Money Growth and Inflation, Real versus Nominal, The Costs of Inflation Flashcards
Why can’t we print more money?
Inflation
What determines the value of money?
the supply and demand for money
The Quantity Theory of Money (QTM) asserts that…
the quantity of money determines the value of
money; growth in the quantity of money is the primary cause of inflation
The supply curve for money is vertical because…
the quantity of money
supplied is fixed by the BSP
The demand curve for money slopes downward because…
people want to hold a larger quantity of money when each peso buys less.
This refers to the speed at which the typical peso bill travels around the economy from wallet to wallet.
velocity of money
According to the quantity theory of money, the ______ which controls the money supply, has ultimate control over the rate of inflation.
central bank
_____ are measured in monetary units; ______ are measured in physical units.
Nominal variables; Real variables
the price of one good relative to (divided by) another
relative price
the price of labor relative to the price of output
real wage
the proposition that changes in the money
supply do not affect real variables
Monetary neutrality
When the BSP increases the rate of money growth, the long-run result is both a higher inflation rate and a higher nominal interest rate. This adjustment of the nominal interest rate to the inflation rate is called the ___.
Fisher effect, after Irving Fisher, the economist who first studied it.
Inflation does not in itself reduce people’s purchasing power. Why?
Because most people earn their incomes by selling their services, such
as their labor, inflation in incomes goes hand in hand with inflation in
prices.
a general increase in prices of the things people buy and the things they sell (e.g., their labor)
inflation
The five costs of inflation
- Shoeleather costs
- Menu costs
- The misallocation of resources from relative-price variability
- Confusion and inconvenience
- Tax distortions
