Inflation: Its Causes, Effects, and Social Costs

This set of flashcards covers key vocabulary related to inflation, including its definitions, theories, and economic implications.

Inflation

A sustained increase in the general price level of goods and services in an economy over a period.

Velocity of Money

The rate at which money circulates in the economy, typically measured as the number of times a dollar is spent to buy goods and services per unit time.

Quantity Theory of Money

A theory that links the inflation rate to the growth rate of the money supply, asserting that higher money supply growth leads to higher inflation.

Nominal Interest Rate

The stated interest rate on a loan or financial product, not adjusted for inflation.

Real Interest Rate

The nominal interest rate adjusted for inflation, representing the true cost of borrowing.

Fisher Effect

The concept that real interest rates increase or decrease with inflation; i = r + π.

Seigniorage

The profit made by the government when issuing currency, calculated as the difference between the value of money and the cost to produce and distribute it.

Hyperinflation

An extremely high and typically accelerating inflation rate, often exceeding 50% per month.

Expected inflation

The inflation rate that economic agents anticipate in the future, which can influence their economic behavior.

Shoeleather Cost

The costs associated with reducing money balances to avoid the inflation tax, including the time and effort spent accessing cash.