Studied by 0 people
Looks like no one added any tags here yet for you.
t or f: in LR, a change in MS doesn’t affect RGDP/real quantity of money or AD, but affects APL
t: ↑MS → ↓IR → ↑AD (↑I and ↑C) → ↑RGDP (stops here in SR) → ↑ N wages and ↑APL → ↓SRAS → RGDP back to eq.
money is neutral in LR
change in APL is proportionate to change in MS
*opposite for a decrease in MS
why is using the classical model ineffective for times of low inflation, but effective in times of high inflation?
low inflation → slow adjustment of wages and APL (sticky prices)
changes in SRAS/MS can affect RGDP
high inflation → quick adjustment of wages + prices (o.c. of holding cash)
changes in MS affect IR, but not RGDP
can the government increase revenue by printing money?
yes
seigniorage
revenue generated by the govt.’s right to print money
amount collected by govt. over a period of time = change in MS in that time
<1% of the govt.’s budget
inflation tax
reduction in the value of money (purchasing power) held by the public caused by inflation (govt. prints $ to cover deficit)
x% inflation → x% tax rate of the money’s value
inflation causes the tax on holding money to ___, so people end up spending money and acquiring interest-bearing assets ____.
increase, faster
cycle of hyperinflation
↑MS → ↑inflation → ↑MS by a greater amount to get same amount of g/s as before → ↑inflation → so on
if the desire to not hold money causes people to spending it faster than the govt. prints it, then the APL increases faster than the MS → govt. must increase MS rapidly → hyperinflation → cycle continues
2 things that lead to an increased APL
decrease in AS (cost-push) or an increase in AD (demand-pull)
cost-push inflation
inflation caused by a significant increase in the price of an input with economy-wide importance; decrease in SRAS
demand-pull inflation
inflation caused by an increase in aggregate demand
AD > AS → “too much money chasing too few goods”
caused by economic growth + exp. policies
in SR, policies that create a booming economy do what to inflation?
increase it
in SR, policies made to reduce inflation do what to the economy?
puts it in a depression
IMPORTANT INFO
inflationary policies → SR political gains
policies to combat inflation → SR political costs
real seigniorage
rate of growth of MS real MS → (ΔM/M) * (M/P)
