ECON 201: Chapter 17- Money Growth and Inflation

Nominal Variables

measured in monetary units

Real Variables

measured in physical units

Real Wage equation

nominal wage / price level

classical dichotomy

theoretical separation of nominal and real variables

If central banks _____ __their money supply, all__ _____ __variables will double and all__ ____ variables will remain unchanged

double, nominal, real

Neutrality of Money

proposition that changes in the money supply do not affect real variables

Real wage remains unchanged if ______ __of labor__ ___ __does not change,__ ____ __of labor__ ____ __does not change and__ ______ employment of labor does not change.

quantity, supplied, quantity, demanded, total

Velocity of money

rate at which money changes hands

Velocity of money formula

velocity = (price level x real GDP) / money supplied

The Fisher Effect

In the long run money is neutral, so a change in the money growth rate affects the inflation rate but not the real interest rate. So the nominal interest rate adjusts for one-for-one with changes in the inflation rate

The Fisher Effect states that a change in the _____ _____ __rate affects the__ _____ _____ __but not the__ ____ _______ rate.

money growth, inflation, real interest