Money growth refers to the increase in the amount of money available in an economy.
Inflation is a significant economic topic, often discussed in modern discourse.
It relates to the value of money and how it changes over time.
Inflation is an economy-wide phenomenon affecting the economy's medium of exchange, primarily money.
It can be understood by looking at currency such as the US dollar, euro, yen, and yuan.
Consumer Price Index (CPI)
A calculation based on a basket of goods and services.
It reflects how prices change over time.
Value of Money
A rise in price levels indicates a decrease in the purchasing power of money.
Example: A dollar bought more in 1934 than it does today.
The value of money is determined by supply and demand.
The money supply is controlled by the Federal Reserve, resulting in a vertical supply curve.
Changes in the demand for money affect its value:
Higher demand increases money's value.
Lower demand decreases money's value.
An increase in price level results in a higher quantity of money demanded.
Increased prices necessitate more money for purchases, impacting wages and employment.
Refers to when a central bank increases the money supply to stimulate the economy.
Quantity Theory of Money: The available money quantity determines price levels and growth rate, influencing inflation rates.
An increase in money supply leads to a decrease in money's value and an increase in price level.
Nominal Variables: Measured in monetary units (e.g., dollars).
Real Variables: Measured in physical units (e.g., quantity of goods).
Classical Dichotomy: The theoretical distinction between nominal and real variables.
Monetary Neutrality: Changes in money supply do not affect real variables.
Velocity of money is the rate at which money circulates in the economy.
High velocity during inflation; low velocity during economic recessions.
Equation:
Velocity (V) = Price Level (P) * Quantity of Output (Y) / Quantity of Money (M).
After the war, countries like Germany faced hyperinflation, leading to extreme price level increases.
Germany’s inability to pay debts led to excessive money printing, devaluing currency severely.
Key takeaway: Increasing money supply results in rising price levels.
Revenue generated by governments from creating money, which devalues existing money held by individuals.
Hyperinflation is often caused by high government spending, inadequate tax revenue, and limited borrowing ability.
Real Interest Rate = Nominal Interest Rate - Inflation Rate.
Nominal interest rates adjust to compensate for expected inflation in the long run.
Example: If mortgage interest is 7%, and inflation is 4%, the real interest is 3%.
Fall in Purchasing Power
Higher prices decrease the value of money.
Shoe Leather Costs
Costs associated with frequent bank visits due to inflationary pressures.
Menu Costs
Costs incurred from changing prices and menus frequently.
Tax Distortions
People pushed into higher brackets due to inflated incomes may find themselves worse off.
Confusion and Inconvenience
Fluctuating prices create uncertainty and discomfort among consumers.
Arbitrary Wealth Redistribution
Some benefit from inflation while others suffer, leading to inequities.
Characterized by falling price levels.
Often symptomatic of deeper economic issues.
Example: The Great Depression saw severe deflation affecting agricultural sectors.
A careful reduction of price levels must be gradual to avoid economic pain.
The story reflects historical monetary debate, such as the gold standard versus silver representation in characters.
The discussion of monetary policy continues to remain relevant across history.
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