Chapter 17- Money Growth & Inflation

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

prices rise when government prints too much money

quantity theory of money

quantity of money determines the value of money

Price level

P- number of dollars needed to buy a basket of goods and services

Value of money

1/P- quantity of goods/serves that can be bought with $1

When inflation increases, prices ___ and value of money ___

increases, decreases

MS

money supply

What do we assume with our MS model?

only the central bank controls MS and sets it at a fixed amount

MD

Money demand- how much wealth people want to hold in liquid form

What does MD depend on?

P (price level)

quantity of money demanded

negatively related to the value of money, positively related to P

As value of money decreases, quantity of money demanded ___

increases

If money supply increases, quantity of money demanded ___

increases