money growth and inflation

Question 1

money

Answer 1

a set of assets in the economy that people use to buy goods/services from other people

Question 2

M1

Answer 2

physical coins and banknotes,
demand deposits
checking accounts & NOW accounts
traveler’s checks

Question 3

M2

Answer 3

M1+…
all time related deposits
non-institutional money market funds
(money that can be readily transferred into cash)

Question 4

M3

Answer 4

boradest definition,
M2+…
all large time deposits
institutional money market funds
short term repurchase agreements
indicates total amount of money in an economy

Question 5

inflation

Answer 5

when the value of money decreases, and overall prices increase

Question 6

CPI =

Answer 6

cost of basket in new year / cost of basket in base year x 100

Question 7

inflation rate in year 2=

Answer 7

CPI in year 1 - CPI in year 2 / CPI in year 1 x 100

Question 8

demand pull inflation

Answer 8

excess spending relative to output
central bank issues too much money

Question 9

cost-push inflation

Answer 9

due to rise in per unit input costs
supply shocks

Question 10

hyperinflation

Answer 10

rate of over 50% / month
when governments print too much money to pay for their spending

Question 11

effects of inflation

Answer 11

distortion of relative prices & consumer decisions - markets are less able to allocate resources to best use
too much printed money erodes the real value of the unit of account
causes the value of money to have different real values at different times
more difficult to compare real revenues/costs/profits

Question 12

nominal income…

Answer 12

is unadjusted for inflation

Question 13

real income

Answer 13

nominal income adjusted for inflation

Question 14

% change in real income =

Answer 14

& change in nominal inc. - % change in price level

Question 15

quantity theory of money

Answer 15

states that the price level of goods & services is directly proportional to the amount of money in circulation/money supply
when the overall price lvl rises, the value of money falls-
- in the long run, the overall level of prices adjusts to the level at which the demand for money equals the supply

Question 16

the money supply

Answer 16

policy variable controlled by the central bank
through open-market operations the central bank directly controls the quantity of money supplied

Question 17

money demand

Answer 17

determined by interest rates, average lvl of prices
the amount of money people hold depends on the prices of goods and services

Question 18

velocity of money=

Answer 18

(P x Y)/M
price lvl x quantity of output / quantity of money

Question 19

quantity equation

Answer 19

M X V = P X Y
- an increae in the qauntity of money must be reflected in 1 of 3 other variables:
price level must rise
quantity of output must rise
the velocity of money must fall

Question 20

quantity theory of money

Answer 20

the velocity of money is relatively stable over time
when the central bank changes the quantity, it causes proportionate changes in the normal value of output (P X Y)
because money is neutral it doesnt affect output

Question 21

the fisher effect

Answer 21

refers to an adjustment of the nominal interest rate to the inflation rate
when inflation rate rises the nominal interest rate rises by the same amount, and the real interest rate stays the same
the real interest rate equals the nominal interest rate - expected interest rate

Question 22

monetary neutrality

Answer 22

the idea that an increase in money affects nominal variables (wage, price level) but not real variables (like production and employment) this applies in the long term