Economics chapter 17

What is inflation

Increase in the overall level of prices

What is deflation

Decrease in the overall level of prices

What is hyperinflation

An extraordinary high rate of inflation over 50%

What is the classical theory of money

Explain the long run and is the quantity theory of money OK

What is 1/p

Measures the quantity of goods and services that can be bought with the dollar

What is money demand

Reflects how much wealth people want to hold in liquid form

What does money demand rely on

Credit cards, availability of ATM machines, interest rate the average level of prices and economy

With money demand what is the demand curve doing

Downward sloping

What does the money supply, supply curve look like

It is vertical

What happens if the Fed double s the supply of money or the Fed open market purchase

Supply curve shifts to the right, the value of money decreases and the price level increases

What is the quantity theory of money

The quantity of money available in the economy determines the price level

Growth rate in the quantity of money available determines the what

Inflation rate

What are nominal variables

Variables measured in monetary units

What are real variables

Variables measured in physical units

What is an example of a nominal and real variables

Nominal variable is dollar prices and real variable is wages or interest

What is classical dichotomy

Theoretical separation of normal and real variables

What is monetary neutrality / money neutrality

The idea that changes in the money supply does not affect real variables

What is velocity

The rate at which money changes hands

When might the idea of money neutrality not be realistic

In the short run

What is the inflation tax

Revenue the government raises by creating printing money

What is shoe leather cost

The resources wasted when inflation encourages people to reduce their money holdings

What is menu cost

The cost of changing prices

What is relative price variability

The difference over time in long standing prices

What is market economies

Relative prices allocate scarce resources, consumers compare quality and prices of various goods and services

Inflation induced tax distortions

The increase in distortions of incentives due to taxes in the presence of high inflation

What is capital gains

Profits made by selling an asset for more than its purchase price