Chapter 17 Macro - 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 measures in monetary units

real variables

variables measured in physical units

classical dichotomy

the theoretical separation of nominal 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

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

Fisher effect

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

shoe leather cost

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

menu costs

the costs of changing prices