Mankiw, Cha. 17 - Money Growth and Inflation

quantity theory of money

a 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.

nominal variables

variables measured in monetary units

real variables

variables measured in physical units.

classical dichotomy

the theoretical separation of nominal variables and real variables

monetary neutrality

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

velocity of money

the rate at which money changes hands.

V = (P x Y) / M (P= GDP deflator; Y = real GDP; M = quantity of money)

formula for the velocity of money:

quantity equation

the equation M x V = P x Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy’s output of goods and services.

inflation tax

the revenue the government raises by creating money.

real interest rate = nominal interest rate - inflation rate.

real interest rate formula

Fisher effect

the one-for-one adjustment of the nominal interest rate to the inflation rate.

shoeleather cost

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

menu costs

the costs of changing prices.

inflation rate = ({year 2 price - year 1 price} x 100) / year 1 price.

inflation rate formula