Money Growth and Inflation

Flashcards covering vocabulary terms related to money growth, inflation, and their effects on the economy.

Deflation

Decrease in the overall level of prices.

Inflation

Increase in the overall level of prices.

Hyperinflation

Extraordinarily high rate of inflation.

Classical theory of inflation

Price rise when governments prints too much money

Quantity theory of money

A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate.

Value of money, 1/P

The quantity of goods and services that can be bought with $1

Money supply in the real world

Determined by the central bank, the banking system, and consumers

Money demand

How much wealth people want to hold in liquid form; Depends on P.

Quantity of money demanded

Negatively related to the value of money and positively related to P, other things equal

Classical dichotomy

The theoretical separation of nominal variables and real variables.

Nominal variables

Measured in monetary units.

Real variables

Measured in physical units.

Relative price

The price of one good in terms of another.

Real wage

The price of labor relative to the price of output.

Monetary neutrality

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

Velocity of money

The rate at which money changes hands.

Quantity equation

MV=PY; Relates the quantity of money (M) to the nominal value of output (P × Y).

Inflation tax

Revenue the government raises by creating (printing) money; like a tax on everyone who holds money.

Fisher effect

One-for-one adjustment of nominal interest rate to inflation rate.

Shoeleather costs

tax on the holders of money. Avoid it by holding less money

Relative-Price variability

Misallocation of resources because of firms not raising prices at the same time and prices vary that the consumers decisions are distorted

Menu costs

Costs of changing prices.