Ch12 econ macro
Terms
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alternatively, we can view the price level as a measure of the value of money
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in the long run, the overall level of prices adjusts to the level at which the demand for money equals the supply
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- if the PRICE LEVEL is above the equilibrium level, ppl will want
- to hold more money than the fed has created so the Price level must FALL to balance S&D
- if the PRICE LEVEL is below the equilibruim level ppl will want to
- hold less money than the fed has created and the prive level must rise to balance S&D
- quantity theory of money
- a theory asserting that the quantity of money available determines the price level and the growth rate in the quantity of money available determines the inflatoin rate
- nominal variables
- variables measured in monetary units
- real variables
- variables measured in physical units
- classical dichotomy
- the theoretical separation of nominal and real variables
- monetary neutrality
- the proposition that changes in the money supply do not affect real variables
- velocity of money
- the rate at which money changes hand
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velocity of money=
v= -
(price level*y)/quanity of money
(p*y)/M - quantity equation
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m*v=p*y
which relates the quantity of money the velocity of money and the dollar value of the economy's output of G and S - Elements necessary to explain equilibrium price level and inflation rate (1)
- the velocity of money is relatively stable over time
- Elements necessary to explain equilibrium price level and inflation rate (2)
- because velocity is stable, when the central bank changes the quantity of money (M), it causes proportionate changes in the nominal value of output
- elements necessary to explain equilibrium price level and inflation rate (3)
- b/c money is neutral money does not affect output
- elements necessary to explain equilibrium price level and inflation rate (4)
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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 output (p*Y)
-these changes are reflected in the changes in the price level (p) - elements necessary to explain equilibrium price level and inflation rate (5)
- therefor when the central bank increases the money supply rapidly, the result is a high rate of inflation
- inflation tax
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the revenue the govt raises by creating money
-a tax on eveyone who has money - fisher effect
- the one for one adjustment of the nominal interest rate to inflation rate
- when the fed increases the rate of money growth, the result is...
- a higher inflation rate and a higher nominal interest rate
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inflation itself does not reduce ppls real purchasing power
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- shoeleather costs
- the resources wasted when inflation encourages ppl to reduce their money holdings
- menu costs
- the costs of changing prices
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because of inflation induced tax changes, higher inflation tends to discourages ppl from saving
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