Inflation and the Quantity Theory of Money

Flashcards about Inflation and the Quantity Theory of Money.

Inflation

An increase in the average level of prices.

Inflation Rate

The percentage change in a price index from one year to the next.

Consumer Price Index (CPI)

Measures the average price for a basket of goods and services bought by a typical American consumer.

GDP Deflator

The ratio of nominal to real GDP multiplied by 100.

Producer Price Indexes (PPI)

Measure the average price received by producers; includes intermediate and finished goods and services.

Real Price

A price that has been corrected for inflation; used to compare prices of goods over time.

Hyperinflation

Occurs when price increases are so out of control that the concept of inflation is meaningless.

Quantity Theory of Money Equation

M = Money supply, P = Price level, v = Velocity of money, YR = Real GDP. Mv = PYR

Velocity of Money (v)

The average number of times a dollar is spent on finished goods and services in a year.

Deflation

A decrease in the average level of prices (a negative inflation rate).

Disinflation

A reduction in the inflation rate.

Money Illusion

When people mistake changes in nominal prices for changes in real prices.

Nominal Rate of Return

The rate of return that does not account for inflation.

Real Rate of Return

The nominal rate of return minus the inflation rate.

Fisher Effect

The tendency of nominal interest rates to rise with expected inflation rates.

Monetizing the Debt

When the government pays off its debts by printing money.