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Macroeconomics SEM 2 > Money Growth + Inflation > Flashcards

Money Growth + Inflation Flashcards

1
Q

Define Inflation

A

Increase in Overall Level of Prices

- General Price Level

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2
Q

Define Deflation

A

Decrease in Overall Level of Prices

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3
Q

Define Hyperinflation

A

Extremely high rates of Inflation

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4
Q

What does Inflation/Rise in P.L imply?

A
  1. People have to pay More for G+S
  2. Value of Money falls- 1/P
    - -> Decreased Q. of G+S that can be bought with £1
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5
Q

What determines the Value of Money?

A

D + S of Money

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6
Q

In SR- what equilibrates D+S?

A

Interest Rates

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7
Q

In LR- what equilibrates D+S?

A

Price Level

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8
Q

What is Classical Theory of Money?

A

M.S determined by C.B- via OMOs + Banking System (m)
- Treat M.S as Fixed- Vertical Supply curve
M.D depends on Average Price Level, P, in the Economy
- Determined by amount of wealth people want in Liquid form
As Value of Money Increases–> M.D Decreases
In LR- Price Level, P, adjusts to where M.D = M.S

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9
Q

What is Quantity Theory of Money?

A

Growth Rate in Q. of Money
- Determines Inflation Rate
Increased Q. of Money–> Decreased Value of Money–> Increased Price Level

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10
Q

What is the adjustment Process for Quantity Theory of Money?

A

Excess M.S –> Increased D for G+S –>Increased Price of G+S –> Increased M.D –> Decreased Value of Money (1/P)

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11
Q

What 3 things do Monetary Injections NOT affect in LR?

A
  • Real GDP
  • Employment
  • Real I.R etc.
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12
Q

What is Classical Dichotomy?

A

Theoretical separation of Nominal + Real variables

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13
Q

Define Nominal Variables

A

Variables Measured in Monetary Units

- e.g. £, $, €

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14
Q

Define Real Variables

A

Variables Measured in Physical Units

- e.g. Relative Prices, Real Wages, Real I.R

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15
Q

What do Developments in Monetary System influence?

A

Nominal Variables

- Irrelevant for explaining Real variables

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16
Q

What is Monetary Neutrality?

A

Changes in M.S do NOT affect Real Variables

- Mostly correct in LR

17
Q

What is the Fisher / Velocity + Quantity equation?

A

MV = PY

  • M = Q. of Money
  • V = rate at which money changes hands in economy (velocity)
  • P = Price Level
  • Y = Output
18
Q

What does PY show?

A

£ Value of Economy’s Output of G+S

19
Q

What is the common notation of the Fisher Equation?

A

V = PY / M

20
Q

What is the conclusion of the Fisher Equation?

A

Over LR- V is relatively Stable over time
– Y is NOT affected by Money- determined by Factor supplies
THEREFORE- only Increased M –> Increased P
- In LR- Q. of Money affects Inflation

21
Q

What is the Principle of Monetary Neutrality?

A

Increased Rate of Money Growth–> Higher Inflation Rate

- BUT does NOT affect any Real variables

22
Q

How is Real I.R calculated?

A

Real I.R = Nominal I.R - Inflation

=> Nominal I.R = Real I.R + Inflation Rate

23
Q

What determines the Real I.R?

A

D + S for Loanable Funds

24
Q

What determines Inflation?

A

Money Growth

25
Q

What is the Fisher Effect?

A

One-for-One adjustment of Nominal I.R to Inflation when C.B Increases Money Growth

26
Q

When in SR does Fisher Effect NOT hold?

A

If Inflation is Unexpected

27
Q

What is the Inflation Tax?

A

Revenue Gov. raises by creating (issuing) Money

  • Rather than Raise Taxes or Selling Bonds
  • TAX on Everyone who Holds Money
28
Q

What is the process of Inflation Tax?

A

Gov. Prints Money –> Increases Q. of Money –> Reduces Value of Money –> Increased Price Level

29
Q

Why is the Inflation Tax roughly proportional?

A

Rich pay Proportionately More- hold more money

30
Q

what are the 3 main costs of Inflation?

A
  • Inflation Fallacy
  • Shoe-leather Costs
  • Menu Costs
31
Q

What is Inflation Fallacy?

A

Inflation robs people of Purchasing Power of their money

  • Prices Rise –> Buyers pay more
    • BUT Wage earners get paid more as well
  • Therefore- Relative Prices remain the Same
32
Q

What are Shoe-leather costs?

A

Resources wasted when there is Inflation
- Encourages people to hold money in bank to Minimise Cost of Inflation Tax –> Go to Bank more often- Reduced Productivity

33
Q

What are Menu Costs?

A

Costs of Changing Prices

- Reprinting Menus etc.

34
Q

What do Market Economics + Misallocation say?

A

Relative Prices Allocate Scarce resources

  • Inflation distorts Relative Prices –> Consumer Decisions distorted
  • Markets- Less able to allocate resources to best use
35
Q

What causes Arbitrary Redistribution of Wealth?

A

Unexpected Inflation

36
Q

How does Unexpected Inflation Redistribute Wealth among Population?

A

Redistributes among Debtors + Creditors

- Since loans are Specified in £s

37
Q

Why might Deflation be worse than Inflation?

A

Downward Cycle- Debt Deflation
- Cheaper to Spend later than Today –> Spending + Investment Deferred –> Decreases Output –> Decreased Real GDP –> Higher Unemployment + More Deflation

Macroeconomics SEM 2 (13 decks)

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