Interactive Ch 17 Money Growth and Inflation 9e

Inflation

An increase in the overall level of prices in an economy.

Deflation

A decrease in the overall level of prices in an economy.

Hyperinflation

An extraordinarily high rate of inflation.

Money Supply (MS)

The total amount of money available in an economy at a specific time, determined by the Federal Reserve, banking systems, and consumers.

Money Demand (MD)

The desire of individuals to hold wealth in liquid form, which is influenced by the price level.

Value of Money (1/P)

The quantity of goods and services that can be purchased with one dollar; inversely related to the price level.

Quantity Theory of Money

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

Classical Dichotomy

The theoretical separation of nominal variables (measured in monetary units) and real variables (measured in physical units).

Fisher Effect

A principle stating that an increase in the inflation rate will lead to an increase in the nominal interest rate.

Inflation Tax

The revenue that the government raises by creating money, impacting the purchasing power of money holders.

Menu Costs

The costs incurred by firms when changing prices, which can increase due to inflation.

Shoeleather Costs

The costs associated with reducing money holdings as a response to inflation, resulting in wasted resources.

Relative-Price Variability

The distortion of consumer decisions and resource allocation caused by differences in the timing of price increases.

Inflation-Induced Tax Distortions

The phenomenon where nominal income grows faster than real income due to inflation, causing higher tax burdens.

Monetary Neutrality

The concept that changes in the money supply do not affect real economic variables in the long run.

Velocity of Money (V)

The rate at which money changes hands in an economy.

The Quantity Equation (M x V = P x Y)

A formula that relates the money supply (M), the velocity of money (V), the price level (P), and real output (Y).

Hyperinflation

An extremely high and typically accelerating rate of inflation, causing currency devaluation.

Arbitrary Redistributions of Wealth

Wealth changes among the population due to unexpected inflation, not based on merit or need.

Confusion and Inconvenience

The complexities and challenges in economic decision-making caused by inflation.