Principles of Mac Chap 17

amounts of money people are willing to hold at different price levels.

'Money Demand' is the:

Fisher effect

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

monetary neutrality

the proposition that changes in the money supply do not affect real variables

velocity of money

the rate at which money changes hands

shoeleather costs

the resources wasted when inflation encourages people to reduce their money holdings

inflation tax

the revenue the government raises by creating money

classical dichotomy (division into usually two parts)

the theoretical separation of nominal and real variables

nominal variables

variables measured in monetary units

real variables

variables measured in physical units

quantity theory of money

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

nominal variables are expressed in monetary units and real variables are expressed in physical units.

According to the Classical Dichotomy:

changes in the money supply do not affect real variables.

According to the principle of monetary neutrality:

P x Y must increase.

If the Fed increased the supply of money, and velocity remains unchanged, according to the quantity equation:

the rate at which money changes hands.

The velocity of money is:

better, worse

When inflation turns out to be higher than expected, borrowers will be ________ off, and lenders will be ________ off.

right, increase

When the Fed adds more money to the economy, the Money Supply curve shifts to the ________, causing the equilibrium price level to ________.

the value of money decreases in the economy.

When there is inflation:

menu costs

the costs of changing prices

quantity equation

the equation M x V = P x Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services