Flashcards in Chapter 11 - Money Growth + Inflation Deck (24):

1

## Inflation is about ___ per year

### 4%

2

##
Hyperinflation is

caused by...

###
extremely high inflation (inflation exceeding 50%/month).

...caused by excessive growth in money supply

3

##
Quantity Theory of Money explains...

Quantity of Money determines ____ in a ___ correlation.

###
LR determinants of Price level and inflation rates.

Q of money determines value of money in a negative correlation (more $ = less value)

4

##
Money Demand is...

if P increases, $ reduced so ppl need...

###
how much money people want to hold in liquid form.

-need more money to buy G+S

5

## Q of Money Demanded is...

### negatively correlated with Money Value + positively correlated with Price levels.

6

## Monetary injection (B.o.C. incr Money Supply which...)

###
Money value falls, Price rises.

Result - at initial P, incr in Money Supply causes excess money, which ppl spend or loan to others, which causes incr D for Goods, but the S of Goods d/n rise so the Prices have to.

7

##
Nominal Variables are...

3 examples...

###
those which involve monetary units.

1. nominal GDP; 2. nominal inflation rates; 3. nominal wage

8

##
Real Variables are...

3 examples are...

###
physical units.

1. real GDP; 2. inflation rates (output); 3. wage (output)

9

##
Relative Price is...

...formula

###
Price of G1 to Price of G2.

-formula: PG1/PG2

10

## Real Wage is...

###
($/hr)/output

eg. ($15/hr)/($5/unit)

--need 3 units per hour to be efficient

11

## Classical Dichotomy is...

###
theory of separating real and nominal variables.

-notion that monetary deviation affects nominal (not real) variables

12

## Monetary Neutrality is...

### proposed money changes d/n affect real variables.

13

## Velocity of Money is...

###
rate of money changing hands.

-avg. dollar used in ____ transactions.

-velocity (v) = (P x Y)/M

14

## Quantity Equation...

###
both sides of velocity equation xM.

-M x V = P x Y

15

##
5 steps to Quantity Equation

###
1. V = stable; 2. M change % = nominal GDP change % (PxY);

3. M change d/n affect Y (tech + res determine it); 4. P change % is equal to P x Y and M change %; 5. Rapid $ growth causes rapid inflation

16

##
Inflation tax is ....

causes...

###
is revenue from printing money.

-can cause hyperinflation

17

## Fisher Effect is...

###
Nom inflation rate = inflation rate + real inflation rate

-incr in inflation causes equal incr in nominal inflation, so real inflation rate is unchanged (wealth)

18

## Inflation Fallacy is...

### that inflation erodes real incomes. D/N b/c those are determined by real variables, not inflation rates.

19

## Shoe leather Costs...

### time and transaction cost of frequent bank withdrawals (wasted resources)

20

## Menu Costs...

### costs of changing prices (on menus, catalogues, etc)

21

## Misallocation of resources from relative P variability is caused by inflation b/c...

### Prices don't all change at once, so distorts how resources are allocated.

22

## Confusion/Inconvenience result from inflation b/c...

### it changes the "yardstick"; complicates the LR planning and comparing.

23

## Tax Distortion arise from inflation b/c...

### taxes are on nominal incomes (incr faster than real) so some ppl pay more despite their real income being unchanged.

24