P x Y
What does the quantity equation relate?
The quantity value of money to the nominal value of output (P x Y)
What does the quantity equation show?
It shows that an increase in the quantity of money in an economy must be reflected in one of three other variables
What are the 3 variables that reflect an increase in money?
The price level must rive
The quantity of output must rise
The velocity of money must fall
Why does money not affect output?
Because money is neutral
What happens to P and Y when the central bank changes the quantity of money?
It causes proportionate changes in the nominal value of output but only P changes because money is neutral
