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macroeconomics > chapter 11 > Flashcards

chapter 11 Flashcards

1
Q

what are the 3 ways to measure inflation rate?

A

CPI
GDP deflator
other price indexes

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2
Q

how can inflation rate be measured?

A

by measuring a percentage change in prices year after year

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3
Q

over the past 70 years what is the average inflation rate?

A

4%

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4
Q

how much has the 4% annual inflation rate changed prices over the past 70 years?

A

prices have increased 16 fold

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5
Q

what is the value of money determined by?

A

the supply and demand for money

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6
Q

what controls the supply of money?

A

the central bank and the banking system

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7
Q

what controls the demand for money?

A

how much people want to hold in liquid form (how much cash people want to hold)

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8
Q

what is another term for the demand of money?

A

liquidity preference

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9
Q

what is the most important factor that can influence the demand for money (liquidity preference)?

A

the overall level of prices in the economy

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10
Q

what is an example of overall price level influencing the demand for money (liquidity preference)?

A

in 2005 the average amount of cash held was 10 dollars whereas in 2024 the average has increased to 50 dollars

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11
Q

why does overall price level in the economy influence the demand for money (liquidity preference)?

A

if prices you will need to hold more cash, this increase will be corresponding to the overall price levels in the economy because you will need more money to buy goods and services

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12
Q

what will the overall price levels in the long run adjust to?

A

the point at which demand for money equals supply of money

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13
Q

what is the quantity theory of money?

A

the theory asserting that the quantity of money in an economy determines price levels and the growth rate of money and determines inflation

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14
Q

as central banks increase money supply how does that impact prices and the value of money?

A

the prices rise but the value of money decreases

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15
Q

what are the 2 groups of economic variables?

A

nominal variables
real variables

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16
Q

what are nominal variables?

A

variables measured in monetary terms

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17
Q

what are real variables?

A

variables measured in physical units

18
Q

what does nominal GDP measure?

A

current quantitiy at current prices

19
Q

what does real GDP measure?

A

base year prices and current quantity

20
Q

what is the classical dichotomy?

A

the theoretical separation of nominal and real units

21
Q

what is monetary neutrality?

A

a position that, changes in the money supply do not affect real variables

22
Q

what is an example of the classical dichotomy?

A

200 dollars per tonne of corn and the price of wheat is 100 dollars per tonne, but the separation of nominal and real units would be, 1 tonne of corn could buy 2 tonnes of wheat

23
Q

what does the rate of transaction reflect?

A

the economic activity and gives you insight into the overall health of an economy

24
Q

what is the velocity of money?

A

the rate at which money changes hands

25
Q

what is the equation for the velocity of money?

A

velocity of money= price level OR GDP deflator X real GDP divided by money supply

26
Q

what is the equation for nominal GDP?

A

current prices X current quantity

27
Q

what is the quantity equation?

A

money velocity (V) times money supply (M)

28
Q

what are the 5 steps that capture the essence of the quantity theory of money?

A

1) velocity of money is relatively stable over time

2) due to velocity being stable, central banks can change the money supply, causing a proportional change in nominal GDP

3) the real GDP of a country is primarily determined by its factors of production and technology

4) central banks altering the money supply will induce a proportional change in nominal GDP, but only through prices

5) long term and persistent inflation stem from monetary factors, where as short term inflation stem from push cost and demand pull

29
Q

why is the velocity of money relatively stable overtime?

A

the number of transactions made and spending norms are hard to change in the short term

30
Q

why since velocity is stable, central banks can change the money supply, causing a proportional change in nominal GDP?

A

with a stable velocity, a change in money supply will change in (P x Y) changing the nominal GDP

31
Q

why is the real GDP of a country primarily determined by its factors of production and technology?

A

due to money neutrality, the money supply does not affect real output

32
Q

why is money neutrality a factor in money supply not affecting real output?

A

money neutrality ensures that the real variables like output are not impacted by changes in nominal variables like money

33
Q

why will central banks altering the money supply induce a proportional in nominal GDP through prices?

A

when velocity is stable and there is a change in money supply this causes a change in prices but the output is the same, this causes the nominal GDP to change because the current prices are changing but not the current output

34
Q

when central banks increase money supply what will happen?

A

it will result in high rates of inflation

35
Q

why is it important to know that long-term and persistent inflation stems from monetary factors and short-term monetary factors stem from push cost and demand pull?

A

because inflation is cumulative so both short-run and long-run inflation are felt equally in the present, so identifying the source of these problems help mitigate the root cause of rising prices

36
Q

what is the special cost of unexpected inflation?

A

arbitrary redistribution of wealth

37
Q

why is arbitrary redistribution of wealth a special cost of unexpected inflation?

A

unexpected inflation can redistribute wealth within a population because of many loans within the economy are specified in units of account (money)

38
Q

since loans are specified in units of account, why can this cause a redistribution of wealth when there is unexpected inflation?

A

this Is because the value of money decreases under inflation, so the debt burden for the debt holders declines since they took on the loan when the value of money is higher

39
Q

what does long term inflation stem from?

A

monetary factors

40
Q

what does short term inflation stem from?

A

cost push and demand pull

macroeconomics (13 decks)

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