Quantity Theory of Money

Flashcards about the Quantity Theory of Money

Quantity Theory of Money

Explains the long-run determinants of the price level and the long-run rate of inflation.

Inflation

Increase in the overall level of prices.

Deflation

Decrease in the overall level of prices.

Hyperinflation

Extraordinarily high rate of inflation.

Quantity Theory of Money

The quantity of money available in the economy determines the price level, and the growth rate in the quantity of money determines the inflation rate.

Money Supply

Determined by the Federal Reserve and the banking system.

Open Market Operations

The Fed prints money.

Fractional-Reserve System

Banks use this system to manage money supply.

Quantity Equation

Quantity equation: M x V = P x Y

M

Quantity of money

V

Velocity of money

P

Price level

Y

Real GDP

P x Y

Nominal GDP

Irving Fisher

Developed the Quantity Theory of Money

Quantity Theory of Money

Inflation Rate = Growth of M – Growth of Y

Hyperinflation

Inflation that exceeds 50% per month.