Topic 10- Money Growth and Inflation

Question 1

The Quantity theory of money
-assumptions

Answer 1

M * C =P *Y

If the velocity of money is constant, then

Quantity of Money supply * Velocity of money= The Price Level * GDP

Question 2

What does the quantity theory of money equation do

Answer 2

it relates the quantity of money, the velocity of money, and the dollar value of the eoconomy’s output of g/s

Question 3

what is the velocity of money

Answer 3

the average number of times each dollar in money supply is used to buy g/s included in the gdp

THIS IS THE RATE AT WHICH MONEY CHANGES HANDS

V= P* Y / M

Question 4

Is the velocity of money fluctuating over time?

Answer 4

It is stable over time

Question 5

Explain each variable of

MV=PY

Answer 5

Velocity is the rate at which money changes hands

Y (gdp) is determined by factor supplies and tech

Money supply is changed by the central bank

P (price level)

Question 6

V = P*Y / M formula significance

Answer 6

Velocity is stable over time, however with output determined by factors and tech, when BoC changes M, there is proportionate changes in price level and output (umerator)

SOOO when the BoC increases money supply rapidly, high rate of inflation

Question 7

How to calcualte the inflation rate intuitively

MV=PY

Answer 7

MV=PY

Get all their growth rates (derivatives), but V is constant

SOOO

change in Money supply= Change in price + Change in output

change in price= Change in money supply= Change in output

Question 8

Inflation rate formula inutitive

Answer 8

Growth rate of money- Growth rate of output

Question 9

Inflation rate formula connotations

Answer 9

Growth Rate of MOney- Growth rate of GDP

If money supply grows faster than real gdp, inflation

money supply grows slower than real gdo, deflation

money supply grows at same rate ass real gdp= neither inflation or depflation

Question 10

is velocity of money truly ocnstatn year over year

Answer 10

NO

Question 11

in the long run, what deos inflaiton rate come from

Answer 11

results from the money supply growing faster than real gdp

Question 12

hyperinflation

Answer 12

high rates of inflation more than 50 % per month

Question 13

hyperinflation intutively

Answer 13

when BoC increase money supply far faster than GDP

growth rate of M- Growth rate of Y

Question 14

why DOES hyperinflation happen

Answer 14

govts want to spend more than they can raise thorugh tax,, so they force cent bank to pruchase govt bonds and print money

Question 15

steps of hyperinflation

Answer 15

1) high spending, not ienoguh tax revenue
2) govt cant borrow funds so they have to print money
3) large increase in money disproportione to gdp growth result in inflaiton
4) ends when govt instututies fiscal reforms scuh as cutting spending and elimnanting cretion of more new money

Question 16

inflation results in fall of purchasing power

Answer 16

if incomes rise with prices, then it is the same purchase pwoer

if incomes rise slower than prices then purchasing power falls

Question 17

menu costs

Answer 17

happens during inflations, firms must include chanigng orices on products and printing new catalogues constantly in their actual prices of goods

Question 18

Inflation-induced tax distoriton

Answer 18

investors are taxes on nominal returns (inlcuding inflation) as opposed to real trurns, so it can increase how much tax they are paying

higher inflaiton=less savings

Question 19

unexpected inflation on borrowing and lending

Answer 19

he real value of the cost of borrowing depends on inflation.
I For example, in 1980 banks were charging 18% or more on home loans
because the rate of inflation was very high. People who bought homes
were locked into high rates even when inflation subsided.
I On the other hand, if banks lend money at a low rate and then high
inflation takes place, the real interest rate they receive may be zero or
negative; thus, the risk of inflation makes banks wary of lending.
I Because inflation is often hard to predict, it imposes risk on both
people and banks that the real value of the debt will differ from that
expected when the loan is made

Question 20

inflation vs deflation

Answer 20

deflation can be worse bc lowere prices means lower demadn for goods and services, firms lay off workers

Question 21

Although the quantity theory of money is not literally correct because
the velocity of money is not constant, it is true that in the long run,
inflation results from the money supply growing faster than real GDP

Answer 21

Although the quantity theory of money is not literally correct because
the velocity of money is not constant, it is true that in the long run,
inflation results from the money supply growing faster than real GDP

Question 22

who is hurt most by inflation

Answer 22

retired people and workers with fixed incomes

Question 23

WHy does inflation occure in the long run

Answer 23

money supply grows faster than real GDP/output grows

Question 24

WHAT DOES INCREASE IN PURCHASING POWER USUALLY MEAN

Answer 24

DEFLATION!!!!!!!!!!!!!!!!!!!!!!!!