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41 Cards in this Set

  • Front
  • Back
The overall increase in prices is known as: _________
Inflation.
What is happening when prices rise as inflation falls?
Disinflation. This really happened in the 1980s.
A sustained decrease in price levels is known as ________ (negative inflation rate).
Deflation.
Germany experienced a period of ______________ in 1923, when prices increased an average of 500% per month.
Hyperinflation.
This is the stock of assets that can be readily used to make transactions.
Money!
Money has _ functions. They are:
1.
2.
3.
3

1. Store of Value
2. Unit of Account
3. Medium of Exchange
Store of Value means that money can do what?
Transfer purchasing power from the present to the future.

Example: if I work today and earn $100.00, I can hold it (store the value) and spend it tomorrow.
Unit of Account means what about money?
Unit of Account means that money creates a fixed unit measurement to quote prices and settle debts.
As a medium of exchange, money is used to do what?
Buy goods and services.
Money can either be classified as _____ money or _________ money. What is the difference between the two?
Fiat or Commodity.

Fiat money is money with no intrinsic value (like dollar bills).

Commodity money is money with intrinsic value (like gold).
Money supply is defined as:
The quantity of money available in the economy.
Monetary policy pertains to what and is controlled by whom?
Monetary policy pertains to the government's control over the money supply and is usually controlled by the central bank (the Fed).
How does the Fed control the money supply?
Open-market operations
What are the three measures of money?
C - Currency
M1 - Currency + Demand Deposits
M2 - M1 + retail money market mutual funds, savings deposits
Demand deposits consist of:
Funds in peoples' checking accounts.
The quantity theory of money states that the more money people need for transactions, the _____ money people hold.
more
The quantity equation is expressed as:
(money)(velocity) = (price)(transactions)
In the quantity equations, the right side of PRICE x TRANSACTIONS can be substituted with PRICE x _______?
Output Y (GDP)
The income velocity of money tells economists what?
How many times a dollar bill enters someone's income in a period of time.

The income velocity equation is the most common quantity theory equation:

(money)(velocity) = (price)(output)
Real money balances indicate what and are represented by what equation?
Real money balances indicate the quantity of money in terms of the quantity of real products that money can buy.

The equation is M/P
Money Demand Function
The equation that shows the determinants of the quantity of real money balances people wish to hold. It is expressed as:

M/P = L(r + Eπ, Y)
Seigniorage is revenue raised from what activity?
Printing money
i = r + π is what equation?
The Fisher Equation. It shows that interest rates change for two reasons:

1. the real interest rate changes. (r)
2. inflation changes. (π)
A one-to-one relationship between inflation (π) and nominal interest rate (i) is called the ________ ________.
Fisher Effect
The interest rate that the borrower and lender expect when a loan is made is the __ ____ interest rate. It is expressed as:
Ex ante

i - Eπ
The interest rate that is realized when loaning money is the __ ___ interest rate. It is expressed as:
Ex post

i - π.
Shoeleather costs refer to the costs of __________ the money held. It is the first cost of inflation.
reducing; if you reduce the amount of money physically held, you have to walk to the bank more and thus, wear out your shoe leather.
Menu costs are the second cost of inflation. Menu costs are:
costs associated with reprinting items with prices (such as menus) to keep up with inflation.
What does the quantity theory of money imply about long term inflation?
The quantity theory of money implies that, over the long term, the central bank has control over inflation because it controls the money supply.
What two factors affect investment demand?
Technological Advances
Tax Laws change
Why does the government increase the money growth rate?
To raise money through seignoraige. It earns revenue off of printing money, like an inflation tax.
Explain the relationship between πe, i, and Md.
πe is expected inflation.
i is nominal interest rate.
Md is money demand.

If πe increases (people anticipate inflation), then i increases as well. When i increases, Md decreases. People don't want to pay more (i) to hold money (M).
What are the social costs of expected inflation?
1. Shoeleather Costs.
2. Menu Costs.
3. Variability in Pricing.
4. Changing tax liability
5. Inconvenience of inconsistent price levels.
What are the social costs of unexpected inflation?
1. Wealth is arbitrarily redistributed.
2. Those on fixed incomes are hurt by rapid inflation.
Describe the functions of money.
Money:

1. Stores Value (transfers purchasing power from now to the future)
2. Is a Unit of Account (provides an increment to benchmark with)
3. Is a Medium of Exchange (allows people to buy and sell goods/services)
What is fiat money? What is commodity money?
Fiat money is money with no intrinsic value, like the dollar bill.

Commodity money is money with intrinsic value, like gold.
Who controls the money supply and how?
The central bank (the Fed in the US) controls the money supply through monetary policy.
Explain the quantity equation.
The quantity equation (MV = PY) explains the relationship between the amount of money in the economy and the dollars exchanged in transactions.
What does the assumption of constant velocity imply?
The assumption of constant velocity implies that the quantity of money determines the dollar value of the economy's output.
Who pays the inflation tax?
People who use money.
If inflation rises from 6 to 8 percent, what happens to real and nominal interest rates according to the Fisher effect.
If inflation rises two percent, then real and nominal interest rates increase by two percent. The Fisher Effect represents a one for one relationship between inflation and interest rates.