ap economics: module 33 terms

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)