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16 Cards in this Set
- Front
- Back
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Inflation
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Increase in the overall level of prices (2%)
--> A rise in the Plevel = lower value of money (1/P) |
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Quantity theory of money
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A theory asserting that the quantity of money avaible determines the price level and that growth rate in the quantity of money avaible determines the inflation rate
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Nominal vs. Real variabales
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1-Nominal = Variable measured in monetary units
2-Real= Variable measured in physical units Classical dichotny: the seperation of nominal and real variables |
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Velocity of money
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The rate at which money changes hands
V= (Price level. Real GDP)/ Quantity of Money |
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Cost of inflation
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1)Shoeleather costs
2)Menu costs 3)Inflation-induced tax distortions |
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Deflation
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1)Menu costs
2)Relative-price variability 3)Redustribution of wealth toward creditors and away from deptors 4)a sign of broaders macroeconomic difficulties |
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If the money supply doubles, what must happen in the long run to the quantity of money demanded and to the price level?
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The quantity of money demanded must double to maintain monetary equilibrium. Spending will double on the same amount of goods, thus causing prices to double and the value of money to fall by half.
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Explain the classial dichotmy.
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Is the view that macroeconomics variables can be divided into 2 groups: real (measuerd in physical units) and nominal (measured in monetary units)
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Classical dic., which type of variable is affected by changes in money and which type is not? What phrase do we use to capture this effect?
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Nominal are affected. Real are not. This effect is known as monetary neutrality.
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How does unexepected deflation redistribute wealth?
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it redistributes wealth from debtors, who are often poorer, to creditors, who are often wealthier.
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What are the three sources of revenue of a gvt can use to support its expenditures? Which method causes inflation, and who bears the burden of this method of raising revenue?
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Taxes, borrowing and printing money; printing money, those that hold money because its value decreases
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In the long run, what does an increase in the growth rate of the money supply do to real and nominal interest rate?
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There is no impact in the real interest in the long run. It raises the nominal interest rate one-to-one with the increase in the growth rate of money and prices
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Does inflation erode the values of people's income and thereby lower their standard of living?
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No. Income is a result of selling labour services, the value of which rises along with other prices during an inflation
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What are the cost of inflation when inflation is perfectly anticipated?
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1) showleather cost
2) menu costs 3) Costs due to relative-price variability that misallocates resources, tax disortions, confusion, and inconvenience |
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Suppose inflation turns out to be lower than expected. Who is likely to gain, borrowers or lenders? Union workers or firms? why?
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Lenders; Workers. Those who receive dolars in the future on contract receive dollars of greater valye than they had bargained for.
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The BOF has succesfully used monetary policy to keep inflation close to its 2% target. Explain how it does it?
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It raises the overnight rate of interest, which reduces the growth rate of the money supply, and reduces future inflation
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