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 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 × V = P × 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.

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

Menu costs: the costs of changing prices.