U2-Ch 31: Inflation and the Quantity Theory of Money

Inflation is the

Increase in the average level of prices

The Inflation Rate is

The percentage of change in a price index from one year to the next.

What is the Inflation rate equation?

(P1-P2/P1) x 100

Price Indexes are

Used by economists to measure inflation

The Consumer Price Index (CPI)

Measures the average price for a basket of goods and services brought by a typical American consumer. Corresponds most directly to daily economic activity.

The Real Price is

A price that has been corrected for inflation and are used to compare the prices of goods over time.

The Producer Price Index

Measures the average price received by producers. Measures prices of intermediate as well as finished goods and services.

The Quantity Theory of Money

Helps to explain the critical role of the money supply in determining the inflation rate.

What is the total yearly spending equation?

M x v = P x Yr

What do M, v, P, and Yr stand for in the total yearly spending equation?

M= Money you are paid

v= The average number of times a dollar is spent on finished goods and services in a year.

P= Prices

Yr= The real goods and services you buy

What is the equation for the total yearly spending rate for the nation as a whole?

Mv = PYr

What do M, v, P, Yr stand for in the the total yearly spending rate for the nation as a whole equation?

M= The supply of money

v= The average number of times in a year that a dollar is spent on a finished good

P= Price level

Yr= the real GDP

What is inflation caused by?

An increase in the supply of money

Changes in the ________ __ _____ will affect prices.

velocity of money