Principles of Macroeconomics: Money Growth and Inflation

These flashcards cover key concepts related to money growth, inflation, and their economic implications as discussed in Mankiw's Principles of Macroeconomics.

Inflation

The increase in the overall level of prices in an economy, typically measured as a percentage change in an index such as the Consumer Price Index (CPI).

Quantity Theory of Money

Theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate.

Hyperinflation

Extraordinarily high rate of inflation, typically exceeding 50% per month.

Classical Dichotomy

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

Monetary Neutrality

Proposition that changes in the money supply do not affect real economic variables.

Velocity of Money

The rate at which money changes hands in an economy, defined as the nominal GDP divided by the money supply.

Nominal Variables

Variables measured in monetary units, such as nominal GDP or nominal interest rates.

Real Variables

Variables measured in physical units, such as real GDP or real interest rates.

Inflation Tax

The revenue the government generates by creating money, effectively acting as a tax on everyone who holds money, as it reduces the value of money.

Fisher Effect

The one-for-one adjustment of nominal interest rates to inflation rates, indicating that an increase in the money growth rate raises the inflation rate but does not affect real variables.

Shoeleather Costs

Resources wasted when inflation encourages people to reduce their money holdings and make more frequent trips to the bank.

Menu Costs

The costs associated with changing prices, including updating price lists, catalogs, and communicating new prices to customers.

Capital Gains

Profits from the sale of an asset, which may be exaggerated by inflation, leading to a higher tax burden on nominal gains.

Confusion and Inconvenience

The difficulties associated with inflation, including complications in long-term planning and comparisons of dollar amounts over time.

Relative-Price Variability

The distortion of relative prices caused by inflation, leading to misallocation of resources and inefficient market behavior.