EC 111 - Money and Inflation

What does the quantity theory of money explain?

It explains that prices rise when the government prints too much money.

What is the price level (P) in economics?

P is the price of a basket of goods, measured in money.

How is the value of $1 represented in terms of price level (P)?

The value of $1 is represented as 1/P, measured in goods.

What happens to the value of money as inflation rises?

Inflation drives up prices and drives down the value of money.

What determines the value of money according to the quantity theory?

The value of money is determined by the quantity of money in circulation.

What is the Money Supply (MS) in the real world?

It is determined by the Federal Reserve, the banking system, and consumers.

How does an increase in price level (P) affect money demand (MD)?

An increase in P reduces the value of money, increasing the quantity of money demanded.

What is the relationship between the value of money and the price level (P)?

As the value of money rises, the price level falls.

What occurs when the Fed increases the money supply?

The value of money falls, and the price level (P) rises.

What is the velocity of money?

The rate at which money changes hands in the economy.

What does the quantity equation M x V = P x Y represent?

It relates money supply (M), velocity (V), price level (P), and real GDP (Y).

What is hyperinflation?

Inflation exceeding 50% per month, often due to excessive money supply growth.

What is the inflation tax?

The revenue generated from printing money, which reduces the value of money held by the public.

What is the Fisher Effect?

The relationship where the nominal interest rate adjusts one-for-one with changes in the inflation rate.

What are shoeleather costs?

Resources wasted when inflation encourages people to economize on their money holdings.

What are menu costs?

The costs associated with changing prices, such as printing new menus or catalogs.

How does inflation affect tax distortions?

Inflation causes nominal income to grow faster than real income, increasing tax burdens.

What is the long-term effect of inflation on real incomes?

In the long run, real incomes are determined by real variables, not the inflation rate.

What happens to purchasing power during unexpected inflation?

Higher-than-expected inflation transfers purchasing power from creditors to debtors.

What is the impact of high inflation on wealth redistribution?

High inflation causes arbitrary redistributions of wealth due to its unpredictability.

What is nominal GDP?

The total value of all goods and services produced in an economy, measured at current prices.

What is the relationship between money supply growth and inflation?

Rapid money supply growth causes rapid inflation.

How do you compute the inflation rate?

The inflation rate is calculated by comparing price levels over time.

What is the effect of a monetary injection on the economy?

It causes an increase in demand for goods, leading to higher prices.

What is the significance of the stable velocity of money (V)?

A stable V allows changes in money supply (M) to directly affect nominal GDP (P x Y).

What is the formula for calculating velocity (V)?

V = nominal GDP / money supply (M).

What does a change in money supply (M) imply for nominal GDP?

A change in M causes nominal GDP (P x Y) to change by the same percentage.