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12 Cards in this Set
- Front
- Back
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Money Neutrality
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Changes in the money supply affect nominal variables but not real variable in the long run
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Real Variables versus Nominal Variables
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Real variables are adjusted for inflation and are measured in physical units. Nominal variables are measured in monetary units and are not adjusted for inflation.
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What is inflation?
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Increase of price level, it's measure in an annual percentage increase. With increases each dollar buys a smaller percentage of goods.
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What is hyperinflation?
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An extraordinarily high rate of inflation.
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What happens with fluctuations in the money supply?
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decrease of money supply will increase interest rates and decrease price levels. (money supply model). The decrease in interest rates increase aggregate demand and cost of borrowing decreases which stimulates investment.
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What does fiscal policy influence in the long run?
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Investment, savings, and growth
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What does fiscal policy influence in the short run?
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It affects aggregate demand.
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Three functions of Money
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1) Unit of account
2) Medium of exchange 3) Store of value |
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Unit of account
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The yardstick at which people post prices and debt
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Medium of Exchange
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The item buyers give sellers in order to purchase goods and services
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Store of value
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The ability to store and save purchasing power
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reduce the supply of money
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amount to be reduced/reserve ratio
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