Money Growth and Inflation - Principles of Macroeconomics

Flashcards covering key concepts of money growth and inflation from the Principles of Macroeconomics lecture.

What does deflation refer to?

A fall in the overall level of prices.

Which price indexes are used to measure the inflation rate?

CPI, GDP deflator, and other indexes of the overall price level.

How much have prices risen on average over the past 70 years?

About 4 percent per year.

What is the quantity theory of money?

It asserts 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.

What determines the value of money?

The supply and demand for money.

What are shoeleather costs?

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

What is the Fisher effect?

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

What is the inflation tax?

The revenue the government raises by creating money without issuing a bill for it.

What is monetary neutrality?

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

How does an increase in the money supply affect the price level?

It increases the price level.

What is relative-price variability?

Fluctuations in relative prices caused by inflation.

What are menu costs?

The costs associated with changing prices.

What is meant by the classical dichotomy?

The theoretical separation of nominal variables from real variables.

How does inflation affect saving?

Inflation raises the tax burden on income earned from savings.

What happens during a monetary injection?

It creates an excess supply of money, leading to increased demand for goods and services.

What is liquidity preference?

The demand for money reflecting how much people want to hold in liquid form.

What is the velocity of money?

The rate at which money changes hands in the economy.

What does it mean for output to be neutral in relation to money?

Money does not affect output in the long term.