Econ Chp. 30

Front 1

the demand for money reflects what?

Back 1

how much wealth people want to hold in liquid form

Front 2

A higher price level (or lower value of money) increases the quantity of money demanded?

Back 2

true

Front 3

IN the long run, the overall level of prices adjusts to the level at which the demand for money equals the supply

Back 3

true

At the equilibrium price level, the quantity of money that people want to hold exactly balances the quantity of money supplied by the fed

Front 4

The equilibrium of money supply and money demand determines the value of money and the price level

Back 4

True--Review page 667!

Front 5

When an increase in the money supply makes dollars more plentiful, the result is an increase in the price level that makes each dollar less valuable

Back 5

true! see page 678

Front 6

Quantity Theory of Money

Back 6

A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate

Front 7

Economic variable shoudl be divided into 2 groups

Back 7

Nominal Variables: variables measured in monetary units

Real variables: variables measured in physical units

Front 8

Dollar prices are nominal variables, relative prices are real variables

Back 8

true

Front 9

Review page 669...

Back 9

yup

Front 10

Changes in the supply of money affect real variables but not nominal ones?

Back 10

FALSE!!!

The irrelevance of monetary changes for real variable is called monetary neutrality

remember ruler analogy. Dollar is just a measurement tool

Front 11

Velocity of Money

Back 11

The rate at which money changes hands

Front 12

V = (Price level * Nominal GDP)/Quantity of Money

Back 12

Velocity equation

V = (P * Y)/M

Front 13

M * V = P * Y

Back 13

Velocity equation rearranged

Money Supply * Velocity = Price Level * Nominal GDP

Front 14

5 Steps to the Quantity Theory of Money

Back 14

1. The velocity of money is relatively stable over time

2. Because velocity is stable, when the central bank changes teh quantity of money (M), it causes proportionate changes in the nominal value of output (P*Y)

3. The economy's output of goods and services (Y) is primarily determined by factor supplies (labor, physical capital, human capital, and natural resources) and teh available production technology. In particular, because money is neutral, money does NOT affect output

4. With output (Y) determined by factor supplies and technology, when the central bank alters the money supply (M) and induces proportional changes in the nominal value of output (P*Y), these changes are reflected in changes in the price level (P)

5. Therefore, when the central bank increases the money supply rapidly, the result is a high rate of inflation

Front 15

Inflation Tax

Back 15

The revenue the government raises by creating (printing) money

When the government prints money, the price level rises, and the dollars in your wallet are less valuable--The inflation tax is like a tax on everyone who holds money

Front 16

Real interest rate

Back 16

corrects the nominal interest rate for the effect of inflation to tell you how fast the PURCHASING POWER of your savings account will rise over time.

Nominal Interest Rate - Inflation rate = R. INterest Rate

Front 17

Nominal Interest rate

Back 17

tells you how fast the NUMBER OF DOLLARS in your account will rise over time

Front 18

What determines the real interest rate?

Back 18

supply and demand for loanable funds

Front 19

What determines the inflation rate?

Back 19

growth in the money supply

Front 20

when the fed increases the rrate of money growth, the long run result is both a higher inflation rate and a higher nominal interest rate

Back 20

Nominal Interest Rate = Real Interest Rate + Inflation Rate

Front 21

Fisher effect

Back 21

the one for one adjustment of the nominal interest rate to the inflation rate

states that the nominal interest rate adjusts to expected inflation

Front 22

because inflation in incomes goes hand in hand with inflation in prices...

Back 22

inflation does not in itself reduce people's real purchasing power

Front 23

What are the 6 Costs of Inflation?

Back 23

1. Shoeleather Costs

2. Menu Costs

3. Tax liability

4. confusion inconvenience

5. Arbitrary redistribution of wealth

6.increased variability of relative prices