Money Growth and Inflation

This set of flashcards covers key concepts related to money growth and inflation, including effects on the economy, theories, and costs associated with inflation.

How does the money supply affect inflation and nominal interest rates?

Increasing the money supply can lead to higher inflation and nominal interest rates.

What is the classical dichotomy?

The theoretical separation of nominal and real variables, where monetary developments affect nominal variables but not real variables.

What does the quantity of money determine according to the Quantity Theory of Money?

The value of money.

What does 'monetary neutrality' imply?

Changes in the money supply do not affect real variables.

What is the velocity of money?

The rate at which money changes hands.

What happens to the value of money when the price level rises?

The value of money falls.

What are shoeleather costs?

The resources wasted when inflation encourages people to reduce their money holdings.

What is an inflation tax?

The reduction in the purchasing power of money held by people due to inflation, which acts like a tax.

What costs are associated with menu changes due to inflation?

Menu costs include the costs of changing prices, such as printing new menus or catalogs.

What is the Fisher Effect?

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