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22 Cards in this Set
- Front
- Back
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Classical theory of inflation |
interest rate is reflective of supply and demand for money |
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when the price of something increases, the money used to buy it is |
less valuable |
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Short term demand equals |
consumption |
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long term demand equals |
investment |
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Money supply, money demand, and Monetary equilibrium |
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Quantity theory of money |
the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate |
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nominal variables |
variables measured in monetary units
Money and prices |
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real variables |
variables measured in physical units
output |
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classical dichotomy |
the theoretical separation of nominal and real variables |
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money neutrality |
the proposition that the change in money supply does not affect real variables |
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velocity of money |
the rate at which money changes hands |
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velocity of money equation |
V=(P*Y) / M |
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p= |
price level (nominal GDP) |
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y= |
quantity of output (real GDP) |
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m= |
quantity of money |
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quantity equation |
M*V=P*Y
relates the quantity of money, velocity of money, and the dollar value of the economy to the output of goods and services |
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a rapid increase in the money supply leads to what in terms of inflation |
rapid increase in inflation |
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inflation tax |
the revenue the government raises by creating money (value of money decreases) |
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the fisher effect |
the one for one adjustment of the nominal interest rate to the inflation rate (nom IR - inflation rate = real IR) |
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Shoeleather costs |
the resources wasted when inflation encourages people to reduce their money holdings (transportation) |
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Menu costs |
costs of changing prices |
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price confusion/misallocation of resources |
inflation causes dollars at different times to have different real values |
